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Stock Market Is Getting Close To Being Washed Out: Maley · Bloomberg Intelligence

0:05
Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm pim Fox.
0:08
Speaker 1: Along with my co host Lisa Bramowitz. Each day we
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Speaker 1: bring you the most important, noteworthy, and useful interviews for
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Speaker 1: you and your money, whether you're at the grocery store
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Speaker 1: or the trading floor. Find the Bloomberg p m L
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Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. If
0:31
Speaker 1: you blink, you will probably miss the direction of stock markets.
0:35
Speaker 1: They are whipping around. Uh, they were down, then they
0:38
Speaker 1: were up as much as a percent on the Nasdaq,
0:41
Speaker 1: which has been leading the losses and the gains, and
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Speaker 1: now they're up solidly but way off that NAZAC up
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Speaker 1: to tents of two tenths of a percent joining us now.
0:52
Speaker 1: Matt Malee, equity strategist for Miller, ty Back and Company,
0:56
Speaker 1: joining us, Mad, how do you interpret the whippy action
0:59
Speaker 1: that we've seen, Uh, that really has marked every day
1:03
Speaker 1: over the past few weeks. After the past few weeks,
1:05
Speaker 1: excuse me, it feels like a Friday. Yeah, it's it's well,
1:09
Speaker 1: yesterday's it was. It was particularly worrisome because a lot
1:13
Speaker 1: of these big swings we've seen have been kind of
1:16
Speaker 1: one directional. We do in other words, well, say two directional.
1:18
Speaker 1: In other words, the first direction is in the morning
1:21
Speaker 1: we either open up very strongly or open down very strongly,
1:24
Speaker 1: and then uh, and then we move in the other direction,
1:26
Speaker 1: So that's kind of a second move. Yesterday we actually
1:29
Speaker 1: had three moves and uh. I think that you know,
1:32
Speaker 1: that does nothing but making people more uncertain. And as
1:35
Speaker 1: we all know, I mean, it's an old cliche, but
1:37
Speaker 1: it's very very true. There's nothing worse for the markets.
1:40
Speaker 1: The markets hate nothing more than uncertainty. And I think
1:43
Speaker 1: this has got people stepping back from this rally this morning.
1:46
Speaker 1: I mean, it's still holding up a little bit, but
1:48
Speaker 1: we're well off our highs on the day. Matt Malie,
1:50
Speaker 1: in your experience, is it possible to know how many
1:54
Speaker 1: shares of a particular stock need to be traded in
1:57
Speaker 1: order to move that said stock in one d direction
2:00
Speaker 1: or another. I'm sure there's been many studies on it,
2:04
Speaker 1: but for exact numbers that I'm not aware of it. Okay.
2:07
Speaker 1: The reason I bring that up is because hardly anyone
2:10
Speaker 1: has that information. I've never met anybody who can tell
2:13
Speaker 1: precisely what kind of volume is necessary in order to
2:17
Speaker 1: move his stock, and the reason I posed this to
2:19
Speaker 1: you is because the prices are determined not by long
2:23
Speaker 1: term shareholders who may not ever touch their positions. But
2:29
Speaker 1: I'm wondering who determines the price that we see on
2:33
Speaker 1: a daily basis, not on a long term basis, but
2:37
Speaker 1: on this volatile trading basis. Well, I'm afraid nowadays, of course,
2:41
Speaker 1: and more than more than ever, it's these uh you know,
2:44
Speaker 1: it's the mechanics trading. And we all talk about algalis
2:47
Speaker 1: and high frequency traders and such. We've been talking about
2:50
Speaker 1: it for years, but there's no questions they play a
2:52
Speaker 1: big role. And and the thing is in in in
2:55
Speaker 1: former days when you didn't have such a you know,
2:58
Speaker 1: there was been recognized trading around for a while. But
3:00
Speaker 1: with these algorithms that they're just kicking immediately. But not
3:02
Speaker 1: only do they add by orders when the when the
3:05
Speaker 1: market's going up, but they cancel sell orders and they
3:08
Speaker 1: cancel offerings in the same one in the opposite direction,
3:11
Speaker 1: when they add sell orders, they cancel their bids. And
3:14
Speaker 1: this exacerbates the big swings that we have in the marketplace,
3:16
Speaker 1: and it makes it for much harder for for us
3:19
Speaker 1: to regain our you know, kind of the UH investor
3:22
Speaker 1: confidence that we need to get, you know, to form
3:24
Speaker 1: an exactly a kind of the bottom for this h
3:26
Speaker 1: this sell off. So given that confusion, can you read
3:30
Speaker 1: anything into this? I know that you have a lot
3:32
Speaker 1: of specialty looking at technical analysis and sort of watching
3:35
Speaker 1: the markets and the patterns. Me are you gleaning anything
3:38
Speaker 1: or is it sort of all over the place because
3:39
Speaker 1: of this of the noise? Well? No, actually, you know
3:43
Speaker 1: we are seeing some things now, I mean the showing
3:45
Speaker 1: that we I think we're getting somewhat close to a
3:48
Speaker 1: bottom the problem whenever we have in terms of time,
3:51
Speaker 1: I think that we you know, we're starting to see
3:53
Speaker 1: a big pickup in volume. We're seeing some of the
3:55
Speaker 1: major groups I'm sorry, the major average is being oversold,
4:00
Speaker 1: maybe not yet to the quite the big extremes we
4:02
Speaker 1: usually see, but still getting very close to that. We're
4:05
Speaker 1: also seeing um sentiment. I mean, I look at the
4:08
Speaker 1: daily Sentiment index which measures futures traders. It's only ten
4:11
Speaker 1: percent bulls right now, that's quite a quite extremely sometimes
4:14
Speaker 1: you usually seem to need to see it fall into
4:16
Speaker 1: the single digits, but we're getting very close to that.
