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Boeing in Talks To Buy Spirit Aero · Bloomberg Intelligence

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0:25
Speaker 3: M and A talk just kind of coming across the
0:26
Speaker 3: tape here Boeing and talks to buy supplier Spirit Aerosystem.
0:31
Speaker 3: Spirit air System stock is higher Boeing a little bit
0:33
Speaker 3: lower here. But you know, one could argue this is
0:35
Speaker 3: a transaction that probably needs to happen for Boeing to
0:38
Speaker 3: address some of their concerns. Let's bring on them. George Ferguson.
0:41
Speaker 3: George Ferguson covers the aerospace and airlines of business for
0:44
Speaker 3: Bloomberg Intelligence. George tell us why Boeing would want to
0:49
Speaker 3: do this transaction.
0:52
Speaker 4: Good morning, Paul. Quality control. It's absolutely quality control. They
0:57
Speaker 4: must be looking inside Spirit. I know they've been looking
0:59
Speaker 4: inside spe for months. My guess is they've looked inside
1:05
Speaker 4: and they just feel like they can't control quality well enough.
1:09
Speaker 4: As an outsider. They used to own Spirit, not as
1:13
Speaker 4: it looks exactly now, but they used to own you know,
1:16
Speaker 4: those facilities. It makes a majority of the seven thirty
1:21
Speaker 4: seven fuselage, it makes the front portion of the seven
1:24
Speaker 4: eight to seven, two extremely important products. I think they've
1:27
Speaker 4: looked inside and they said, we can't control quality well
1:31
Speaker 4: enough from the outside.
1:32
Speaker 5: We've got to buy this thing.
1:34
Speaker 6: Do we trust Boeing to have the kind of quality
1:36
Speaker 6: control that Spirit needs?
1:39
Speaker 5: Bowe doesn't have a choice.
1:40
Speaker 4: Boone's got to get quality control or they.
1:43
Speaker 5: Got a major problem on their hands. And so I.
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Speaker 4: Guess I think as an owner, I think it is
1:50
Speaker 4: the path, probably a good path forward. I do think
1:54
Speaker 4: they will get the quality issues in hand, but it's
1:58
Speaker 4: going to take some time, but they have to.
2:00
Speaker 5: They have no choice.
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Speaker 3: Yeah, I'm looking at the stock A bug is pretty
2:03
Speaker 3: much unchanged on the news here. I think if I
2:06
Speaker 3: were an investor in Boeing, I would think I may
2:09
Speaker 3: or may it, may or may not make financial sense
2:11
Speaker 3: to own this Spirit thing, but I would say it's
2:14
Speaker 3: probably the best way to move forward here. And when
2:17
Speaker 3: you talk to investors Georgia, did they think that way?
2:22
Speaker 3: You know?
2:23
Speaker 4: I think investors, you know, I don't know that you
2:27
Speaker 4: could say they all monololiithically think that way. I think
2:30
Speaker 4: if there if there could have been a way to
2:32
Speaker 4: keep it outside not have to buy it, you know,
2:37
Speaker 4: I think they that probably would have pleased people more.
2:39
Speaker 4: I mean, there will be an unwinding required in this transaction. Right,
2:43
Speaker 4: So Airbus is a three twenty. Some of the components
2:47
Speaker 4: are made at Spirit. I'm imagining that Airbus is not
2:50
Speaker 4: going to be interested in having you know, Boeing as
2:54
Speaker 4: a subcontractor on their airplane, you know, and their their
2:57
Speaker 4: other defense products, you know, for lockeed things like that.
3:01
Speaker 4: It's going to require some work I think to unwind
3:03
Speaker 4: this thing a little bit in order to you know,
3:07
Speaker 4: in order to pull it inside of Boeing. Probably energy
3:10
Speaker 4: you would prefer not Boeing to spend. But again I
3:13
Speaker 4: think it's their most important products are flowing through Spirit,
3:17
Speaker 4: and Spirit's been a source of the problems in some
3:20
Speaker 4: of those products lately. And if Boeing is going to
3:23
Speaker 4: a much higher production rate, which is where they're going
3:25
Speaker 4: to generate the cash flow they need, the profitability they need,
3:28
Speaker 4: they've got to stabilize production. And I think, you know,
3:31
Speaker 4: they must have looked at it and said we got
3:33
Speaker 4: to own it. And so if you're an investor, I
3:35
Speaker 4: think you're okay, Yeah, it's the way forward. I'd rather
3:39
Speaker 4: not have taken this path, but it's the way forward.
3:41
Speaker 6: This is the leading question, and it could be very wrong.
3:44
Speaker 6: But does this tell us anything about how bad things
3:47
Speaker 6: are at Spirit that this is the option?
3:51
Speaker 5: I think it does.
3:52
Speaker 6: So how bad are things at Spirit?
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Speaker 4: To me, it sounds like it's so bad they got
3:57
Speaker 4: to buy it, And I think that's bad. Right, If
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Speaker 4: you're Boeing, you do want to preserve cash, right, you
4:03
Speaker 4: don't want to go make an acquisition. You got plenty
4:05
Speaker 4: of other things to manage right now. But I think
4:09
Speaker 4: it means that, yes, the turnover at Spirit's been bad.
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Speaker 4: The quality control, I think that's led it to the quality
4:16
Speaker 4: control problems. You want to have your hand in how
4:20
Speaker 4: those line workers are being managed, how the quality control
4:23
Speaker 4: is being handled. Yeah, it means it was really bad
4:27
Speaker 4: at Spirit, all right.
4:27
Speaker 3: The shares of Spirit Error Systems SPR is a ticker
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Speaker 3: for your Bloomberg terminal, up fourteen percent a year today.
4:33
Speaker 3: Trading has resumed here, so obviously the market signing pretty
4:38
Speaker 3: high probability that something will get done here. So George,
4:40
Speaker 3: just looking at Boeing holistically, you know, as you've told
4:44
Speaker 3: us in the past. You know, this is a scale business.
4:46
Speaker 3: You've got to make as many planes as you can
4:48
Speaker 3: for that over that fixed cost base. You have talk
4:51
Speaker 3: to us about the production goals, but taught to us
4:53
Speaker 3: where they are in production today and where do they
4:56
Speaker 3: want to get to and do you think that's a
4:57
Speaker 3: reasonable glidepath.
