Trade, Fixed Income, Kelley Blue Book
Welcome to the Bloomberg PNL podcast. I'm Paul Sweeney along with my co-host this Abramowicz each day. We bring you. The most noteworthy in useful interviews is for you and your money whether at the grocery store or the trading floor. Find the Bloomberg pl podcast on Apple podcasts. Or wherever you listen to podcasts. As well as at Bloomberg DOT COM Tom. President Trump said there is a very good chance to make a trade deal with China but the unrest in Hong Kong is a quote complicating factor. He was speaking on Fox and friends earlier this morning. He also said that he would not commit necessarily or didn't necessarily say whether he was going to sign the bill. Oh that was passed by both houses of Congress basically say that that that the US stance by Hong Kong Brendan Murray joining us now. Bloomberg's Buber's reporter and editor covering all things trade. Can you give us a sense of where we are and what kind of credence we can give to a statement like this by president trump. Will you heard the president say okay. send a couple different signals. There one was yes. We're very close to a deal. But he also talked about some of the tougher issues that They still have yet to to resolve Among those being The Intellectual Property oversight that China that the US wants China to have greater control over for an an and the and the forced transfer of technology. So these are these are issues that You know that that they still have yet to To come to an agreement on you know. Trump has said for weeks now that our very close to a trade deal. It was six weeks ago today. When he sat in the Oval Office and said we have a deal all we have to get it on paper So And he said we could do that in three to five weeks here. We are weak six. And he's still saying it and we still don't have any sign that That that that an agreement is in fact imminent. It could come any day now or it could drag on for several weeks so Brennan both sides the US and China China said that they ideally would like to keep the Hong Kong issue and the trade negotiation issue separate. Do you think that's possible. I think think this is one of the things that That that that president trump will offer as a concession to his Chinese counterpart if they can indeed get close to a deal he ah he could just say you know what I won't sign that bill and but you know this is what I want from you. It's it's it's leverage in trade negotiations and and And that's that's what this piece of legislation is likely to become. What are we hearing from the Chinese side? We heard President Xi Jinping speak overnight about the need for or mutual respect and equality in a deal which is which are guiding principles that China has demanded all along. That is that significant. I saw that headline and I was thinking taking. How do I frame that? In terms of make trade deal more or less likely it is significant when you hear president trump as he did just You know a few hours ago. Say I don't like that word. Equality China has been ripping us off for decades now. you know This can't be a fair deal. This is going to be a deal that benefits us so you ube you add those two things together and you've got two leaders who are still Apparently very far apart Brennan Next Steps I think the last thing I a red was A. US delegation had been invited to Beijing by China. Is there anything on the counter. We don't have any information that that invitation has been accepted yet. that that was made last week and the The US Trade Representative Robert Lighthizer. Kaiser has been running around Capitol Hill the past few days trying to work out the US A- Canada Mexico deal and get Speaker Pelosi to sign up to that so he's had his hands full with some other things now he he can do multiple things at once but His priority is not flying to Beijing in the next couple of days And certainly with the US holiday next week you know it's it would be. It would be a stretch to think it could come together before the middle of next week as always mentioning the uh-huh trade negotiators on both sides are trying to distinguish the Hong Kong issue as unique and separate from other negotiations having to do with trade. What's the Tipping Ping Point here for one? That is impossible. Well I think the real it this whole thing will I think tip when the US yes Agrees or disagrees to rollback tariffs that are already in place that seems to be where the US is is You know China really wants to to to give some ground on that and the US is you know the whole the the whole US economic strategy with China is to apply tariffs chiefs and keep them applied until You extract You know changes out of China that You know bring it more in line with other sort of market economies So that is where sort of the rubber meets the road in this whole in this whole saga The Hong Kong Issue as president trump said you know is definitely complicating things. But whether it's enough to you know totally throw it off the rails You know as it is a different question that I I don't see it happening. Surprenant we're talking really about a phase one type of deal that's all we're talking about right now is that right. That's right so oh phase. One as president trump laid out a couple of weeks ago involves agriculture purchases on China's behalf protection of