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Adobe Tumbles Most Since 2022 · Bloomberg Intelligence

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Speaker 2: All right, let's get to Adobe worst performing snack on
0:27
Speaker 2: the SMP down almost fourteen percent week sales outlook for
0:30
Speaker 2: the current quarter. That's the key, and it's all about
0:33
Speaker 2: worries now about AI startups being a big threat to
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Speaker 2: the company. So let's get more here with Brody Ford.
0:39
Speaker 2: He joins us. He covers tech for Bloomberg. So what happened?
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Speaker 3: What happened yees last year? If you asked investors who's
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Speaker 3: gonna benefit from AI in twenty twenty four, they'd say
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Speaker 3: Microsoft and Adobe. But after last night, it might be
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Speaker 3: just Microsoft for now, right, because Adobe has invested massively
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Speaker 3: in new AI features to improve a lot of processes
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Speaker 3: in Photoshop, Illustrator, other programs, but we're not seeing a
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Speaker 3: revenue uplift yet. Right, Investors expected that these new features
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Speaker 3: would drive a lot more financials in the new year,
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Speaker 3: and we're just not seeing that. Yet, and they are
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Speaker 3: not keen to weight at this point.
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Speaker 4: I mean, was that reasonable for investors to think that
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Speaker 4: the revenues would be coming in at this point because
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Speaker 4: I feel like they've just developed these new products, like,
1:25
Speaker 4: you know, give them a minute.
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Speaker 3: Yeah, I mean, I think management's been pretty consistent in saying,
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Speaker 3: right now, we're pricing for adoption. We're trying to just
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Speaker 3: get more users. But I just think it's not quick
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Speaker 3: enough for investors, especially when there's this sense that many
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Speaker 3: other AI startups out there are not moving so conservatively. Right,
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Speaker 3: they're going to create tools like you all saw open
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Speaker 3: AI's new Sora, which allows you to generate video right.
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Speaker 3: Something like that gave investors a lot of anxiety because
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Speaker 3: they said, whoa are people even going to need to
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Speaker 3: pay for Adobe's tools if this becomes mainstream? So that's
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Speaker 3: where a lot of this anxiety is stemming from.
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Speaker 2: So also, don't they need people like me to not
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Speaker 2: use it for free and come in and pay for stuff?
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Speaker 2: How are they going to, like, aside from the AI conversation,
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Speaker 2: how are they going to make me, who wouldn't know
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Speaker 2: Adobe if it hit me in the face, come in
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Speaker 2: and start to pay for some things.
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Speaker 5: Yeah.
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Speaker 3: So, I mean their primary user base is the kind
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Speaker 3: of creators graphic design studios. Right, they are increasingly trying
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Speaker 3: to break into people like you and me who might
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Speaker 3: need to every so often, like you know, edit the
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Speaker 3: margins on a photo or recolor something. And so they've.
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Speaker 2: Invested Kate Middleton. I mean, it's the whole thing, right, exactly, exactly.
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Speaker 3: Yeah, if they had a more unscrupulous marketing department, I'm
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Speaker 3: sure they would have leaned into.
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Speaker 2: Oh my god, yeah, don't do what she did services.
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Speaker 3: If she had had Adobe Firefly, that never would have happened.
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Speaker 2: That's pretty funny.
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Speaker 6: Yeah.
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Speaker 3: So, yes, I mean they have invested more trying to
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Speaker 3: get average users using their stuff. That was a big cornerstone.
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Speaker 3: I don't know if you all remember they tried to
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Speaker 3: buy this company, Figma, for twenty billion dollars. That was
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Speaker 3: part of that planned acquisition that, Hey, this company has
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Speaker 3: been good at putting these complicated tools on the web,
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Speaker 3: making it simple, making it so that average people can
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Speaker 3: use them. We've had trouble with that. Let's just buy them.
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Speaker 4: That's an interesting idea, but I guess I want to
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Speaker 4: get your take on the bigger picture here. So in
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Speaker 4: the long term, AI, do we really need Adobe software?
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Speaker 4: I mean, is this the tail of a buggy whit
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Speaker 4: manufacturer grasping it the last straw when the whole technology
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Speaker 4: has moved on.
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Speaker 3: Yeah, And there was this rare, candid moment on an
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Speaker 3: earnings call last night where they kind of had this
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Speaker 3: argument a little bit, right, some of these Wall Street
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Speaker 3: analysts said, we understand that in the near term people
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Speaker 3: will need Adobe's tools to edit the video, edit the photo.
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Speaker 3: In the long term, are you going to get displaced entirely?
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Speaker 3: Management pretty much said that you will always need something
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Speaker 3: to you know, you're not going to generate a whole
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Speaker 3: video just with a prompt and publish out there. I
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Speaker 3: think the quote the CEO use was the next Oppenheimer.
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Speaker 3: It's not going to be created with a prompt. But
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Speaker 3: it's an open question right as the decades go on
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Speaker 3: the current format of Adobe's tools, which is, you know,
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Speaker 3: these kind of heavyweight applications on the desktop, think about
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Speaker 3: like Photoshop, video editing, picture editing. Will these formats really
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Speaker 3: still exist once you can generate so much more media
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Speaker 3: with a prompt?
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Speaker 2: But you know, I also I have two schools a
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Speaker 2: thought on that, like one. People who want to do that.
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Speaker 2: They want to do that, like they're creative people that
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Speaker 2: enjoy it. They don't want to just put in the
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Speaker 2: word flower and like get a picture. Right, However, do
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Speaker 2: they have tools where you can put in the word
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Speaker 2: flower and create a picture? Like are they working towards that?
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Speaker 5: Oh?
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Speaker 3: Yeah, I mean that's that.
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Speaker 2: Is they're in it like they're in it. Yeah yeah.
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Speaker 3: I mean the Adobe has present the entire last year
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Speaker 3: working quickly because other AI startups did this first, to
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Speaker 3: make these kind of tools where you can type in
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Speaker 3: you know, yeah, like four journalists sitting around a radio
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Speaker 3: booth and he generates the image.