5:01
Speaker 4: So they are at thirty eight today, although they'll tell
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Speaker 4: you even though their suppliers are building at thirty eight
5:08
Speaker 4: and delivering the Boeing at thirty eight, Boeing is not
5:11
Speaker 4: putting thirty eight out.
5:13
Speaker 5: So I don't know. There's somewhere between.
5:14
Speaker 4: They's somewhere in the high thirties.
5:16
Speaker 5: Let's say it depends what month it is.
5:18
Speaker 3: That that's you know, their mother base is just in general.
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Speaker 4: Sorry, and that's on the seven thirty seven. Yep, that's
5:23
Speaker 4: the most important product. On the seven eight seven. You know,
5:27
Speaker 4: we're in the in the I think five is six
5:30
Speaker 4: ish area right now on seven thirty seven. You know,
5:35
Speaker 4: they've got goals to be into the fifties. They've and
5:40
Speaker 4: at the end of the last expansion phase before the pandemic,
5:44
Speaker 4: before the max crashes and groundings, you know they were
5:48
Speaker 4: they were in the sixties. They're not going to go
5:50
Speaker 4: in the sixties airbuses, you know, for the seven thirty seven.
5:53
Speaker 4: Airbus is talking about going to seventy five for the
5:57
Speaker 4: eight three twenty. So I think if you and I
5:59
Speaker 4: were inside the Boeing management meetings and they told you
6:01
Speaker 4: where they really wanted to go, they want to be
6:04
Speaker 4: up there near.
6:07
Speaker 5: Airbus.
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Speaker 4: They're taking a fifty to fifty complement of this market.
6:12
Speaker 4: Is that the right place to go? Yes, they're talking
6:14
Speaker 4: mid decade. Yes, probably pulling Spirit inside. Timing probably had
6:19
Speaker 4: a lot to do with that too. They thought, look,
6:21
Speaker 4: how can we stabilize this the fastest, because we don't
6:25
Speaker 4: want to keep giving away share to air Bus.
6:28
Speaker 6: Going to Spirit back to just for one second. We're
6:30
Speaker 6: also reporting that Spirit is exploring strategic options. So that
6:34
Speaker 6: leads me to believe that if the Boeing thing doesn't happen,
6:36
Speaker 6: they're still in deep trouble and they got to get
6:39
Speaker 6: a buyer or do something else. What would be Plan B.
6:44
Speaker 5: For Spirit?
6:45
Speaker 3: Yeah?
6:46
Speaker 4: Yeah, I mean when we look at Spirit spirits, you know,
6:49
Speaker 4: you know, Spirit has has a bunch of debt coming
6:51
Speaker 4: do the capital markets haven't loved them as much. I
6:54
Speaker 4: think they've they you know that some of the debt
6:57
Speaker 4: they've placed has been up in the nine percent ish level.
7:00
Speaker 4: I think the capital markets, the debt capital markets especially,
7:03
Speaker 4: have looked at the Boeing relationship and that's given them
7:06
Speaker 4: more comfort probably to give them rates that perhaps were
7:09
Speaker 4: better than what Spirit should have got. I think it, frankly,
7:13
Speaker 4: would be strategic options, you know, away from Boeing are
7:17
Speaker 4: really difficult because again some you know, some fifty to
7:21
Speaker 4: sixty I'm talking off the Kuffey I have to go
7:23
Speaker 4: pull the exact number of their revenues flow through Boeing.
7:28
Speaker 4: What I'm guessing, and that's that strategic comment, is that
7:33
Speaker 4: Spirit is probably looking at how they would spin off
7:36
Speaker 4: portions of the business that are not Boeing focused, so that,
7:42
Speaker 4: you know, so that it could continue, you know, to
7:45
Speaker 4: serve those customers. Like I said, Airbus, Lockheed, other defense
7:50
Speaker 4: companies have products that are being built by Spirit. I
7:53
Speaker 4: think They're probably looking at ways to continue to service
7:56
Speaker 4: them in an entity that would be.
7:59
Speaker 5: Outside of Boeing.
8:01
Speaker 4: You know, the fuselage building business, which is largely what
8:05
Speaker 4: Spirit does, isn't one of the great money makers in
8:08
Speaker 4: the industry. And you know, we've seen it go to
8:12
Speaker 4: some you know, to go offshore. You know, the Koreans
8:16
Speaker 4: want to be in this business, the Japanese are in
8:19
Speaker 4: this business, the Chinese are in this business. There's a
8:22
Speaker 4: lot of competition in that space, and so I think
8:25
Speaker 4: it makes it a really hard part of the business
8:28
Speaker 4: to be in to make very good returns and looks
8:32
Speaker 4: it's a space, the fuselage building space that I think
8:34
Speaker 4: Airbus has kept more inside because again they want to
8:37
Speaker 4: control their quality. So, you know, I guess that's a
8:42
Speaker 4: lot a long way of saying, I don't know that
8:44
Speaker 4: options as a complete entity away from Boeing. I don't
8:47
Speaker 4: know the great ones exist and I don't see that.
8:50
Speaker 4: My guess is they're trying to spend parts of it away,
8:53
Speaker 4: all right.
8:53
Speaker 3: George, thanks so much for joining us on short notice.
8:55
Speaker 3: Really appreciate it. George Ferguson, he covers the airspace business
8:59
Speaker 3: was the airlines is the whole complex over there, including
9:01
Speaker 3: the defense manufacturers. Again, Wall Street Journal first reported, now
9:05
Speaker 3: Bloomberg News matching that Boeing is in talks to acquire
9:10
Speaker 3: Spirit Aerosystems Holdings SPRS.
9:13
Speaker 7: The ticker Spirit is.
9:15
Speaker 3: The stock is up fifteen and a half percent today
9:17
Speaker 3: right now, So suggesting to the market believes that there
9:20
Speaker 3: is something there in s George was suggesting, Alex, it's
9:22
Speaker 3: probably something they gotta do.