intellectual property of American aircon companies. And some of these other sort of structural issues whether they can get those You know as a whole nother question. The you know they've we've heard you know phase phase two will be we'll come right afterwards and maybe even a phase three so You know these things. We're we're about to head into year number three of these negotiations with no not. Even the simplest issues worked out in phase one So we could be you know we could be looking at something that lasts CEO through the election next year and beyond. Auntie perhaps Brendan Mary. Thanks so much for joining us. Brendan Murray covers. All things trade for Bloomberg News joining us from our London Bureau Giga under the surface of credit markets. Could you could find a bit of a conundrum you can see that. Everything seems to be chugging along on average but if you take a look at the riskiest credits the triple C. rated debt it sold off and continued to sell off with yields on the securities extra yields now rising to the highest since two thousand sixteen. Joining us is Ken. Monaghan Co director of global high yielded. Mundi Cindy pioneer in our Bloomberg interactive brokers studios can. Do you think that this is a harbinger of more pain to calm the weakness. That's been persistent within and the triple C. rated category here. Well Lisa you know the triple C.. Portion of the market is often been viewed as kind of a big risk indicator for the overall credit markets. And knows knows trade to very high levels which right now. We're spreads are wide yields are high and they've underperform woefully in two thousand nineteen. Usually people. Say Okay well. That's assigned or not such such good things to come and perhaps a recession. I would think in this case. Actually it's a little different because there's so much of it that's tied up with the energy sector and then a few other idiosyncratic situations that that That's really driving it. We said earlier that sometimes triple season detail that wag the dog this time. I don't think the fact that the the tail is wagging that hard it is indicative of more of a major problem and this is what a lot of people are saying. This is a specific sector issue energy and then there are a couple of retailers etc that have also struggled along with some pharmaceutical companies. A number of other types of stories. I'm just wondering what it says about a time when we have so much central bank equity when we have such a risk on kind of overall feel that there are an increasing number of companies going bankrupt even in some of these troubled sectors right. Well you know I think the energy is key piece of that and and I think if you look at the energy sector and you recognize how much money had gone into it. Over the previous ten years and really facilitated the expansion of the shale boom in the United States. You may be had too much money chasing too few opportunities and I think if you look at those companies by and large they have not been able to J. generate a sustainable return on capital companies. That can't return capital or generate the rate of return on capital over. Time just can't raise new money. Which is why these companies are in difficulty so I actually talked to a lot of distrust investors and they are actually highlighting the energy as one of the sectors? They think they can actually find value in ED value. Is it if if you do your real bottoms up research. Are there still opportunities there. I think you're right that there are opportunities and You know but they're they're not a whole lot of them out there. I think you're really going to look under rocks here and But there are some out there and I think we are looking at them but I I would not expect in two thousand and twenty. Necessarily that you'll see a wholesale return or surge turns for the energy sector and if you do because it's not impossible it will probably indicate is that that a lot of the companies have washed out of the index so when a company goes bankrupt it drops out of the index. So if you had enough energy companies going bankrupt in early two thousand twenty the rest of them that are maybe sustainable. They could have have a big rally. How far in the shake-up are we? It's interesting I was up with the capital markets team of the largest banks yesterday and talking to them about it and it's amazing how few companies have gotten religion. You know they were offered a second lien paper early this year. At seven percent than my midsummer was nine percent. Now there may be eleven or twelve percent and they still haven't gotten on board they still haven't figured out there still hope springs eternal. But you know it's the old adage the tropes not a business plan and we're stuck in that situation right now for many of these companies all right so energies dicey only for the brave. What are some of the sectors actors that you think are attractive right? I mean the market gets up. Eleven twelve percent this year. It's at a pretty good year are still areas that you still find attractive you know. It's we're still looking under rocks well in general in this market because the returns have been so significant this year. Let's recognize though what happened is in the fourth quarter of last year. We all expect experienced misery if if anything you had