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Speaker 2: Pretty well, don't do that. You need us because we
5:17
Speaker 2: are unique and awesome. Okay, go ahead, Sorry, No.
5:20
Speaker 3: To your point, do creatives like it? It gives them
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Speaker 3: some anxiety, no doubt, but like I mean, they need
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Speaker 3: to get paid, right, and at the end of the day,
5:29
Speaker 3: if the bosses are saying that, hey, this is a
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Speaker 3: pretty good tool, we're going to be able to create
5:33
Speaker 3: things faster. The incentives are all there. I mean, I
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Speaker 3: don't think the idea that people are anxious because a
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Speaker 3: I might replace their jobs could reduce the adoption of it.
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Speaker 3: I don't think that will be really a prohibitor here.
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Speaker 4: I mean, that's so interesting though, because ever since this
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Speaker 4: generative AI mania came about, the whole question is what's
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Speaker 4: this going to do to jobs? And a lot of
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Speaker 4: the response has always been it'll always be people working
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Speaker 4: in conjunction with AI. But the thing that makes me
6:00
Speaker 4: think about your Oppenheimer comment that the that was made
6:03
Speaker 4: on the call, I think that's a very telling comment
6:05
Speaker 4: because that Academy award went to the one person, not
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Speaker 4: the one person in Hollywood, a prominent person in Hollywood
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Speaker 4: who champions the old school way of doing things, shooting
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Speaker 4: things just on film. And so that kind of leads
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Speaker 4: me down this path that thinking, yeah, the Adobe software
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Speaker 4: might stick around for a while, but it might just
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Speaker 4: become very niche or something for a very specified sort
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Speaker 4: of area of use, whereas the rest of the world
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Speaker 4: is just going to move on with doing things with
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Speaker 4: a couple of prompts totally.
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Speaker 3: And the big question is like, will companies reinvest right
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Speaker 3: because these are labor saving technologies. Will it be that, hey,
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Speaker 3: I'm able to do more with each person so we
6:39
Speaker 3: can expand the scope of what we do, or are
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Speaker 3: we going to do what we currently do work wise
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Speaker 3: with less people and just save a bunch of money
6:46
Speaker 3: and employ less. And I think we're deluding ourselves if
6:50
Speaker 3: we don't think that companies are just going to cut labor,
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Speaker 3: at least some of them will.
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Speaker 2: Yeah, what else are you looking at?
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Speaker 5: Like?
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Speaker 2: What else is driking is built in your boat right now?
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Speaker 3: I mean, I think think a really big one is
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Speaker 3: how soon we are able just to generate these videos
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Speaker 3: with prompts?
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Speaker 5: Right?
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Speaker 3: I mean this demo we saw from open Ai was
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Speaker 3: such a kind of extreme example of this technology, And
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Speaker 3: the big question is is this really ready for prime
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Speaker 3: time or is this one of these demos that you
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Speaker 3: show that isn't actually going to be in our hands
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Speaker 3: for a couple of years.
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Speaker 2: Yeah.
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Speaker 4: I guess that's always the question though, And it's like
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Speaker 4: we're leaving the hyper we're lapping up the hype, any
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Speaker 4: example of how cool this could possibly be. But this
7:32
Speaker 4: is the question for all companies. You know, you've got
7:34
Speaker 4: to start putting real money behind it. And sometimes it
7:37
Speaker 4: just like doesn't work very well, or there's tweaks in
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Speaker 4: the machine that makes you think, like I don't like
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Speaker 4: this response.
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Speaker 3: It looks well, I mean, and I'm sure you also
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Speaker 3: have the controversy of Google's equivalent of the image generation.
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Speaker 3: It had a lot of backlash in recent weeks because
7:52
Speaker 3: it would, you know, if you typed in a certain
7:54
Speaker 3: historical element. You know, some of these tools are made to,
7:57
Speaker 3: you know, emphasize diversity, and some folks there was some
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Speaker 3: backlash to that and historical contacts, contacts or maybe it
8:04
Speaker 3: wouldn't be accurate. And so there is a lot of
8:08
Speaker 3: people very closely scrutinizing the outputs of these machines, right,
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Speaker 3: I mean, there's no precise way to make everybody happy
8:15
Speaker 3: with these Yeah, I.
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Speaker 4: Guess it's a lot of programming needs to keep happening,
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Speaker 4: and it's a question of whether the money will still
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Speaker 4: be there from companies to pay for it.
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Speaker 6: Yeah.
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Speaker 2: Well, Brodie, thanks lot, You're awesome. I love having you on.
8:25
Speaker 2: Your depth of knowledge is great. Brody Ford coming in
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Speaker 2: their Bloomberg Tech and you're looking at Adobe where to
8:31
Speaker 2: go had it and it went away. It's down about
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Speaker 2: seventeen percent. Yeah, it's real, down around seventeen percent. Fourteen
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Speaker 2: Thank you. How to buy back though as well? It's like, hey, guys,
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Speaker 2: stick around, stick around. We know we're not delivering what
8:45
Speaker 2: you want right now, but please stick around for that.
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Speaker 2: I mean, I do think your point is taken, Jen
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Speaker 2: that like everyone seems to say, you will use AI,
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Speaker 2: but you need humans to help it. It's not maybe
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Speaker 2: going to be as binary as maybe we thought a
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Speaker 2: couple of years ago.
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Speaker 4: You need humans. But maybe to Brodie's point, you don't
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Speaker 4: need all those humans, right, just a couple of humans.
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Speaker 2: But which is why you need people like us to
9:06
Speaker 2: want to diversify into you know, photoshop to do that,
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Speaker 2: Like my dad does that, Like he takes photographs, he
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Speaker 2: likes it, and they need tools around in it. Like
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Speaker 2: you need those people to kind of pay for that
9:17
Speaker 2: stuff that is irrespective of AI. But is that really
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Speaker 2: going to move the needle then for a company like Adobe.
9:24
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9:42
Speaker 2: Apparently Boeing is now advising airlines to check the cockpit
9:46
Speaker 2: seats on sevent eighty seven Dreamliner jets after a seat
9:49
Speaker 2: mishap likely pushed a pilot into the controls, calling a sudden,
9:53
Speaker 2: terrifying plunge on a flight to New Zealand this week.