9:24
Speaker 6: George was awesome, Like that was great, that was great perspective, etc. Yeah,
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Speaker 6: And I thought that it was really interesting that it's
9:31
Speaker 6: the fuselage business. So if you can spin off other stuff,
9:34
Speaker 6: maybe that's the profitable money maker. You can still keep
9:37
Speaker 6: the contracts with Airbus and Boeing, but it's the fuselage business. Like,
9:40
Speaker 6: that's the part that Boeing just has to basically absorb
9:42
Speaker 6: and suck up within its within its company. We'll see
9:46
Speaker 6: if that works.
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Speaker 2: station Just say Alexa playing Bloomberg eleven.
10:05
Speaker 6: Thirty New York Community Bank down twenty percent. All right,
10:09
Speaker 6: you know the story. It has discovered quote material weaknesses
10:13
Speaker 6: in how it tracks loan risks. They wrote down the
10:16
Speaker 6: value of the company that acquired years ago and replace
10:18
Speaker 6: its leadership to help grapple with the turmoil, there was
10:21
Speaker 6: a theory that maybe this kind of risk was idiosyncratic.
10:25
Speaker 6: They are one of the big exposures to rent control
10:27
Speaker 6: departments here in New York City that has been hurt
10:31
Speaker 6: by a revamp of some of those rent control laws.
10:35
Speaker 6: So when there's a banking potential crisis, we go to
10:37
Speaker 6: one guy, Herman cham Lumberg, Intelligence Senior analyst for US
10:42
Speaker 6: Regional banks. Herman, can we still call this idiosyncratic?
10:48
Speaker 7: It is a good question. I think it's the appropriate question.
10:51
Speaker 8: What's idiosyncratic is you mentioned the exposures to commercial real estate,
10:56
Speaker 8: specifically apartment lending in office. But what's also idiosyncratic is
11:02
Speaker 8: that it recently cleared the one hundred billion dollar asset mark,
11:06
Speaker 8: which ushers in higher capital liquidity regulatory issues.
11:11
Speaker 7: For the bank.
11:12
Speaker 8: And what's happening in our view is that it's easy
11:16
Speaker 8: to reach the big leagues of one hundred billion dollars,
11:19
Speaker 8: it looks like it's harder to stay there, right And
11:22
Speaker 8: what we're seeing is that they're facing growing pains and
11:25
Speaker 8: becoming such a bigger company, and these lack of material
11:30
Speaker 8: weakness and internal controls just reflects.
11:32
Speaker 3: That change in management. Is that usually doesn't look good, right,
11:37
Speaker 3: I guess that's contributing to the stock here today. But
11:39
Speaker 3: tell us about that.
11:40
Speaker 1: Yeah.
11:40
Speaker 4: Sure.
11:40
Speaker 8: So a few years back, the bank acquired another institution
11:47
Speaker 8: called Flagstar Bank, and the CEO of Flagstar Bank is
11:50
Speaker 8: now the CEO of NYCB. He was named the executive
11:55
Speaker 8: chairman back earlier in February once these issues became apparent,
12:02
Speaker 8: and it looks like the former CEO it just has
12:05
Speaker 8: been sidelined because of.
12:08
Speaker 7: The need for new management.
12:11
Speaker 6: Okay, So what's interesting is that if we rewind to
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Speaker 6: when they were able to buy with a signature correct,
12:18
Speaker 6: some signature assets, right, it was like, oh, look, yay,
12:20
Speaker 6: they were the savior, et cetera. Is that gonna are
12:24
Speaker 6: regulator is going to rethink what being a bank savior
12:28
Speaker 6: is in that circumstance.
12:30
Speaker 8: Yeah, that's a great question, and I think it really
12:35
Speaker 8: poses a different question. Was New Your Community the right
12:39
Speaker 8: bank to acquire the signature assets and deposits if we knew,
12:45
Speaker 8: if the regulators should have known, that New Community wasn't
12:49
Speaker 8: really up to snuff up the speed on a number
12:53
Speaker 8: of these internal issues, capital issues, liquidity issues, and reserve issues. So, uh,
13:01
Speaker 8: does do the bank layers need to be more cognizant
13:06
Speaker 8: of what they're doing and anointing of potential savior and
13:12
Speaker 8: a year later, now this bank is in the crossairs.
13:15
Speaker 3: What one of the lessons I'd take away from this
13:17
Speaker 3: story is I think a basic fundamental investing lesson, which
13:21
Speaker 3: is kind of concentration risk. Look like, had so much
13:26
Speaker 3: exposure to this type of loan class i e. Loans
13:30
Speaker 3: to rent controlled apartments, that presents a whole level of risk.
13:35
Speaker 3: I either not diversified in their portfolio as much as
13:38
Speaker 3: maybe we would like. But I guess if you were
13:40
Speaker 3: investor in YCV, you knew that going in, right, Yes,
13:43
Speaker 3: you knew that.
13:44
Speaker 8: Going in that this was the bank that has historically
13:47
Speaker 8: focused on the rent regulated apartment lending sector. There they're
13:53
Speaker 8: the big ahuna in this niche business and they've been
13:56
Speaker 8: doing it for decades.
13:57
Speaker 7: So that's not new.
13:59
Speaker 8: And you should have known that a few years back
14:02
Speaker 8: when when New York imposed tougher regulations, that this was
14:07
Speaker 8: going to hurt their their main business.
14:10
Speaker 7: So it's taken a few years for just to really
14:14
Speaker 7: bore itself out.
14:14
Speaker 6: Also, maybe an investor should know, but the company also
14:17
Speaker 6: should have known, Like that part couldn't have come as
14:20
Speaker 6: a surprise from that end.
14:21
Speaker 3: No, but they're risking controls. That's a real problem exactly.
14:24
Speaker 6: And now they're trying to do what is this risk,
14:27
Speaker 6: synthetic risk something something. So basically the aesthetics sounds.
14:32
Speaker 8: Not great, but synthetic the rid of a transaction to
14:37
Speaker 8: help reduce their their loan exposures and improve their capital.
14:42
Speaker 8: So that's one way to get rid of or improve
14:46
Speaker 8: their capital without actually selling the loans.