4:18
Speaker 1: So the problem is with these mechanized tradings going on,
4:22
Speaker 1: you could see a big another down, draft, another down
4:24
Speaker 1: five percent or more over a couple of days before
4:27
Speaker 1: we get that bottom um. But the thing I like
4:29
Speaker 1: the most right now is what we're seeing in some
4:31
Speaker 1: of the really beaten down groups, like the housing stocks
4:34
Speaker 1: and the um bank stocks. They've gotten so oversold that
4:38
Speaker 1: they're really getting to a level they should be bought.
4:40
Speaker 1: I believe number one and number two this week they've
4:43
Speaker 1: outperformed the rest of the market, so they're holding up
4:45
Speaker 1: much better than the rest of the market. Shows that
4:47
Speaker 1: at least they're getting washed out. So I think the
4:49
Speaker 1: rest of the market is getting very close to being
4:51
Speaker 1: washed out as well. Matt. Maybe I just want you
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Speaker 1: to offer a little bit more detail into the technical
4:56
Speaker 1: aspects of trading, in the sense that sell orders can
5:01
Speaker 1: be canceled because you might put out a bid there
5:04
Speaker 1: to sell a large block of stock, and by the
5:07
Speaker 1: time you get back any information about what's available at
5:11
Speaker 1: a particular price, you can then cancel that order, which is,
5:15
Speaker 1: as you say, would accentuate changes in volatility exactly. They
5:20
Speaker 1: they again these these uh the way these things are
5:23
Speaker 1: set up in in in fractions of a section, so
5:26
Speaker 1: and I mean real fraction tiny when millions of it,
5:28
Speaker 1: well one thousands of of a second. Uh, these orders
5:31
Speaker 1: can be canceled. You think you've got a bid to hit,
5:33
Speaker 1: in other words, that you can sell it at a
5:35
Speaker 1: certain price. When you go down to sell it, it's
5:36
Speaker 1: not there. Uh. And then suddenly you're selling at a
5:39
Speaker 1: lower price. And if you put a market order in
5:41
Speaker 1: and then suddenly you're you're hitting. Instead of sending a
5:44
Speaker 1: lot of one price, you sold just very little there,
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Speaker 1: and then you sell the stock down, so it's it
5:48
Speaker 1: gets overdone. I'll tell you though, if we get another downdraft,
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Speaker 1: I believe the best way to play it is not
5:54
Speaker 1: trying to pick the bottom. But while I call align
5:56
Speaker 1: the book. In other words, if you want to buy
5:59
Speaker 1: a foul dollars with a stock by two at one level,
6:02
Speaker 1: then by another two hundred down half of a dollar
6:05
Speaker 1: below that, and below that, blow that line it all
6:07
Speaker 1: the way down. You're never gonna be able to pick
6:08
Speaker 1: the bottom. But that way your average price will be
6:11
Speaker 1: actually quite good and you won't be sitting there trying
6:13
Speaker 1: to chase things around when all this mechanized trading is
6:15
Speaker 1: going on. Matt, what do you think is driving the
6:17
Speaker 1: sell off. Well, I think you know, it's threefold. Number
6:21
Speaker 1: one is the the Federal Reserve u uh sticking by
6:25
Speaker 1: their guns and saying that they're going to continue to tighten. Um.