9:56
Speaker 2: The flight attendant was serving a meal, and therefore all
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Speaker 2: of this it happening. George Ferguson Bloomberg Intelligence Senior Aerospace,
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Speaker 2: Defense and Airlines analyst joins us, Now, I mean this
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Speaker 2: feels like, okay, yeah, it was a mess.
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Speaker 6: Up, big deal.
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Speaker 7: I'm sorry to catch up.
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Speaker 2: Big deal or no.
10:14
Speaker 7: No, I don't think it's a big deal. I mean,
10:16
Speaker 7: if you were on the flight, obviously it was a
10:18
Speaker 7: big deal. And so we hope everybody's safe and okay
10:22
Speaker 7: after that. But you know, the seventy seven has been
10:26
Speaker 7: operating for a lot of years. Now, this is the
10:29
Speaker 7: first of this incident I've heard of. It sounds like
10:32
Speaker 7: there might not have been a safety device in place
10:36
Speaker 7: that allowed the seat to be adjusted, and so my
10:40
Speaker 7: guess is Boeing, out of abundance of caution, has pushed
10:43
Speaker 7: out to the fleet. You know, hey, make sure that
10:45
Speaker 7: this plastic cover, whatever safety piece is in place, and
10:49
Speaker 7: you don't adjust the seat by mistake. But again, I
10:52
Speaker 7: think it's not a major issue right now, there's definitely
10:54
Speaker 7: a heightened amount of awareness around anything that happens in
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Speaker 7: a Boeing airplane.
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Speaker 1: I think it's a little bit of that.
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Speaker 4: I take your point that it's not a major issue
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Speaker 4: in terms of this particular type of jetliner. But I
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Speaker 4: do wonder about what the rita cross is going to
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Speaker 4: be for the average consumer, because they're not short of
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Speaker 4: news from Boeing that they've seeming to have one mishap
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Speaker 4: after another, and I wonder if consumers are really going
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Speaker 4: to be able to make the distinction between this jetliner
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Speaker 4: versus that jetliner.
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Speaker 7: Yeah, agreed, I mean I've seen, you know, a lot
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Speaker 7: of press on every little thing that happens on any
11:24
Speaker 7: Boeing jet right now. I think, you know clearly it's
11:26
Speaker 7: getting a lot of clicks, and so the media is
11:28
Speaker 7: going after pretty pretty hard. I think at this point,
11:33
Speaker 7: where still still in this situation, where as the problems
11:39
Speaker 7: with the Max fade, I think some of the demand
11:42
Speaker 7: for these stories should fade. I don't think most people
11:44
Speaker 7: are going to the airport worried about what airplane they're flying.
11:48
Speaker 7: I talk to a lot of people, you know about
11:51
Speaker 7: where they're flying and what they're flying all the time.
11:53
Speaker 7: I'm an aerospace geek, so I'm still hearing people that
11:57
Speaker 7: aren't in aerospace say, hey, you know, yesterday I knew
12:00
Speaker 7: I flew a Max. But they're still getting on the airplane.
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Speaker 7: So I think, you know, we're not at that point
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Speaker 7: yet where people are sort of rejecting flying Boeing products,
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Speaker 7: and that's a positive for Boeing.
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Speaker 5: Obviously.
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Speaker 2: I think Jen for like a hot minute, maybe it
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Speaker 2: was on Priceline, you could search the type of aircraft
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Speaker 2: after I think the panel blue off and stuff, and
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Speaker 2: you could search your aircraft.
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Speaker 6: You couldn't.
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Speaker 4: That's got to be totally a function of consumer demand.
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Speaker 2: Yeah, yeah, I wonder how many people actually cared or
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Speaker 2: looked at it. To George's point, George, in the meantime,
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Speaker 2: we learned a lot about the airline industry this week.
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Speaker 2: There was a conference I think was JP Morgan right
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Speaker 2: then airlines, particularly Southwest, was warning of in essence, some
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Speaker 2: slowing demand. What are the order books like for Boeing, Like,
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Speaker 2: how are they navigating that with their customers?
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Speaker 7: So, I mean the order books are really you know,
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Speaker 7: the backlog is very strong for Boeing and so like
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Speaker 7: on the seven thirty seven, five six years worth of
13:00
Speaker 7: backlog on that airplane. That's why it's so disappointing when
13:03
Speaker 7: you know one of their major customers like Southwest, comes
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Speaker 7: out and says, you know, we've been told by Boeing,
13:08
Speaker 7: we're not gonna be able to get this many jets,
13:10
Speaker 7: all the jets we wanted this year. There's a lot
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Speaker 7: of work to be done for Boeing and that's part
13:15
Speaker 7: of their recovery story is increasing build rates, which is
13:18
Speaker 7: going to boost their profits, boost their cash flow. A
13:21
Speaker 7: lot of folks were looking for that to happen this year.
13:24
Speaker 7: When someone like Southwest comes out and says we're not
13:26
Speaker 7: gonna get all the airplanes this year, that means we're
13:28
Speaker 7: kind of set back another year. But that you know,
13:32
Speaker 7: they need to start to build that backlog and keep
13:34
Speaker 7: those customers happy so they don't go away. The longer
13:38
Speaker 7: the delays happen, the more risk there is the customers
13:41
Speaker 7: haven't out in their contract and can walk away from
13:44
Speaker 7: from their orders. But the backlogs are very strong for
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Speaker 7: the seven thirty seven and the seven eighty seven. It's
13:49
Speaker 7: major competitors, the A three fifty, the seven eighty seven
13:52
Speaker 7: has a larger backlog than the A three fifty bid
13:55
Speaker 7: in service a long time. Airlines love it so right now,
13:58
Speaker 7: backlogs are very strong about they just have to start
14:00
Speaker 7: building airplane as well.
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Speaker 4: Looking at the Boeing stock year today, it's the second
14:05
Speaker 4: worst performer in the S and P five hundred, I mean,
14:07
Speaker 4: when is the stock story going to start to turn around?