14:48
Speaker 3: All right, for our listeners and viewers that are not
14:51
Speaker 3: exposed to New York RAN controlled real estate, talk to
14:53
Speaker 3: us about the regional banks in general. What's kind of
14:56
Speaker 3: the feeling. And you talk to investors today, are they
14:59
Speaker 3: warming up to this? I know it's bounced off that
15:01
Speaker 3: October low, right, but I'm not sure if that's a
15:04
Speaker 3: market bouncer. People are saying, I think I've seen the
15:06
Speaker 3: worst in regional banks.
15:07
Speaker 8: It's it's an interesting question. You're right that they've bounced.
15:11
Speaker 8: But now a number of folks in the market are
15:16
Speaker 8: saying potentially no rate cuts this year, which would be
15:20
Speaker 8: viewed as negative for the regional banks, just because the
15:23
Speaker 8: positive costs have risen.
15:25
Speaker 6: Yeah, cuts because the economy is good and accelerating, So wouldn't.
15:30
Speaker 9: That be good?
15:31
Speaker 7: There's two things that that weigh on that.
15:33
Speaker 8: Number One, there's not a lot of loan growth and
15:36
Speaker 8: rate cuts would improve loan demand. And number two, elevated
15:41
Speaker 8: interest rates is bad for credit quality and being able
15:44
Speaker 8: to refinance the existing loans.
15:46
Speaker 7: And the decline and value.
15:49
Speaker 8: In areas like office commercial real estate could hamper banks
15:53
Speaker 8: credit quality.
15:54
Speaker 3: So where are we all on that commercial real estate risk?
15:56
Speaker 3: I kind of feel like it's a time bombs still
15:59
Speaker 3: out there, and at any time over the next two
16:01
Speaker 3: or three or four years, maybe multiple times over that timeframe,
16:05
Speaker 3: we're gonna have bank a or group of banks are
16:08
Speaker 3: going to call out CIRI is a reason why they
16:10
Speaker 3: really missed or they have to really up their reserves or.
16:13
Speaker 5: Something like that. Where are we on that?
16:15
Speaker 8: Yeah, that continues to play out. We saw that with
16:19
Speaker 8: your community in the fourth quarter. We'd expect more of
16:22
Speaker 8: that going ahead in the coming quarters. That being said,
16:28
Speaker 8: the risk in our view is really relegated to the
16:31
Speaker 8: smaller banking institutions.
16:33
Speaker 7: We just looked at some data which I think was
16:35
Speaker 7: pretty interesting. Since the.
16:40
Speaker 8: COVID era starting in twenty nineteen, the top twenty five
16:45
Speaker 8: US banks have grown their commercial real estate loans by
16:48
Speaker 8: only two percent, and then the large the smallest banks
16:51
Speaker 8: have grown their commercial real estate by forty three percent.
16:54
Speaker 8: So that shows me that really the risk is comprised
17:00
Speaker 8: largely in the smaller bank cohort.
17:02
Speaker 6: That's interesting. So let me ask a question. Went back
17:05
Speaker 6: to the FED cut, So if we don't get a
17:07
Speaker 6: cut for this year, let's just pretend game out.
17:10
Speaker 3: Did that just Torton wor other people know it's just Torston?
17:12
Speaker 3: I think.
17:13
Speaker 6: I think a couple of weeks ago people were talking
17:14
Speaker 6: about the worry that we may have to have another
17:17
Speaker 6: hike because inflation was reaccelerating. But this is maybe the
17:20
Speaker 6: first I've heard of no cuts at all. So if
17:22
Speaker 6: that happens and there's no cuts, who's going to be
17:25
Speaker 6: under pressure? I mean, you mentioned the fact that a
17:28
Speaker 6: cut would help loan demand, So who's already seeing sketchy
17:32
Speaker 6: loan demand?
17:33
Speaker 4: Right?
17:33
Speaker 8: So that's an industry phenomenon where where we're not seeing
17:37
Speaker 8: loan growth across the group. The FED puts out weekly
17:41
Speaker 8: data and it shows that loans are down quarter to
17:44
Speaker 8: day in commercial loans, so that's a big driver of
17:48
Speaker 8: the regional bank the large region on bank balance.
17:51
Speaker 7: Sheets, so that's hampered. It's going to affect.
17:57
Speaker 8: Banks like probably New York community the most because any
18:01
Speaker 8: potential rate cuts review as a savior for them because
18:05
Speaker 8: then their borrowers could refinance at rates.
18:08
Speaker 3: All right, Herman, thanks so much for joining us. Hermy Chands,
18:10
Speaker 3: senior analysts for the banks, joining us here in our
18:12
Speaker 3: Bloomberg Interactive Broker Studio.
18:15
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Speaker 6: of how to invest on a broader level, particularly on
18:44
Speaker 6: a day where the data My point to, maybe we're
18:46
Speaker 6: going to get some fed cuts, but then Tauris and
18:48
Speaker 6: Slackowapaula said, you're not going to get any cuts this
18:51
Speaker 6: year because the economy is just actually accelerating. Things are
18:54
Speaker 6: too strong. So Anna Rappern joins us now she is
18:57
Speaker 6: CIO at CBIZ Investment Advisory Service. Says Anna, do you
19:01
Speaker 6: agree with Torsten Slock maybe or what's the case for
19:04
Speaker 6: no cuts at all this year?
19:06
Speaker 1: I don't know about no cuts, but I think it's
19:08
Speaker 1: certainly difficult for the FED to raise rates at this
19:11
Speaker 1: time or at least looking out into twenty twenty four.
19:15
Speaker 1: And it's not just the inflation, it's their target of
19:17
Speaker 1: two percent. It has been really sticky. Sticky doesn't mean
19:21
Speaker 1: it's not falling sticky me that's falling very slowly and
19:24
Speaker 1: that it's very very bumpy. So either the FED is
19:26
Speaker 1: going to have to accept a higher than two percent
19:30
Speaker 1: inflation rate and call it maybe the momentum is heading
19:33
Speaker 1: down and start to normalize rates, or they may have
19:37
Speaker 1: to be higher for longer. That may be one cut,
19:40
Speaker 1: maybe two cuts, maybe no cuts. But I think no
19:42
Speaker 1: cuts is that's a pretty hockey shew.