6:28
Speaker 1: And the one thing is that they've been tightening for
6:30
Speaker 1: two years now, almost two years anyway, and and that's
6:33
Speaker 1: what happens. That usually takes usually a big lad between
6:35
Speaker 1: when they start tightening when it has an impact on
6:37
Speaker 1: the stock market. Now. The same thing as is true
6:40
Speaker 1: uh on the these um things with trade issues with China.
6:45
Speaker 1: I mean, it was a lot of talk, but once
6:47
Speaker 1: these trade I'm sorry, these terrorists were actually imposed, that's
6:50
Speaker 1: when it's starting having the impact. And it is having
6:52
Speaker 1: an impact as we're seeing on at least not earnings
6:55
Speaker 1: right now, but on earnings guidance, and that's a big concern.
6:58
Speaker 1: And the last thing, of course, I think is Europe
7:00
Speaker 1: with this thing is Italy. The people. You know, we've
7:02
Speaker 1: seen the European banks fall well into the bear market
7:05
Speaker 1: territory before and our markets started to decline. It's something
7:08
Speaker 1: people were ignoring and not paying enough attention to. So
7:10
Speaker 1: it's kind of three three pronged thing here. Um. But uh,
7:14
Speaker 1: you know, it's it's the economy is still fine. I think, Well,
7:17
Speaker 1: this correction is healthy and normal. It could be a
7:19
Speaker 1: little bit deeper, actually, could be even go down another
7:22
Speaker 1: you know, like I said, five or six or seven
7:23
Speaker 1: percent more, But uh, we don't want things to go
7:26
Speaker 1: up on a straight line. This is actually healthy and
7:29
Speaker 1: h I wouldn't um, I wouldn't get overly concerned. It's scary,
7:33
Speaker 1: but that's that's the way it works. Thanks very much
7:37
Speaker 1: for being with us. Matt Malee is the chief equity
7:41
Speaker 1: strategist for Miller, tay Back and Company, and it sounds
7:44
Speaker 1: as though he's bullish, at least on the price action.
7:49
Speaker 1: I mean, this price action is mind boggling. Now we're
7:51
Speaker 1: back down to barely any gain at all on the NASDAC.
7:54
Speaker 1: I mean, things have absolutely been swinging all over the
7:56
Speaker 1: place h today, and they have been over the past
7:59
Speaker 1: few days. That certainly undermines confidence in and of itself. Yeah,
8:03
Speaker 1: and you've got this sell off well. I mean, even
8:05
Speaker 1: though the SMP fire is higher by a little bit
8:08
Speaker 1: more than six and a half points, it is off
8:10
Speaker 1: its highs of the day, and we are almost doing
8:13
Speaker 1: a round turn to where the market opened. General Electric
8:29
Speaker 1: has been a source SPoD for equity markets for a
8:32
Speaker 1: long time, and today it almost looked like they were
8:35
Speaker 1: ripping the band aid off. And then regulator, as it
8:38
Speaker 1: turns out, are looking into the company Brooks Otherland Bloomberg
8:42
Speaker 1: opinion columnists covering all things industrials choices. Now, so what's
8:45
Speaker 1: going on here and why can't she just catch a break?
8:49
Speaker 1: There are a couple of different things going on here. Um,
8:51
Speaker 1: so you know you reference regulators what they said on
8:54
Speaker 1: the conference callege the SEC is expanding its investigation into
8:59
Speaker 1: the companies that counting practices to include this twenty two
9:02
Speaker 1: billion good will charge that they booked in their power unit. Now,
9:05
Speaker 1: the SEC started this investigation after g E said in
9:08
Speaker 1: January that it was going to have a fifteen billion
9:11
Speaker 1: reserve shortfall related to a legacy insurance business. So to me,
9:16
Speaker 1: it's not terribly surprising that the SEC is going to
9:18
Speaker 1: look at this good will charge because it's basically the
9:21
Speaker 1: same issue. So the insurance business GE reviewed that every
9:24
Speaker 1: single year. So then all of a sudden come out
9:27
Speaker 1: with a fifteen billion dollar shortfall. I think raised a
9:30
Speaker 1: lot of questions about the credibility of their internal controls.
9:34
Speaker 1: It's the same issue with the good will I mean
9:35
Speaker 1: G reviewed that as recently as the second quarter and
9:38
Speaker 1: said that the you know, caring value exceeded the fair
9:41
Speaker 1: value and so too. Then all of a sudden do
9:44
Speaker 1: a complete all of a sudden, have this twenty two
9:46
Speaker 1: billion dollar charge. I think those are the same questions. Now.