14:11
Speaker 2: You know?
14:11
Speaker 7: I mean that's always hard to say. I think you
14:13
Speaker 7: need obviously some level of sentiment to change for people
14:16
Speaker 7: to be excited about this. You know, I personally think
14:20
Speaker 7: that this purchase of Spirit Aerosystems that's been floated, I
14:25
Speaker 7: personally think getting that done could put a bottom under
14:29
Speaker 7: the problems Boeing's having in their manufacturing process. And getting
14:34
Speaker 7: that bottom underneath, I think, you know that this quality
14:39
Speaker 7: story that's going to be key, I think to keeping
14:41
Speaker 7: investors happy.
14:43
Speaker 2: All right, George, really appreciate it. Thanks so much for
14:45
Speaker 2: happing on with us. George Ferguson Bloomberg Intelligence, senior Aerospace,
14:48
Speaker 2: Defense and airlines analysts.
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15:06
Speaker 2: The University of Michigan sentiment, as John Tiger was just reporting,
15:09
Speaker 2: falling just a bit, let's get more data on it
15:11
Speaker 2: with Joanne Chu, University of Michigan Surveys of Consumer Director.
15:15
Speaker 2: She's breaking it down right now. Okay, So, Joanne, what
15:17
Speaker 2: happened here?
15:19
Speaker 5: Essentially not a whole lot. Consumer sentiment has been remarkably
15:23
Speaker 5: stable over the last three months. We've had very little
15:26
Speaker 5: movement since January, and that's following the enormous gains that
15:31
Speaker 5: happened in November and December, December, November and January. So
15:36
Speaker 5: not a whole lot of change. Consumers don't really perceive
15:39
Speaker 5: any sort of clear developments in the economy. Possibly more importantly,
15:43
Speaker 5: inflation expectations also remarkably stable. Consumers still expect inflation to
15:48
Speaker 5: slow down, both in the year ahead as well as
15:50
Speaker 5: the long term.
15:51
Speaker 4: You know, we've been talking so much on this program
15:53
Speaker 4: about where investors are expecting the FED to go. Can
15:57
Speaker 4: you dig in a little bit to what you think
15:58
Speaker 4: consumers read it on what what interest rate re cuts
16:02
Speaker 4: are coming. I mean, do they feel confident? Are they
16:05
Speaker 4: a little bit more enthusiastic than investors are?
16:07
Speaker 5: Perhaps consummers are expecting broadly speaking, they are expecting interest
16:12
Speaker 5: rates to come down over the next year. And you know,
16:16
Speaker 5: that was a pretty sharp change in consumer views or
16:19
Speaker 5: consumer expectations over interest rates over the last three to
16:22
Speaker 5: six months. So even though most consumers really aren't paying
16:25
Speaker 5: that close attention to developments and financial markets, more more broadly,
16:29
Speaker 5: they do expect the interest rates that they face to
16:32
Speaker 5: come down. We don't really know much about what they're
16:35
Speaker 5: thinking in terms of timing, but every month there is
16:38
Speaker 5: an increasing number who expect interest rates to soften.
16:41
Speaker 2: I mean, do we read anything from the fact that
16:44
Speaker 2: things are just slowing over time? Like, is this sort
16:47
Speaker 2: of the tightening that we've been waiting for and the
16:50
Speaker 2: consumer sentiment a bit lighter so they just buy and
16:53
Speaker 2: spend less, Like, is this kind of what we've been
16:55
Speaker 2: waiting for for the last year and a half. It's possible,
16:58
Speaker 2: but it's the part of the thing.
17:01
Speaker 5: Is that, excuse me, part of the reason that consumers
17:03
Speaker 5: are not really moving a whole lot in the sentiment
17:07
Speaker 5: is that there's a good chunk of consumers who are
17:09
Speaker 5: thinking about the election ahead, and you and a lot
17:13
Speaker 5: of consumers are telling us spontaneously that the trajectory of
17:17
Speaker 5: the economy very much depends on the result of November's election.
17:21
Speaker 5: So I think there are people who are just reserving
17:23
Speaker 5: judgment right now. Whether that's going to affect their spending,
17:25
Speaker 5: it's a little bit hard to say, because I think
17:27
Speaker 5: you know, even even though they're reserving judgment, you know
17:29
Speaker 5: that they they're they're still expecting.
17:33
Speaker 2: Two possible outcomes.
17:37
Speaker 5: And uh, and you know what we'll see as in
17:40
Speaker 5: the months ahead as it comes into focus, if that
17:42
Speaker 5: starts to move sentiment one way or the other.
17:46
Speaker 4: I noticed that in your data you do pull Republicans
17:49
Speaker 4: versus Democrats versus independence on how they're feeling. So is
17:52
Speaker 4: there any interesting change there this month?
17:55
Speaker 5: I would say it's a little early to say, because
17:57
Speaker 5: you know, at the preliminary reading, we don't want to
17:59
Speaker 5: draw too many conclud out of small samples.
18:02
Speaker 2: You're divided into three different parties.
18:04
Speaker 5: What I will say is that this general stability that
18:07
Speaker 5: we're seeing, we see that across party as well. So
18:10
Speaker 5: the the enormous gains in sentiment that we saw in
18:13
Speaker 5: November to January, and then the stability between January and March.
18:17
Speaker 2: All three of the both of those.
18:19
Speaker 5: Patterns are visible across Republican's Independence as well as Democrats.
18:24
Speaker 2: Interesting. Hey, Joan, we love it. Thank you for the
18:26
Speaker 2: incident analysis. It really helps us as we get through
18:28
Speaker 2: all the data. Here to insue of University of Michigan.
18:32
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18:36
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18:40
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18:50
Speaker 2: All right, let's get the take on a market here.
18:53
Speaker 2: My daughter's making animal sounds. Sit down, don't stand on
18:56
Speaker 2: the chair. All right, looking at a market here where
18:58
Speaker 2: we're training a little bit heavy. Yes, it's options expiration,
19:01
Speaker 2: triple witching, volumes super high. But you know, I'm trying
19:04
Speaker 2: to understand if we're gonna be looking for bad news
19:07
Speaker 2: or good news and what the reaction function is for stocks.