19:47
Speaker 3: He's certainly got some airtime if nothing else today, Anna,
19:51
Speaker 3: what do you think about this kind of soft landing
19:54
Speaker 3: scenario that seems to be out there? People kind of
19:56
Speaker 3: feel like I think the Fed's doing a pretty good
19:58
Speaker 3: job here negotiating a soft landing. You buy into that, well,
20:03
Speaker 3: I think.
20:03
Speaker 1: You have to look at the underlying risks that are
20:07
Speaker 1: in the markets. I mean, there's the labor market. You know,
20:09
Speaker 1: weakness in the fringes that we've seen, and this is
20:12
Speaker 1: sort of like, you know, what would a recession look
20:15
Speaker 1: like if we didn't have external shocks? If you think
20:19
Speaker 1: about the last three recessions that we had, they all
20:22
Speaker 1: came from crazy external shocks. How often do you have
20:25
Speaker 1: a pandemic? How do you often do you have a
20:28
Speaker 1: global financial crisis? Maybe there's a tech bubble. I don't know,
20:32
Speaker 1: depends on who you asked, but that was in the
20:34
Speaker 1: late nineties. These are sort of triggered by outside factors.
20:39
Speaker 1: If you have a normal economic cycle where you really
20:42
Speaker 1: have like a natural boom and bust, you're going to
20:45
Speaker 1: see weakness around the fringes. And I think we're starting
20:47
Speaker 1: to see that and in the consumers labor market as
20:51
Speaker 1: well as delinquency rates, et cetera. And you're starting to
20:54
Speaker 1: see some cracks in the markets, especially with New York
20:58
Speaker 1: Community Bank, right, I mean, was news that came out.
21:01
Speaker 1: We started to see some cracks about a year ago,
21:03
Speaker 1: it's almost a one year anniversary, and here we are
21:07
Speaker 1: in twenty twenty four talking about banks again.
21:10
Speaker 6: So does that would that be a call then to
21:13
Speaker 6: sell the rally in small caps because what you're describing
21:16
Speaker 6: is really great for large cap companies and really bad
21:19
Speaker 6: for the small guys.
21:21
Speaker 1: Well, I mean, I think the small caps have been
21:23
Speaker 1: telling us that it's been pretty uncertain because.
21:25
Speaker 6: They've outperformed Anna and the short term they have outperformed.
21:29
Speaker 1: Yes, yes, so short term they've outperformed because the yields
21:32
Speaker 1: came down, right. So if we're talking about a higher
21:34
Speaker 1: for longer scenario, I mean, look at the ten year today,
21:37
Speaker 1: it's falling pretty dramatically and yesterday as well. I mean,
21:41
Speaker 1: small caps tend to like these things. But if we're
21:44
Speaker 1: talking about a higher for longer, we're talking about a
21:46
Speaker 1: pretty volatile rate environment where it can definitely go back up,
21:50
Speaker 1: and when it goes back up, it sort of supports
21:52
Speaker 1: that higher for longer narrative, and that's not as friendly
21:55
Speaker 1: for small stocks.
21:57
Speaker 3: How About on the fixed income side here, I'm looking
21:59
Speaker 3: at you know, just the to your treasure for example,
22:01
Speaker 3: what's pulling back today off a seven basis points but
22:03
Speaker 3: you know, you're still getting north of four and a
22:05
Speaker 3: half percent for a two years. How do you kind
22:07
Speaker 3: of advise your clients I think about the fixed income.
22:10
Speaker 1: Space, Well, so depending on why you're investing in fixed income,
22:14
Speaker 1: I think that that reason is very important. Look, I mean,
22:17
Speaker 1: yield is very, very attractive, and so even if you
22:20
Speaker 1: have some sell off on and some headwind on the price,
22:25
Speaker 1: there's enough yield there to cushion some of that below
22:28
Speaker 1: so that we're not talking about the same environment as
22:30
Speaker 1: before the FED started to raise rates, right, So we're
22:34
Speaker 1: less sensitive to price changes, so we do invest for yield,
22:39
Speaker 1: especially on the shorter end. We are keeping durraser a
22:41
Speaker 1: little bit on the shorter side because of some of
22:44
Speaker 1: the volatility that we were expecting on the longer end
22:47
Speaker 1: of the curve.
22:47
Speaker 6: So is that a steep Nerd trade then.
22:51
Speaker 1: Yes, I mean we're not like that.
22:53
Speaker 6: He doesn't like to talk about steepeners. But because a
22:56
Speaker 6: steep nerd trade has been real.
22:58
Speaker 10: Rough, Oh yes it has.
23:01
Speaker 1: And I think that's because every time the FED comes
23:04
Speaker 1: out and says, well, you know, we we're thinking about
23:08
Speaker 1: cutting rates, we're thinking about doing this, that I think
23:11
Speaker 1: the markets interpret that to be Okay, the FED is
23:14
Speaker 1: going to be dubbish and the financial conditions loosen and
23:17
Speaker 1: then it tightens again. I think it's that volatility that's
23:20
Speaker 1: very hard to stummch for some of our investors. So
23:23
Speaker 1: keeping duration a little bit on the shorter side to
23:26
Speaker 1: minimize some of that price impact is sort of our goal.
23:29
Speaker 3: How about on in the credit space here, should I
23:33
Speaker 3: be willing to go out there and maybe take some
23:35
Speaker 3: credit risk in in an effort to maybe goose up
23:38
Speaker 3: my yield here, So we're.
23:43
Speaker 1: Talking about credit spreads or every talking about treasure yields,
23:45
Speaker 1: because the treasury yields are very very attractive, and of
23:48
Speaker 1: course you put the credit spreads on top of that,
23:50
Speaker 1: it's even more attractive. But we are a little bit
23:53
Speaker 1: more careful on credit, especially on high yield. I believe
23:57
Speaker 1: our high yield is at the lowest that we're in
23:59
Speaker 1: tern a percentage that willing to go it is still
24:02
Speaker 1: a very attractive yield. Again, there's some cushion for some
24:06
Speaker 1: of the price volatility. But when high yield spread widens,
24:11
Speaker 1: that widens pretty quickly. There's a big price action there
24:14
Speaker 1: on the negative side that we don't necessarily want to
24:16
Speaker 1: participate in. So we're staying on the investment grade credit.