9:50
Speaker 1: The difference, I think, and the bigger point is that
9:53
Speaker 1: G also said the d o J is now investigating
9:57
Speaker 1: the same things the SEC was looking into, including this
9:59
Speaker 1: good will charge the Department of Justice, meaning it could
10:02
Speaker 1: be potentially criminal. Yes, and so I think that obviously
10:05
Speaker 1: adds another element of risk here. The other factor is
10:09
Speaker 1: now that you're bringing this good will charge into the
10:11
Speaker 1: SEC and based investigation. There's a number of shareholder fraud
10:15
Speaker 1: lawsuits out there against GE related to that insurance reserve shortfall.
10:21
Speaker 1: This just sort of adds more fuel to their claims.
10:24
Speaker 1: I wonder if you could tell us what the effect
10:26
Speaker 1: or potential effect this might have on the credit rating
10:30
Speaker 1: of g E. Yes, so um SMP has cut its
10:33
Speaker 1: credit rating on GE earlier this month or now at
10:37
Speaker 1: B B B plus, down from A, and Moody's and
10:40
Speaker 1: Fish put their ratings on review for downgrade Um. Personally,
10:44
Speaker 1: I have to say that's long overdue, and they were
10:47
Speaker 1: about the last people to wake up to the fact
10:50
Speaker 1: that gees earnings and debt prospects for the foreseeable future
10:54
Speaker 1: are nowhere near that realm of credit worthiness. Um, you know,
10:58
Speaker 1: in terms of the numbers from today changing their outlook.
11:02
Speaker 1: I don't know if there's anything that would necessarily, you know,
11:06
Speaker 1: dilute that more other than just sort of the ongoing
11:08
Speaker 1: challenges that the power unit, which g says is going
11:11
Speaker 1: to cause it to significantly miss its cash flow targets
11:14
Speaker 1: for the year. So why were the shares up ahead
11:18
Speaker 1: of the market open when the company said that it
11:21
Speaker 1: was going to cut its dividend, which was widely expected,
11:24
Speaker 1: but still it means that shareholders are getting less money
11:26
Speaker 1: and missed estimates, and still their shares were rallying until
11:30
Speaker 1: I mean, it almost makes you feel like they shouldn't
11:33
Speaker 1: have conference calls, right, But no, I I think you
11:37
Speaker 1: know why you saw the shares railing. The divon and
11:39
Speaker 1: cut was expected, but I think it's the kind of
11:42
Speaker 1: aggressive action people are really looking for out of Larry
11:45
Speaker 1: colpe Um. And I think I talked with you at
11:47
Speaker 1: the time when John Flannery cut the divon in last
11:50
Speaker 1: year about how it probably wasn't going to be enough
11:52
Speaker 1: and that the payout was still going to soak up
11:54
Speaker 1: way too higher percentage of their free cash flow. Um.
11:57
Speaker 1: And that was with their you know, old target. Now
12:00
Speaker 1: obviously with the new target, it becomes even more untenable.
12:02
Speaker 1: And so I think this was a bold step and
12:06
Speaker 1: it was also a necessary step when you look at
12:08
Speaker 1: all of these potential capital calls, the g E and
12:10
Speaker 1: the ongoing struggles in G Power. I mean, he needed
12:13
Speaker 1: to do something to shore up the balance sheet, and
12:16
Speaker 1: I think this was what investors were looking for. Um.
12:20
Speaker 1: You know, and there's some debate about GE has long
12:23
Speaker 1: been sort of a retail investor attraction, but you know,
12:27
Speaker 1: you probably lost some of that base when they cut
12:30
Speaker 1: the dividend the first time around. So that maybe why
12:32
Speaker 1: you're not saying quite as painful of a reaction. Is
12:35
Speaker 1: the power unit at GE salvage herble? Yeah, Uh, that
12:41
Speaker 1: is the question. Um, you know, there's a lot of
12:44
Speaker 1: debate about this. I do think it's interesting what they're doing.
12:47
Speaker 1: So they said they're going to split the power unit
12:49
Speaker 1: into two, and so one will be primarily focused on
12:52
Speaker 1: the gas, turbines, equipment, and services, and then the other
12:55
Speaker 1: will be sort of all of these other assets that
12:57
Speaker 1: are in power, so that's steam, that's nuclear, that's power convergent.
13:01
Speaker 1: Not all of those other assets are bad and they're
13:04
Speaker 1: not necessarily as exposed to this sort of structural transition
13:09
Speaker 1: where you know, the preference is really shifting to renewable
13:13
Speaker 1: energy technologies because they're cheaper. But some of these assets,
13:16
Speaker 1: like industrial focus generation equipment or the grid's business, those
13:20
Speaker 1: still have a relatively viable outlook. I mean, you think
13:23
Speaker 1: about a b b is trying to sell its grids
13:25
Speaker 1: business and it is getting pretty high valuations for it.