19:10
Speaker 2: So Dana Dioria is co CIO of Investment and she
19:15
Speaker 2: joins us. Now, Dana, what are we waiting for at
19:18
Speaker 2: this point, like you need to be selling into this.
19:20
Speaker 2: Do you buy whatever?
19:21
Speaker 8: Dip?
19:21
Speaker 6: But what do we do? Yeah, it's a great question,
19:26
Speaker 6: you know, I think, well, we've been buying. There's been
19:29
Speaker 6: there's been plenty of buying going on in this market.
19:31
Speaker 6: I think actually, I think, you know, what we're seeing
19:34
Speaker 6: now is of course the market slowly but surely getting
19:37
Speaker 6: to where it's hard to understand why we maybe didn't
19:39
Speaker 6: start there, right, you know, the market contending with it's
19:42
Speaker 6: probably not six right, cuts we're past that question, is
19:47
Speaker 6: is it even three? At this point? All all sql right,
19:50
Speaker 6: not knowing what we know now, And you know, if
19:53
Speaker 6: that's the case, you know, I guess the question becomes,
19:56
Speaker 6: does it finally start hurting some of these growthier stocks
19:59
Speaker 6: where in in spite of the fact they have you know,
20:01
Speaker 6: longer dated cash flows. We know, traditional would say that
20:05
Speaker 6: higher for longer, you know, should be more painful for
20:07
Speaker 6: them if they're self funded, they're really not feeling that pain.
20:11
Speaker 6: I think, you know, it's kind of more in small
20:13
Speaker 6: caps is an interesting place to be thinking about their
20:16
Speaker 6: more interest rate sensitive you know, does higher for longer
20:19
Speaker 6: how does that impact them? But there's pros and cons there.
20:23
Speaker 6: You know, my take is actually to keep tilting a
20:26
Speaker 6: little bit into that space, especially if you can wait
20:28
Speaker 6: it out. They may be interest rate sensitive, but if
20:31
Speaker 6: inflation comes back, you know, small value in particular tends
20:34
Speaker 6: to outperform inflation. So there's push and pull in this market.
20:38
Speaker 6: But I think the overall theme is, Wow, maybe we're
20:41
Speaker 6: not going to get these these rate cuts we were
20:43
Speaker 6: hoping for.
20:43
Speaker 5: I mean, can you.
20:44
Speaker 4: Talk a little bit about your views on the of
20:46
Speaker 4: the balance of risks for the Fed? I mean, do
20:48
Speaker 4: they have a lot to lose by waiting a lot
20:50
Speaker 4: to lose by moving too quickly.
20:53
Speaker 6: I think they have more to lose by moving too quickly.
20:56
Speaker 6: You know, their mandate is employment and inflation, and really
21:00
Speaker 6: both of those are signaling the same thing that it's
21:04
Speaker 6: not time to cut right. So we have PPI coming
21:06
Speaker 6: in a little higher than we wanted core, you know,
21:09
Speaker 6: inflation a little higher. Obviously, these are not extremes. We're
21:13
Speaker 6: not seeing a bounce back or something in inflation yet,
21:16
Speaker 6: but we are seeing stickiness to inflation. And you know,
21:19
Speaker 6: the history suggests inflation does kind of come in waves.
21:22
Speaker 6: We've seen a lot of macro analysts talk about that
21:25
Speaker 6: you know. So the FED of course is well versed
21:28
Speaker 6: in that, so they're probably worried about that. They're also
21:31
Speaker 6: looking at these employment reports. Unemployment ticks up a little bit,
21:34
Speaker 6: but you know, initial job those claims look great, right,
21:37
Speaker 6: The employment picture looks pretty sound. So if your mandate
21:40
Speaker 6: is employment inflation, both of those signals are saying why
21:43
Speaker 6: are we cutting? Right now? I will say, look on
21:45
Speaker 6: the other side, well, one other signal saying why are
21:47
Speaker 6: we cutting, of course, is the stock market itself. It's
21:49
Speaker 6: not like, you know, we're feeling a lot of pain there.
21:52
Speaker 6: We're certainly not small you know, areas of the market,
21:55
Speaker 6: but not the market overall. I will say, you know,
21:58
Speaker 6: if there's you said, pros and cons right the other
22:00
Speaker 6: side of it for the FED, if there is some
22:03
Speaker 6: and I don't think this is the decisional part, but
22:05
Speaker 6: we do have a federal debt that's climbing dramatically. We
22:09
Speaker 6: do have cost of you know, maintaining that debt. The
22:13
Speaker 6: higher the interest rates, of course, and the more that
22:15
Speaker 6: debt rolls over, the worse it is. So you know,
22:18
Speaker 6: to the extent that impacts on the FED, that is
22:20
Speaker 6: in the mix.
22:21
Speaker 2: So if we're dealing with all of this, is it
22:24
Speaker 2: a commodity situation that you need to be playing right now?
22:27
Speaker 2: I'm just looking at month to date the S and
22:29
Speaker 2: P Energy Index is up almost seven percent, whereas you
22:33
Speaker 2: have WTI also with a nice move a month to
22:38
Speaker 2: date up a little over three percent. It's a little
22:40
Speaker 2: softer today, but you know, copper it eleven month high.
22:42
Speaker 2: Like if we're in for a period of yep, we're
22:44
Speaker 2: gonna get stickier prices. We're not sure where the reaction
22:47
Speaker 2: function is from the FED, it's gonna push off rate
22:49
Speaker 2: hikes just by the commodity sectors.