24:21
Speaker 1: As we all know, that market has been very very
24:23
Speaker 1: healthy in terms of new issuance, in terms of demand,
24:27
Speaker 1: and so we are there at the moment. I can't
24:29
Speaker 1: tell you that we'll be there next month, but we're
24:33
Speaker 1: certainly for now. We've been clipping very nice coupon on
24:36
Speaker 1: that on that front.
24:37
Speaker 6: Okay, So that's a good point because so you're you're
24:40
Speaker 6: in the investment grade market, but that's for the coupon.
24:42
Speaker 6: In the tragy market, are you there for price appreciation
24:45
Speaker 6: or are you there for the coupon.
24:47
Speaker 1: We're there for the coupon because again, rates are so
24:50
Speaker 1: volatile that we sort of have to ignore it as
24:53
Speaker 1: noise for the time being, and we're there to clip
24:56
Speaker 1: the coupon. So we were there for a while now,
25:00
Speaker 1: especially after let's say in twenty twenty three, about halfway
25:04
Speaker 1: into twenty twenty three, we increase duration, we increase our
25:08
Speaker 1: fixed income exposure to participate on that yield, and a
25:13
Speaker 1: lot of our clients are actually looking for that yield,
25:15
Speaker 1: so that made sense for us.
25:18
Speaker 3: So Anna, the issue here is for a lot of
25:20
Speaker 3: folks is what is our federal reserve going to do.
25:23
Speaker 3: And you know, again there's lots of competing calls out there,
25:25
Speaker 3: but overall, where do you think the risk profile for
25:30
Speaker 3: this market is? Do you think people are willing to
25:31
Speaker 3: take risk when when you talk to your clients, are
25:33
Speaker 3: they a little bit more risk adverse?
25:37
Speaker 1: It's mixed, So there's definitely fomo, but there are people who,
25:43
Speaker 1: especially small business owners, they see some of the you know,
25:46
Speaker 1: some of them see strength, some of them definitely see weaknesses,
25:49
Speaker 1: and a lot of them tell us that this market
25:52
Speaker 1: doesn't make sense to them. So what is priced into
25:55
Speaker 1: the markets right now is a lot of optimism, including
25:59
Speaker 1: the area where FED starts to cut, and if that
26:03
Speaker 1: doesn't materialize, I think that the markets may be in
26:06
Speaker 1: for a surprise, and a lot of our clients are
26:08
Speaker 1: definitely thinking in that way. The valuations, you know, the
26:11
Speaker 1: numbers don't sit very well with them. So certainly there's
26:15
Speaker 1: some fear, but you know, there's always a pusson pool
26:18
Speaker 1: between fomo and fear.
26:20
Speaker 6: Right, Yeah, I definitely have some fomo, but I'm also
26:23
Speaker 6: like soup cans under my bag kind of gal so
26:25
Speaker 6: Anna thanks a lot, really appreciate it. In a Rathburn
26:27
Speaker 6: cio at Sibiz Investment Advisory Services.
26:32
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26:36
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26:39
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26:42
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26:46
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26:50
Speaker 6: We did see paul A Spike once we got the
26:53
Speaker 6: ism and the you mish in the S and P
26:55
Speaker 6: like I get, we're only up one tenth of one
26:56
Speaker 6: percent and definitely buying coming into the front end. It's
26:59
Speaker 6: like buy everything. It's okay, the Fed's gonna cut not
27:02
Speaker 6: at all what torrest and slock was saying, No, no.
27:04
Speaker 3: Tors and side. We justaid Torson slock On saying economy
27:06
Speaker 3: is better than expected. Well, these numbers don't show that.
27:09
Speaker 6: They don't, so let's kind of understand what's going on.
27:12
Speaker 6: Tim Fiori is chair of the Institute for Supply Management,
27:15
Speaker 6: so he's the ISM GUYE. So he does all the stuff,
27:17
Speaker 6: He does all the surveys, he knows the things, and
27:19
Speaker 6: just to recap ism manufacturing coming in light of forty
27:22
Speaker 6: seven point eight the new orders, though slipping below fifty,
27:25
Speaker 6: All right, Tim, what happened.
27:26
Speaker 5: Was going on? So Alex, it was actually a pretty
27:30
Speaker 5: good month.
27:31
Speaker 9: So what's actually happening on the number side is seasonal
27:35
Speaker 9: adjustment factors. So we got a huge benefit in January
27:39
Speaker 9: from seasonal factors, and we got a huge deducted in
27:42
Speaker 9: February from seasonal factors. If you look at the raw numbers,
27:45
Speaker 9: we're actually positive in February compared to January, which you
27:47
Speaker 9: would normally expect to see anyway. So overall, you know, go,
27:51
Speaker 9: I go through the ten sub inducs, I categorize them
27:54
Speaker 9: as positive, negative, or mixed for the month, and I
27:58
Speaker 9: determined all the sub inducks were positive for the month.
28:01
Speaker 9: So let me let me support this whole thing on
28:03
Speaker 9: the demand side, because the new order number is the
28:05
Speaker 9: one that's going to really.
28:06
Speaker 5: Flash out of people.
28:07
Speaker 9: By far, the majority of our comments around softening demand
28:12
Speaker 9: is decreased in half, so many fewer panelists are commenting
28:15
Speaker 9: about softer orders, which is a positive thing. Our sentiment
28:19
Speaker 9: around future demand is still running at about two to one.
28:23
Speaker 9: You know, we peaked at ten or twelve to one,
28:25
Speaker 9: you know, many many months ago, but two to one
28:27
Speaker 9: still says we have a predominant amount of people saying
28:29
Speaker 9: that things in the future are going to get better.
28:32
Speaker 9: You know, I've been tracking the percent of respondents that
28:35
Speaker 9: are below fifty industry sectors and the ones that are
28:38
Speaker 9: below forty five, which is a real warning sign.
28:41
Speaker 5: So I think last month under forty five we were
28:43
Speaker 5: twenty seven.
28:44
Speaker 9: Back in January, twenty seven percent of manufacturing was contracting
28:47
Speaker 9: in forty five or less.