13:28
Speaker 1: And so the idea here is to sort of create
13:30
Speaker 1: i mean almost a bad bank of power assets and
13:33
Speaker 1: then you know, an okayish bank of these other assets.
13:36
Speaker 1: So that should help. The other big thing is cost cuts, um,
13:40
Speaker 1: but you know, there's a big debate on how much
13:43
Speaker 1: those cost cuts are actually going to translate to the
13:45
Speaker 1: bottom line. G has done a lot of restructuring over
13:48
Speaker 1: the years, and we haven't really seen that playoff, and
13:50
Speaker 1: there's issues in Europe to given the agreements that they
13:52
Speaker 1: made as part of the Alstom deal around jobs numbers
13:56
Speaker 1: as to how deep they can cut their many Thanks
13:59
Speaker 1: always Brooks Otherland, a Bloomberg opinion columnist all about deals
14:03
Speaker 1: and industrial companies. After the close of trading today, we
14:21
Speaker 1: will get quarterly results from Facebook. And here to tell
14:25
Speaker 1: us about Facebook and other technology stocks is none other
14:28
Speaker 1: than Colin Gillis, the director of research for Chatham Road Partners.
14:33
Speaker 1: Colin Gillis, is Facebook as big as it's going to
14:36
Speaker 1: ever get him? It's always a wonderful pleasure to speak
14:40
Speaker 1: with you. And let's put this into perspective. Right, we've
14:43
Speaker 1: gotten three names out of the five letter fang tech
14:48
Speaker 1: stocks that have reported, right, Facebook, Apple, Amazon, Netflix, and Google.
14:53
Speaker 1: And then we know that of the Amazon, Netflix and
14:56
Speaker 1: Google reports that we've seen, the stocks have all traded
14:59
Speaker 1: down today. Is Facebook's turned The stock has declined over
15:04
Speaker 1: from a tie in July. I do not think it's peaked.
15:08
Speaker 1: You don't think it's peaked. In other words, I do
15:10
Speaker 1: not you think that it's going to rally. I do, right,
15:14
Speaker 1: And so I understand the concerns that they're running out
15:19
Speaker 1: of users, right, the concerns literally you know they've got
15:23
Speaker 1: around two point two billion users are about three point
15:25
Speaker 1: five billion humans on the Internet, So that's going to
15:29
Speaker 1: be a constraint factor. I definitely understand that they're putting
15:34
Speaker 1: in more and more expenses around privacy and contact control, right,
15:39
Speaker 1: but they're going to be able to extract over time
15:42
Speaker 1: more value per user. And while you may see margins
15:47
Speaker 1: come down, they've told us that quite clearly, Right, this
15:50
Speaker 1: is still a company that's going to grow its revenue
15:53
Speaker 1: this quarter, somewhere along the lines of you know, on
15:57
Speaker 1: a year of a year basis, it's a real bit nous,
16:01
Speaker 1: if it's a real business, then those billions of users
16:07
Speaker 1: are potentially at risk if something goes wrong with the platform,
16:12
Speaker 1: and something has gone wrong previously correct, correct, Yeah, And
16:16
Speaker 1: this is you know, this is the risk reward equation, right,
16:18
Speaker 1: and this is why some people have decided to exit
16:22
Speaker 1: their investments and rotate their money into other names. Right.
16:25
Speaker 1: But given the magnitude of the pullback, and also you
16:28
Speaker 1: said hasn't gotten as large as E were going to get.
16:31
Speaker 1: It's market cap is four billion dollars, well, still well
16:36
Speaker 1: below you know where Google is at it, you know,
16:38
Speaker 1: with seven seventeen Amazon, right, much larger than Netflix. Well, Colin,
16:46
Speaker 1: I'm wondering heading into what was your outlook on Facebook shares.