22:53
Speaker 6: The hot right, there's definitely a camp who would say
22:55
Speaker 6: yes to that, and especially too if you think inflation
22:58
Speaker 6: might be stickier. Of course, there's a whole you know,
23:01
Speaker 6: school that says that that's a place to be to
23:04
Speaker 6: tackle inflation. I don't know if I come in really
23:07
Speaker 6: in that camp, not to say one way or the other. Obviously,
23:11
Speaker 6: demand there's several variables that are an impact on that,
23:15
Speaker 6: and energy of course very dominant in that sector. But
23:19
Speaker 6: I guess you know, from the standpoint of just what
23:21
Speaker 6: am I trying to protect against? You know, the commodity
23:24
Speaker 6: sector is pretty volatile. If it's inflation I'm trying to
23:26
Speaker 6: protect against. You know, tips is probably a better place
23:30
Speaker 6: to be if I'm specifically looking there, and if i'm inequities,
23:33
Speaker 6: and as I mentioned, small value in particular, you know,
23:36
Speaker 6: I can go there and I have a reason to
23:39
Speaker 6: productive capacity, right to earn returns over time there versus
23:43
Speaker 6: maybe just you know, betting on a commodity, betting on
23:46
Speaker 6: a price increase because of supply demand issues. So my
23:50
Speaker 6: personal preference is more along those lines. It's not to
23:53
Speaker 6: say you shouldn't be in commodities, but I don't put
23:56
Speaker 6: a big stake in the allocation there.
23:58
Speaker 4: So just one last question for you. Getting into the
24:00
Speaker 4: second half of the year presidential election campaign coming up,
24:03
Speaker 4: there could be highly partisan activities going on around there.
24:07
Speaker 4: What should equity investors be looking out for.
24:10
Speaker 6: Yeah, under statement of the year right, definitely, Well, we'll
24:14
Speaker 6: see some partisan ship. You're you're I'm with you one
24:18
Speaker 6: hundred percent. Look, I think you know, there's a there's
24:21
Speaker 6: a lot of academic evidence, a lot of empirical research
24:23
Speaker 6: that says you can draw a good correlation between who's
24:26
Speaker 6: in power, whether it's presidency, Senate, you know, House, all
24:31
Speaker 6: sorts of every think of the matrix of which which
24:34
Speaker 6: in power for each of those, it's all been looked at.
24:36
Speaker 6: It's really not definitive which you know, configuration is better
24:41
Speaker 6: for markets. Obviously if it was, you'd have that party
24:44
Speaker 6: really singing that those those phrases. But so so I
24:47
Speaker 6: don't from that perspective, I don't think there's a lot
24:49
Speaker 6: of information content. But I think you nailed it. It's
24:52
Speaker 6: the volatility, right, It's the fact that the market ball
24:56
Speaker 6: and actually you're seeing vix you know, futures in VIX
24:59
Speaker 6: reflect this a bit that around October, all of a sudden,
25:02
Speaker 6: you know, a spike in volatility is probably coming for
25:04
Speaker 6: the market. So I think you're absolutely right. I think
25:07
Speaker 6: expect kind of bumping us the election season and as
25:10
Speaker 6: we all know too, globally there's a lot of elections
25:14
Speaker 6: going on this year, so overall that could be you know,
25:17
Speaker 6: not just in the S and P five hundred and
25:19
Speaker 6: US indexes, but globally as well.
25:21
Speaker 2: All right, Dana, thanks a lot, really appreciated Dana Dioria,
25:24
Speaker 2: co Cio of Investment joining us there. But the interesting
25:27
Speaker 2: thing is if you played volatility or election volatiler or
25:32
Speaker 2: geopolitical risk it hasn't paid off like you had a
25:34
Speaker 2: brief momentary thing in twenty sixteen with Brexit. But the
25:37
Speaker 2: hedging like window of making money just gets smaller and
25:40
Speaker 2: smaller with these things.
25:41
Speaker 6: I know.
25:41
Speaker 4: So if that's your move, then you've got to think
25:43
Speaker 4: of another strategy, because I'm looking at the VIX right
25:45
Speaker 4: now and it's at a pretty low level.
25:47
Speaker 2: Yeah, And if anything, everyone's buying calls to play the
25:50
Speaker 2: upside or selling calls, not necessarily hedging their bets when
25:54
Speaker 2: it comes to puts.
25:58
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26:01
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26:04
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26:16
Speaker 2: I think they do have share marks. Shakes still at McDonald's.
26:19
Speaker 2: I'm not gonna you know, don't don't quote me on that.
26:22
Speaker 8: Tucker, but I must get well at least, you know,
26:25
Speaker 8: for Saint Patrick's Day's the seventeenth.
26:28
Speaker 2: Yeah, I mean I feel like that's that's okay. I mean,
26:30
Speaker 2: do you want to know the calorie count for that or
26:31
Speaker 2: you're good.
26:32
Speaker 8: I actually did check the calorie count for the large.
26:36
Speaker 8: It's eight hundred cowaries. You imach, that's something one drink.
26:42
Speaker 4: That is a something breakfast and lunch right there.
26:44
Speaker 8: Combine that with a big mac large fries just set
26:48
Speaker 8: for a week.
26:49
Speaker 6: Yeah.
26:50
Speaker 2: Oh, they can have reduced fat ice cream though, so
26:52
Speaker 2: that's something. But that's only if you can order it
26:54
Speaker 2: because apparently there was an outage. They experience a system outage.
26:59
Speaker 2: It appears to have or did in the Asia Pacific
27:01
Speaker 2: region and spread to other markets globally, leaving customers unable
27:05
Speaker 2: to order at its stores. It's huge, so we have
27:07
Speaker 2: to get more on this on the stock you just
27:09
Speaker 2: down by about a four tens one percent. Michael Halem,
27:11
Speaker 2: Bloomberg Intelligence Senior restaurant and food service analyst joins us, Now,
27:15
Speaker 2: what happened here?
27:17
Speaker 3: Nice segue by the way.
27:18
Speaker 2: Thank you, you know, I mean, I do this for
27:20
Speaker 2: a living, but you know it's a hit or miss
27:22
Speaker 2: for me.
27:22
Speaker 6: It's fifty to fifty.
27:23
Speaker 9: Can't all be winners, I guess, but that was a
27:25
Speaker 9: good one. Yeah, So I'm not really sure how many
27:30
Speaker 9: stores in how many countries were affected so far from
27:33
Speaker 9: what I could cobble together, it look like a couple
27:36
Speaker 9: dozen countries, and it wasn't. All of the stores in
27:38
Speaker 9: the countries had this digital outage, so people couldn't order
27:42
Speaker 9: and pay with their mobile apps, right, and they had
27:45
Speaker 9: trouble ordering ahead on.