28:49
Speaker 5: This month is one percent.
28:51
Speaker 3: Wow.
28:51
Speaker 9: And then on the overall contraction under fifty last month
28:55
Speaker 9: was in the range of sixty five. This month we're
28:58
Speaker 9: in the range of forty. So overall we're moving in
29:01
Speaker 9: the right direction. This is going to be a slow recovery.
29:03
Speaker 9: I think the month of February indicated that, yes, January
29:07
Speaker 9: was a pivot month. We're starting to grow again. The
29:09
Speaker 9: headline number is and showing that with the detail underneath
29:12
Speaker 9: supports for sure. So I think the man is coming back,
29:16
Speaker 9: for sure, especially with the raw number being up.
29:17
Speaker 3: Okay, So how about so tim four us folks that
29:20
Speaker 3: just kind of look at the headline number, What am
29:23
Speaker 3: I going to see a I in manufacturing number north
29:26
Speaker 3: of fifty? When do you think we're going to see
29:27
Speaker 3: that and see a little bit of growth in manufacturing ecounomy.
29:30
Speaker 9: I think it's very possible in March. I've been saying
29:33
Speaker 9: that for the last three four months. It's very possible
29:35
Speaker 9: that we could see it over fifty in March. You know,
29:39
Speaker 9: you know, the seasonal factors are an interesting thing. I'm
29:41
Speaker 9: a big believer in seasonal factors. We had three years
29:44
Speaker 9: of no seasonality, and those three years are now factoring
29:47
Speaker 9: into our seasonal adjustment factors. You know, we had, for instance,
29:50
Speaker 9: on the new order side, we actually up the January
29:53
Speaker 9: new order number up four point two points in January
29:56
Speaker 9: and we're now deducting four point three. So there's some
29:59
Speaker 9: real voluti going in here because of what happened in
30:02
Speaker 9: the pandemic is your carryover effects. But so you look
30:05
Speaker 9: at both elements, look at the seasonal factor, look at
30:08
Speaker 9: the non seasonal factor.
30:09
Speaker 5: We're definitely heading in the right direction.
30:11
Speaker 9: And I think the other thing here is on the
30:12
Speaker 9: production side, we again were generally stable to the prior month,
30:17
Speaker 9: so revenue continues to be stable, which is good. We
30:20
Speaker 9: continue to take headcount out to match the future projections.
30:24
Speaker 9: At least within the next six months. We're running at
30:26
Speaker 9: about a one to one hired to force managed ratio,
30:29
Speaker 9: with half of the force managed activity being layoffs, so
30:32
Speaker 9: people are a little bit more urgent and eliminating the
30:34
Speaker 9: head count compared compared to where they were in September October.
30:38
Speaker 5: I think that's all positive.
30:39
Speaker 9: And then for the first time in many, many months,
30:41
Speaker 9: I think sixteen, the supply base is now stiffening up.
30:45
Speaker 9: For the first time in many months, we've now gone
30:47
Speaker 9: to an environment where the suppliers are struggling to deliver.
30:50
Speaker 9: So that's all positive. It means demand is aggregating at
30:53
Speaker 9: the lowest level and we're now starting to feel the
30:56
Speaker 9: impacts of it.
30:56
Speaker 6: So this is why we love having Tim on because
30:59
Speaker 6: you look at the headline number and we're all like, oh, oh,
31:02
Speaker 6: this isn't good here, and we get the idea and
31:05
Speaker 6: we get the real data behind those numbers. So maybe
31:08
Speaker 6: when Torston's Slock says the economy is better than expected,
31:11
Speaker 6: maybe that's true. Tim. I know you're not an economist
31:14
Speaker 6: or a FED official or Torsten's Slock, but is the
31:17
Speaker 6: economy better than we think?
31:20
Speaker 5: Well?
31:21
Speaker 9: I think Alix, you and I have talked about this
31:23
Speaker 9: for many months now, back in the August timeframe. I
31:26
Speaker 9: think in September, I came out with the declaration I
31:29
Speaker 9: think we're in the trough, and I think we've been
31:30
Speaker 9: in the trough since August. The thing I didn't have
31:34
Speaker 9: any insight into is when did we get to climb
31:36
Speaker 9: out of it. Then we did our forecast back in
31:38
Speaker 9: December before Chairman Powell releases predictions on twenty twenty four,
31:43
Speaker 9: the most important one being I'm pretty much going to
31:46
Speaker 9: cap out increases and then by the time we get
31:49
Speaker 9: to twenty twenty six, sometime I might get get to
31:52
Speaker 9: the two percent. So at that point we already had
31:54
Speaker 9: a very positive forecast of twenty twenty four and that
31:57
Speaker 9: just provided really good tailwinds to help us through. And
32:01
Speaker 9: then you know, last month I said, I think we've
32:03
Speaker 9: now started to climb out of the trough. And I
32:05
Speaker 9: think this month supports that it's unfortunate that the seasonal
32:08
Speaker 9: factors are so fluid here, but that will all stabilize.
32:13
Speaker 9: March and April are really strong manufacturing months. We probably
32:16
Speaker 9: will have significant seasonal factors to overcome. I think, like
32:20
Speaker 9: I said, we're not on a huge ramp up here
32:22
Speaker 9: in terms of the expansion. It's going to be slow
32:24
Speaker 9: and gradual, but we're going to be expanding nonetheless, so
32:27
Speaker 9: I think we'll probably break the fifty mark in March
32:31
Speaker 9: April for sure.
32:32
Speaker 3: Hey, Tim, any particular industry out there leading the way
32:35
Speaker 3: or is there any industry kind of holding back this
32:37
Speaker 3: US manufacturing?
32:39
Speaker 5: Yeah, thanks Paul.
32:40
Speaker 9: So, I mean the one I've been watching for three
32:42
Speaker 9: years now is chemical products coming back to an expansion
32:45
Speaker 9: mode because they support the other seventeen industry sectors.
32:49
Speaker 5: Chemical products is positive.