16:51
Speaker 1: So we were uh concerned for four pull back. We
16:55
Speaker 1: were concerned that the market was not factoring in the
16:57
Speaker 1: costs related to the obviously efforts that they were that
17:01
Speaker 1: they had to implement. Right, and some of that did
17:05
Speaker 1: bear out to be true, But now I think the
17:08
Speaker 1: pendulum has swung too far the other way. Well, hold
17:10
Speaker 1: on a second, because you were talking about how it's
17:12
Speaker 1: a real business and how it's you know, it's not
17:14
Speaker 1: as big as Google, for example. But at the end
17:17
Speaker 1: of the day, Facebook essentially is an advertising platform. Is
17:20
Speaker 1: essentially a place where they have a lot of eyeballs
17:22
Speaker 1: and they can distribute content to them. But if they're
17:26
Speaker 1: algorithms and if their privacy standards are questioned, that undermines
17:32
Speaker 1: their business model, albeit real or not. Well, it only
17:36
Speaker 1: undermines that business model if we see users leaving the platform,
17:39
Speaker 1: and if we see advertisers leaving the platform. Right, and
17:42
Speaker 1: so we're gonna see that. We're gonna get that data
17:45
Speaker 1: literally literally, you know, in a few hours, right, and
17:48
Speaker 1: we'll see the particularly the most valuable component are the
17:52
Speaker 1: North American right monthly active users, and we'll see if
17:55
Speaker 1: that number moves, right, it's kind of stalled out right,
17:57
Speaker 1: you know they were it's around two one million, right,
18:01
Speaker 1: you know, any lift from that number last quarter would
18:03
Speaker 1: be would be a positive. So you know it's not
18:07
Speaker 1: going to grow much. But if you can extract more
18:10
Speaker 1: revenue from those people, right, and that number that are
18:13
Speaker 1: two the average revenue per user is people are expecting
18:18
Speaker 1: a nice hefty lift on that. The estimate is that
18:21
Speaker 1: each user in the United States or Canada generates about
18:24
Speaker 1: twenty six dollars in revenue for the company. Right, all right,
18:31
Speaker 1: Now you talk about the potential for Facebook, do they
18:35
Speaker 1: have a plan for how to monetize What's App? Well,
18:42
Speaker 1: you know, what's app is a wonderful messaging service. Messaging
18:45
Speaker 1: in and of itself has not been very well monetized,
18:51
Speaker 1: and so I wouldn't be focused as much on the one.
18:55
Speaker 1: I wouldn't be an investor based on the what's that
18:57
Speaker 1: part of the story. I wouldn't be an investor based
18:59
Speaker 1: on uh oculus part of the story. Right, Instagram is
19:03
Speaker 1: obviously also a growing, flourishing business. It's going to have
19:07
Speaker 1: the same monetization opportunities as Facebook, right, But you want
19:11
Speaker 1: to make sure that the core business itself is is
19:14
Speaker 1: that they're able to stabilize it. They're able to do
19:17
Speaker 1: so in a way where they can retain their users,
19:20
Speaker 1: where they can retain their advertisers, and that they can
19:23
Speaker 1: can quell both public perception as well as investor concerned
19:29
Speaker 1: that the management team has a privacy issue that they
19:33
Speaker 1: can't contain. Let's shift our focus a little bit to Thursday.
19:36
Speaker 1: That's when Apple is going to report their third quarter earnings.
19:39
Speaker 1: Shares of that company up almost year to date. What
19:43
Speaker 1: are you expecting to hear from them, right, you know?
19:45
Speaker 1: And so the thing with Apple is, while everyone you
19:50
Speaker 1: know will dissect the numbers that the report, the most
19:52
Speaker 1: important piece of information they'll give will be the guidance
19:56
Speaker 1: for the December quarter because they're still very stacked to
20:00
Speaker 1: the holiday season. And right, if you focus on the
20:04
Speaker 1: iPhone itself, right, the concern that the thesis is one
20:08
Speaker 1: of two things. Right, it's a stable platform on which
20:12
Speaker 1: they can build a successful services business on top of right,
20:16
Speaker 1: and that's a positive thesis. Or you look at the
20:20
Speaker 1: units of iPhones and you say they've done a good
20:22
Speaker 1: job of driving more revenue per phone. But if you're
20:26
Speaker 1: concerned that the unit base you know, is either growing
20:30
Speaker 1: and you know, small single digit numbers, or possibly even shrinking,
20:35
Speaker 1: but the revenue is being made up because they're getting
20:37
Speaker 1: more revenue per phone. Then that may impact the services
20:41
Speaker 1: business and its ability to grow, because a big part
20:45
Speaker 1: of the of the story and the thesis is that
20:47
Speaker 1: the services business will become a major margin driver and
20:52
Speaker 1: will add a higher multiple business onto the lower multiple hardware,
20:56
Speaker 1: onto the hardware side, thinner, lighter and has written a
21:01
Speaker 1: display that's the description of the new MacBook Air that's
21:05
Speaker 1: just been released and is on sale from Apple. Do
21:08
Speaker 1: you believe that the desktop or the laptop or the
21:12
Speaker 1: computer and PC business for Apple is important? It's you know,
21:18
Speaker 1: it's it's it's really just icing on the cake, right
21:21
Speaker 1: and depending on how the phones move and and the
21:24
Speaker 1: r poos, right, the rest of it is, you know,
21:27
Speaker 1: just kind of consider ampler information. Thank you so much
21:31
Speaker 1: for being with us. Colin Gillis, a director of research.