27:47
Speaker 2: I mean, I can make fun of it, but that
27:49
Speaker 2: happened to Starbucks, like freak out.
27:51
Speaker 9: So you know it's fair because you're addicted to the
27:53
Speaker 9: caffeine and Starbucks, you're not addicted to the Big Mac.
27:56
Speaker 4: Right, Well, think of the people who are addicted to
27:58
Speaker 4: the Big macau exactly be hurt.
28:01
Speaker 2: Yeah, think of the people who want that eight hundred
28:02
Speaker 2: dollars dollars eight hundred calorie share mark shake would be
28:06
Speaker 2: a really expensive shake if that was the case. How
28:09
Speaker 2: is McDonald's doing so?
28:12
Speaker 9: Yeah, So what I guess what I was getting at
28:13
Speaker 9: is it's going to be negligible that the impact on
28:16
Speaker 9: their earnings, you know, basis you know, it'll be we're
28:18
Speaker 9: talking about like a few basis points maybe impact to
28:20
Speaker 9: the global same star sales for the quarter. But McDonald's
28:23
Speaker 9: is doing really well overall. Last quarter, they started to
28:27
Speaker 9: talk a little bit more about the low income consumer
28:30
Speaker 9: and how they're kind of pulling back on their spending,
28:32
Speaker 9: visiting less often, ordering more off of the dollar menu
28:36
Speaker 9: and things of that nature. But overall the company is
28:40
Speaker 9: doing really well. They are they are having some issues
28:45
Speaker 9: in the Middle East, however.
28:46
Speaker 4: Yeah, can you talk us through that. It looks like
28:48
Speaker 4: the CFO and now it's something At a recent conference.
28:50
Speaker 9: Yeah, and they mentioned that same Star sales in the
28:56
Speaker 9: for their international and developed markets are going to be
28:59
Speaker 9: lower than expected, lower than consensus, lower than they were
29:02
Speaker 9: last quarter. And so I think most of the street
29:05
Speaker 9: had thought that initial impact of you know, some of
29:09
Speaker 9: the things that happened with their franchise and perceived support
29:12
Speaker 9: of Israel over Hamas hurt sales in the region, and
29:16
Speaker 9: I think a lot of investors thought that would kind
29:18
Speaker 9: of roll off after fourth quarter. But it looks like
29:20
Speaker 9: it's going to impact their results for longer than expected.
29:24
Speaker 9: I mean, it could last throughout the year. McDonald's does
29:28
Speaker 9: have exposure to Egypt and Jordan too, countries that are
29:32
Speaker 9: geographically very close to the conflict, so that's going to
29:36
Speaker 9: impact their results as well, you know, and it could
29:40
Speaker 9: be a few quarters for this for this you know,
29:44
Speaker 9: impact to kind of to roll off. What I'm hearing
29:47
Speaker 9: is it is improving. Things are improving not only with
29:50
Speaker 9: the American chains but also locally, but it's going to
29:55
Speaker 9: take time.
29:56
Speaker 2: So I'm looking at the stock just this week, in
29:59
Speaker 2: the last two day is down by about five percent.
30:01
Speaker 2: Do you feel like that's accurately reflected now on the
30:03
Speaker 2: stock price and valuation or is there just a little
30:05
Speaker 2: bit more downside? Is that ego or is it actual
30:08
Speaker 2: Middle East issues? Or he's kind of laughing at me, and.
30:10
Speaker 5: I don't know.
30:11
Speaker 9: Well, I've worked for Bloomberg Intelligence. Am I allowed to
30:14
Speaker 9: tell you what's priced in, what's what's not priced in?
30:18
Speaker 9: I mean, listen on the on the valuation, it's interesting.
30:21
Speaker 9: We're in an interesting spot for restaurants right now. So
30:25
Speaker 9: the stocks have done.
30:26
Speaker 6: Really well.
30:28
Speaker 9: Over the last like six months or so. I think
30:30
Speaker 9: we've we've passed the toughest year over year comparisons in
30:34
Speaker 9: January and February, so the year over year compares are
30:37
Speaker 9: getting easier throughout the rest of the year. On one hand,
30:40
Speaker 9: but on the other hand, you have a weakening consumer,
30:42
Speaker 9: especially the low end, middle income consumer, right and so
30:47
Speaker 9: it's tough to say. I mean, you can make the
30:49
Speaker 9: argument the entire space is overvalued, right, so maybe that
30:53
Speaker 9: five percent correction, maybe that's not enough. It's very difficult
30:59
Speaker 9: to say. Like I said, we're a point now where
31:03
Speaker 9: where it's going to be really really interesting. And I
31:06
Speaker 9: think what's gonna happen is we're going to see a
31:08
Speaker 9: bigger divergence between the winners and the losers. You know,
31:10
Speaker 9: companies that are doing really well, companies like Chipotle, McDonald's
31:15
Speaker 9: that have been able to draw in some of the
31:17
Speaker 9: higher income consumers, I think are going to continue to
31:20
Speaker 9: outperform some of these other chains that haven't been able
31:23
Speaker 9: to do that to the same extent, like a Wendy's
31:25
Speaker 9: or a cracker Barrel. So it feels like it's getting
31:30
Speaker 9: back to a stock pickers markets market for restaurant stocks,
31:34
Speaker 9: which is great, which I love, you know, so we'll
31:39
Speaker 9: see it is a it is a business where you
31:41
Speaker 9: have to compare I think, uh, you know these restaurant
31:45
Speaker 9: chains where they were versus their peers, and McDonald's gets
31:48
Speaker 9: a premium valuation, but it also has outperformed.
31:51
Speaker 2: You know.
31:51
Speaker 4: I would love to go back to this point you're
31:53
Speaker 4: making about like consumer spending and getting which chains are
31:56
Speaker 4: getting the wealthier customers. I mean, because we definitely saw
31:58
Speaker 4: a trend of casual dining moving to fast casual, fast
32:02
Speaker 4: casual moving to quick service, and so where are we
32:04
Speaker 4: now on that is with inflation pressures easing, is that
32:07
Speaker 4: kind of unlocking a little bit.