32:50
Speaker 9: It's expanding at about a fifty one to fifty two
32:53
Speaker 9: in the month of February for the first time in many,
32:55
Speaker 9: many months. But we've had five or six months of
32:57
Speaker 9: improving in chemical products, so that just continues to support
33:01
Speaker 9: the story. And then also in the month of February,
33:03
Speaker 9: fabricated metal products, which is another feeding industry sector. They
33:08
Speaker 9: generally don't sell anything direct to the consumers themselves. They
33:11
Speaker 9: sell it to other companies that then convert it and
33:14
Speaker 9: sell it. That's our strong that's one of our strongest
33:16
Speaker 9: industry sectors for the month of February. Two in the
33:19
Speaker 9: positive territory, I think the number was fifty one fifty two,
33:22
Speaker 9: So two of the big big feeder industry sectors that
33:25
Speaker 9: support growth overall are in the positive territory.
33:28
Speaker 5: I think that's a very good sign.
33:30
Speaker 9: Transportation has gotten a little bit weaker than it has been.
33:34
Speaker 9: We're still expanding at a fifty and some change. Okay,
33:37
Speaker 9: food and beverage is contracting. It's probably of our big
33:40
Speaker 9: six industries that we follow, it's the one that's probably
33:43
Speaker 9: the weakest. But I've come to learn that there's a
33:46
Speaker 9: real seasonal factor in the food and beverage industry, and
33:49
Speaker 9: we're at the bottom end of that seasonal factor.
33:51
Speaker 5: Now.
33:51
Speaker 9: They did really well in Q four, they've done really
33:54
Speaker 9: weekly in January February they expected to. That's our number
33:57
Speaker 9: three industry sector. So back by the time we heard
34:01
Speaker 9: April that's gonna come out of the it's going to
34:03
Speaker 9: pass fifty and move on, and that supports the whole
34:05
Speaker 9: PMI expansion over fifty in the March April.
34:07
Speaker 3: TIMEA Hey, Tim, thanks so much. You know what, I'm
34:09
Speaker 3: gonna give you an unsolicited room rader here, I mean
34:11
Speaker 3: your room raider in the background. It's fine, but the
34:14
Speaker 3: fact is you're in Miami, Tim, you should have we
34:16
Speaker 3: should have the background be like the ocean or your
34:19
Speaker 3: yacht on the inner Coastal Waterway. So if you can
34:22
Speaker 3: work on that that that'd be great.
34:23
Speaker 5: It's even better. I'm a Jupiter.
34:25
Speaker 3: Ah, there you go. That's what I'm talking about. Golf course.
34:28
Speaker 3: Then Tim Fury, thanks so much for joining us, Chairman
34:31
Speaker 3: of the Manufacturing Business Survey for the Institute for Supply Management. Again,
34:35
Speaker 3: headline numbers not looking so great, but if you go
34:37
Speaker 3: under the surface, Tim suggesting there's some strength out there,
34:41
Speaker 3: so I appreciate it his time.
34:44
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Speaker 2: station just say Alexa playing Bloomberg eleven.
35:02
Speaker 6: Let's get back some of the ECO data. At the
35:04
Speaker 6: top of the ten University of Michigan sentiment, the final
35:07
Speaker 6: read for February coming in a bit lighter. Current conditions
35:10
Speaker 6: revised lower as well, and expectations revised lower as well.
35:15
Speaker 6: We want to get to the bottom of it. Joan Chu,
35:17
Speaker 6: University of Michigan Surveys of Consumers Director joins us. Now
35:20
Speaker 6: the revision lower. Joeanne, what happened there.
35:24
Speaker 10: You know, essentially it edged down just a little bit.
35:27
Speaker 10: It was not much of a change at all, and
35:29
Speaker 10: essentially we should interpret this as moving sideways between January
35:33
Speaker 10: and February. Essentially, consumers haven't really noticed any material changes
35:37
Speaker 10: in the state of the economy since the start of
35:39
Speaker 10: the year, and that comes through in our data. At
35:43
Speaker 10: the same time, it's also solidifying the really enormous games
35:46
Speaker 10: that we saw in December and January. We're still almost
35:51
Speaker 10: thirty percent above where we were in November. That hasn't
35:54
Speaker 10: really changed even with this little wiggle this month. So
35:56
Speaker 10: consumers feeling better than last fall, feeling about the same
36:00
Speaker 10: as last month.
36:02
Speaker 3: I guess a lot of folks, uh, Joanne, right now,
36:04
Speaker 3: given some of the inflation data we saw in January,
36:06
Speaker 3: CPI and PPI and so on, maybe concerned and maybe
36:10
Speaker 3: inflation's coming back into this economy. Are you seeing that
36:14
Speaker 3: in any of.
36:14
Speaker 7: Your survey work.
36:16
Speaker 10: No, Consumers broadly have felt pretty assured that the slowdown
36:21
Speaker 10: in inflation is going to continue. You know, the data
36:25
Speaker 10: that the that these new inflation numbers came from comes
36:30
Speaker 10: from consumer reflects consumers experiences last month. You know, it
36:33
Speaker 10: comes in at a lag, so consumers already notice those
36:35
Speaker 10: prices around them and any changes in prices. And you
36:39
Speaker 10: know last year we were seeing quite a bit of
36:40
Speaker 10: volatility see sawing and inflation expectations in January and February
36:45
Speaker 10: exactly the same.
36:47
Speaker 6: So, Joanne, what are we going to be looking for
36:49
Speaker 6: for the preliminary read then for March, like, what are
36:52
Speaker 6: going to be like the standouts that you're looking at.
36:55
Speaker 10: The main thing we want to look for in the
36:57
Speaker 10: months ahead is whether this thirty percent game that we
37:01
Speaker 10: saw in December and January, whether that's actually going to
37:04
Speaker 10: stick given how dramatic those increases were. You know, so
37:08
Speaker 10: far the February week confirm that. Let's see if that
37:11
Speaker 10: stays put in March and April. And you know, as mentioned,
37:17
Speaker 10: inflation expectations absolutely top of mind for consumers. Right.
37:21
Speaker 3: Very good at Joann, thanks so much for joining us.
37:23
Speaker 3: Really appreciate it. You inshoot Surveys of consumers Director hit
37:26
Speaker 3: there at the University of Michigan. We had some data
37:28
Speaker 3: come out there today.
37:29
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