21:33
Speaker 1: Chatham wrote partners talking about what to expect with Facebook
21:37
Speaker 1: coming out after the bell with their earnings, as well
21:39
Speaker 1: as Apple under armour has been a stock that has
21:56
Speaker 1: been hard to get right. Today it is surging at
21:58
Speaker 1: twenty six per scent after demonstrating that it's turnaround is
22:03
Speaker 1: taking hold. That is the biggest one day pop in
22:05
Speaker 1: the share since two thousand and eight. Joining us to
22:07
Speaker 1: break it all down, give us a sense of what's ahead.
22:10
Speaker 1: Is Channa cartuitis He's apparel and footwear analyst for Bloomberg Intelligence.
22:14
Speaker 1: So Chenn, what's your take? What exactly drove there better
22:17
Speaker 1: than expected results? Yeah? High, I think this is today
22:22
Speaker 1: we actually see the first phase of the turnaround UM
22:26
Speaker 1: actually benefiting the company UM. And I think it's mainly
22:29
Speaker 1: on the margin side, and and they took a few
22:32
Speaker 1: steps that are necessary for the business, but they were
22:34
Speaker 1: very hard to do UM. So, first of all, the
22:36
Speaker 1: inventory inventory was done one percent versus last year, and
22:39
Speaker 1: that was a surprise because we were expecting it to
22:41
Speaker 1: be a lot higher. And when you have less inventory
22:45
Speaker 1: is when you have to do a less discounting. So
22:48
Speaker 1: in Bloomber Intelligence, we track, for example, the promotional emails
22:52
Speaker 1: year of year. So last year in the third quarter
22:54
Speaker 1: we had about thirty three emails we got from them.
22:56
Speaker 1: This year's only twenty, so there's a thirty percent decrease
23:00
Speaker 1: in discounting. So gross margin the higher and that's what
23:04
Speaker 1: drove most of the benefit this quarter. Just say that again,
23:07
Speaker 1: you tracked the number of promotional emails that are sent
23:11
Speaker 1: out by like every company, for the companies we cover, yes,
23:16
Speaker 1: and it gives us some indication year of a year
23:19
Speaker 1: how promotions look like. Clearly, because I noted that the
23:22
Speaker 1: retailers cited under Armour in several cases as being the
23:27
Speaker 1: cause for why their numbers were not better because they
23:31
Speaker 1: were flushing out the inventory that I guess under Armour
23:34
Speaker 1: had shipped to them, right, So under Arma would have
23:37
Speaker 1: different channels to clear their inventories. So you know, while
23:40
Speaker 1: the retailers have elevated inventory under Arma, we're not promoting
23:44
Speaker 1: their own in their own channels, so they're able to
23:47
Speaker 1: get their margins on that side. Is this is this
23:49
Speaker 1: a story about international growth versus growth in the United
23:53
Speaker 1: States for under Armour. So under Armory is still mostly
23:56
Speaker 1: US a lot more than you know, their competitors like
23:59
Speaker 1: Nike and Adidas. So yeah, they're still let's say they're
24:01
Speaker 1: still seeing you know, double digit growth in international markets,
24:05
Speaker 1: but it's a much much lower base. UM we saw
24:07
Speaker 1: a pause and then in the the third quarter it was
24:09
Speaker 1: only about UM they think they're gonna see the re
24:13
Speaker 1: acceleration of that in the fourth quarter, so going back
24:15
Speaker 1: to a growth. So it's it's for the most part,
24:18
Speaker 1: it's an international story. For undrum. The interesting thing to
24:21
Speaker 1: me is how under armour certainly is an idiosyncratic story.
24:24
Speaker 1: But I'm looking right now at the SMP five hundred
24:26
Speaker 1: sub index of retailers, which is actually outperforming the broader
24:31
Speaker 1: SMP index year to date, which is a surprise because
24:34
Speaker 1: this industry had been left for dead. What does that
24:37
Speaker 1: tell you? So you know what I gotta I gotta
24:39
Speaker 1: say when we're going into I had a you know,
24:41
Speaker 1: feeling and looking at the data, that is going to
24:44
Speaker 1: be the year that retailers actually fight back the five
24:47
Speaker 1: back Amazon, the fight back the shift to e commerce.
24:50
Speaker 1: They're trying to um. You know, they are in a
24:53
Speaker 1: mode of surviving survival, so closing stores, we're just in
24:56
Speaker 1: the inventory. But now they're trying to figure that out.