32:09
Speaker 9: We're still seeing this case shaped recovery. We're seeing you
32:14
Speaker 9: know that that's what we're seeing. So we're seeing the
32:18
Speaker 9: high end consumers. We think they're going to start spending
32:21
Speaker 9: again this year. Full service, I'm sorry, fine dining, they've
32:27
Speaker 9: had they had the toughest comparisons. Last year, Fine dining
32:30
Speaker 9: did absolutely terrible. People visited less and they spent less.
32:34
Speaker 9: They've bought less expensive wine, things of that nature. Now,
32:38
Speaker 9: with asset prices going up, we think that high end
32:40
Speaker 9: consumer is going to come back and spend a lot more.
32:43
Speaker 9: So we're going to see I think we're going to
32:44
Speaker 9: see fine dining recover and probably outperform a lot of
32:48
Speaker 9: the other sub segments of the restaurant industry. And I
32:51
Speaker 9: think casual dining is probably going to get pinched the hardest.
32:54
Speaker 9: You know, it's a similar lower and middle income consumer
32:58
Speaker 9: to fast food, but fast food is cheaper and fast
33:02
Speaker 9: casual is cheaper, so I think people are are going
33:05
Speaker 9: to go and spend their money where they think they
33:06
Speaker 9: get better value for that dollar, right, And and casual dining,
33:10
Speaker 9: you know that full service, full service experience, you're going
33:13
Speaker 9: to pay a tip. You're more likely to buy drinks, aaptizers, desserts,
33:16
Speaker 9: So the bill ends up being a lot higher than
33:18
Speaker 9: it would at the fasts.
33:19
Speaker 2: Like fine dining now forget it, Like regular dining is
33:22
Speaker 2: now fine dining, right, Like three hundred dollars for three people?
33:26
Speaker 8: Can I point out an achilles heel? I think from
33:30
Speaker 8: the suburban perspective for McDonald's, the drive in where everybody goes.
33:34
Speaker 8: You don't go into the you go through your car.
33:36
Speaker 8: I go on my mailbox in my car to get
33:39
Speaker 8: the mail. That's a disaster. You pull up, you order,
33:44
Speaker 8: you pay, and then you go to pick up your food,
33:47
Speaker 8: and consistently they tell you have to go park and
33:50
Speaker 8: someone will bring your food out to you later. That's
33:52
Speaker 8: not fast food, and it's annoying because it's too much.
33:56
Speaker 2: They can't do it.
33:56
Speaker 8: Maybe I'm a staffed understand that's in the restaurant A
34:00
Speaker 8: lot of the restaurants, so that that's such a pet peeve.
34:04
Speaker 8: Every time I go, and I haven't been a long time,
34:06
Speaker 8: I say to myself, I'm never going back to McDonald's.
34:09
Speaker 9: And that's why they're pushing you to order ahead. They
34:11
Speaker 9: want you to order ahead, and they have the geo
34:13
Speaker 9: fencing so you can order ahead on your mobil ap.
34:15
Speaker 9: Once you pull on the lot, they're alerted that you're
34:18
Speaker 9: on premises. You park in the spot, you hang out,
34:21
Speaker 9: you look at your phone, look at Instagram for a
34:23
Speaker 9: couple of minutes, and then they bring out your food.
34:25
Speaker 2: Yeah, it's totally described what Tucker does.
34:27
Speaker 6: For sure that instagramming is like.
34:28
Speaker 2: A few minutes.
34:30
Speaker 6: Let you go though.
34:31
Speaker 2: But then to that point, what are their margins like?
34:33
Speaker 2: Because input costs and inflationary costs and then you have
34:36
Speaker 2: labor costs, and I'm wondering they can't really pass it on.
34:39
Speaker 2: What are their margins looking like?
34:40
Speaker 9: Well, the franchises are getting squeezed, There's no doubt about it.
34:42
Speaker 9: I mean, the beauty of being a franchise or like
34:45
Speaker 9: McDonald's is their margins are fantastic because you know, they're
34:48
Speaker 9: really a marketing company, right Like they're helping their franchisees market,
34:54
Speaker 9: you know, market the brand and the food so yeah,
34:57
Speaker 9: but franchises are getting squeezed, there's no about it. This year,
35:02
Speaker 9: commodity prices are going to be commodity price increases are
35:05
Speaker 9: going to be less than what we've seen. But chains
35:09
Speaker 9: are very, very wary about raising prices anymore because you've
35:14
Speaker 9: seen traffic decline a lot over the last three years,
35:17
Speaker 9: and it's been in response to much much higher prices.
35:20
Speaker 2: Michael, great stuff, really great to have you, super interesting
35:23
Speaker 2: conversation Michael Hale and Bloomberg Intelligence senior restaurant and food
35:26
Speaker 2: service analysts. But then you would think Jen that, like
35:29
Speaker 2: the people who don't want to go out to eat
35:31
Speaker 2: anymore or don't want to go to casual like, do
35:34
Speaker 2: they then trade down? And is there a new customer
35:36
Speaker 2: that's going to be coming in on a more consistent
35:38
Speaker 2: basis as things get harder.
35:39
Speaker 3: I don't know.
35:39
Speaker 6: I don't know.
35:40
Speaker 4: And the thing is, I do always wonder about the
35:42
Speaker 4: low income consumer because if that spending starts tailing off,
35:46
Speaker 4: what does that say about consumer spending for the rest
35:48
Speaker 4: of the economy. I'm good seventy percent of the economy.
35:50
Speaker 2: There's a really great article on the Bloomberg that talks
35:52
Speaker 2: about how auto debt, for example, and credit card debt
35:55
Speaker 2: has really been rising, and that people might be getting
35:58
Speaker 2: paid more, but it's the debt part. It is really
36:00
Speaker 2: squeezing everyone. I encourage everyone to read it. It was
36:03
Speaker 2: really eye opening to me.
36:04
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