24:58
Speaker 1: So now they they're starting to at tools to actually
25:01
Speaker 1: help them compete with their online competitors, so, you know,
25:05
Speaker 1: getting better insights from data online on you know, which
25:09
Speaker 1: inventory they should put in which stores. UM, that helps
25:12
Speaker 1: them to again avoid discounting so less inventory in stores
25:15
Speaker 1: that are not doing well. Um, cutting the cycles of
25:19
Speaker 1: getting merchandise into the stores. Instead of the nine to
25:21
Speaker 1: twelve months, now you can go three to six months.
25:24
Speaker 1: So you're better, you know, you have a better idea
25:27
Speaker 1: and the trends out there in the market. Then you're
25:29
Speaker 1: not bringing in merchandise. It's not going to sell fast.
25:31
Speaker 1: So its retailers are getting smarter about what they're selling
25:34
Speaker 1: the store. Um. I think people are feeling compelled to
25:36
Speaker 1: go and visit the stores because they look better and
25:38
Speaker 1: they have more you know, on trend stuff. Um. Therefore
25:43
Speaker 1: the seals are beratter, margins are better. Can you speak
25:45
Speaker 1: to any product that they've introduced that is a big
25:49
Speaker 1: winner for them right now, specifically und armor? Yeah. I
25:53
Speaker 1: think actually that's part of the problem, um, because what
25:55
Speaker 1: we're seeing is the turnaround is mainly about the margin.
25:58
Speaker 1: I'm still waiting to see in the product pipeline what's
26:02
Speaker 1: going to be the next hit. Now next month in December,
26:04
Speaker 1: they're gonna have an investor day, and I think over
26:06
Speaker 1: there we're going to see some of the new products
26:08
Speaker 1: are going to come out next year in to reignite
26:12
Speaker 1: the growth rather than just the margins. They're going to
26:14
Speaker 1: be using technology to make these textiles and these products.
26:17
Speaker 1: I mean they got hoodies, joggers, polos, underwear, I mean
26:20
Speaker 1: everything you know, cold gear, hot gear, compression gear. I
26:24
Speaker 1: think they want to be known as as the company
26:26
Speaker 1: that actually brings into science into their apparel and footwear.
26:29
Speaker 1: And I think that's the message they want to send
26:31
Speaker 1: to the consumers and they're going to continue to do
26:32
Speaker 1: so going forward. So is under Armour grabbing share from
26:36
Speaker 1: other retailers or is this just sort of a general
26:40
Speaker 1: increase in demand across the boarders the economy expands. So
26:44
Speaker 1: that's not happening yet. So I don't think they're taking
26:46
Speaker 1: share away from Nike audit does. It's just that the
26:48
Speaker 1: sales that they are getting, they're getting in a much
26:51
Speaker 1: better margin than they did before, so they don't have
26:53
Speaker 1: to clear as much inventory. So we're not seeing that
26:56
Speaker 1: grabbing share yet, but we might next year. And it
26:58
Speaker 1: is a competitive business, very competitive business, and very hard
27:01
Speaker 1: to get into. If you're not easy to make shoes, no,
27:04
Speaker 1: and not to make them in the volume that Adidas
27:06
Speaker 1: or Audi Das as well as Nike makes, and make
27:09
Speaker 1: you and make it the design compelling enough of people
27:11
Speaker 1: to buy. Maybe Elon Musk will get into it. Oh
27:15
Speaker 1: there you go from your lips. All right, No that's
27:19
Speaker 1: I'm not sorry, sorry, not sorry, sorry not I see
27:22
Speaker 1: footwear in your future. Thanks very much for being with us.
27:26
Speaker 1: And Grass is a apparel and footwear analyst for Bloomberg Intelligence.
27:31
Speaker 1: You can follow him on Twitter at se Gratis. Now
27:35
Speaker 1: spell it c g R A z U t I s.
27:40
Speaker 1: We all follow him because we want to know what's
27:41
Speaker 1: going on in the world of apparel and footwear. Thanks
27:48
Speaker 1: for listening to the Bloomberg P and L podcast. You
27:51
Speaker 1: can subscribe and listen to interviews at Apple Podcasts, SoundCloud,
27:55
Speaker 1: or whatever podcast platform you prefer. I'm Pim Fox. I'm
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Speaker 1: on Twitter at Pam Fox. I'm on Twitter at Lisa Abramo.
28:03
Speaker 1: It's one before the podcast. You can always catch us
28:05
Speaker 1: worldwide on Bloomberg Radio.