that was risk whether it was equities or high yield got absolutely pummeled so effectively. The return that should've taken place in two thousand eighteen got sucked into two thousand nineteen so affectively as supercharge the performance for two thousand nineteen. But where we look at when we look at things where they are now. It's much going to be much more difficult to generate a return next exchange. Two Thousand Twenty is not going to be double digit year for for high yield. Just not possible. What's IT GONNA be? I think you're looking at mid single digits. It could be even lower depending on what happens. Binge with the wash out of certain sectors like energy. Do you think that you are guaranteed bigger returns. Going into the double be or into the single. Be or into the triple C.. That's the big question I would tell you that the problem with double bs right now is one. They've got a lot of interest rate risk on them in two of the other problem. Ah would suggest is that there's been so much money that's gone into double bs from what we call crossover. Investors otherwise investment grade buyers. That are so desperate to we. Get some extra yield into their portfolio that they're dipping down into the buy things they don't normally by double be credits that they've compressed spread on those bonds and if we look at those new issues that come came out recently a little last several weeks for example in the WBZ space very few of them are trading up significantly. They kind of come out. They price it par four and a half four and three quarter coupon and it just sits there now arguably maybe if it stays there at that level for all the two thousand twenty four and three quarter return may not look so bad relative to investment grade particularly if interest rates rise. A bit from here. But it's not exactly been attracting a lot of interest so outside of Energy Hausa credit quality in your portfolio. I would say you know if we look at our portfolio historically we generally owned credits that on average rated about a notch below that of the index. So we'll tend to seek seek value in single bees. And that's where we are right now doesn't mean we're not buying WBZ's we are a bit more selective about it but we're very much overweight single bees we're kind of underway WBZ nor about market. Triple C's right now. How close are we to our session? Well not between here and Christmas. How's that and I? I don't think we can and I don't think it happens in twenty twenty either but we'll it'll remains to be seen. Obviously the whatever ever happens we supposedly are on the verge as we have been for over a year now it seems of a of a completion of these trade talks and if that keeps getting pushed out or there's more saber rattling that goes on on either side that could facilitate something. Yeah all right all right I mean come on. This is literally what we live every every day. So what's most attractive area that you guys looking at right. Now it's interesting. The auto sector had been beaten up fairly fairly bad and there's a bit of a recovery going on there we've found some opportunities there and that's one of the places we would point to where there is It may be had gotten over. Sold people talk. Perhaps a recession was coming people sales. We're GONNA come down and that really has not happened. Bonds backed by the sniper truck. That's maybe data Ken. Monaghan co-director global high yielded Mundi pioneer joining us here in our Bloomberg interactive brokers student. He's based in Durham North Carolina. Home of the Durham Bulls amongst other institutions. Down there and derm looking at quick data. Check rate here the sap we are absolutely flat on the SNP today. No changed our forty. Two two Nasdaq off. Just a little bit looking at yields again not much movement there to tenure up three thirty seconds pushing that ten year yield down to slightly to one point seven six percent compare that to the two year at one point. Six one percents of the curve flattening just a little bit. This is Bloomberg Tis The era of forecasts. A lot of the big banks are coming out with with their twenty twenty predictions joining us now. Dan Skelly hell head of equity model. Portfolios market strategist at Morgan Stanley. Wealth Management. Joining us here in New York. I'm trying to understand Dan. The consensus so far. which is a resurgence in a way? At least equities next year the country could even see double digit returns in the US and perhaps even bigger in Europe. Do you agree with that consensus. So I think that at this point in the cycle you want to be more selective in the US market in particular. We think there's less upside side to the index in the US where we could see more. Absolute returns is overseas in Europe in particular. Just given how much it's lagged and then also given the potential for some a rising catalysts on the fiscal front. You know the only game in town forever in Europe has been monetary stimulus. And I think should we see some fiscal improvement. There that could be a potential catalysts. You think we will see that because I know you know particularly Germany which is where everybody I think. Kinds focuses has been pretty resolute and saying they're not into that game. Yeah so I think that's an interesting question. It's right now. I would label a small probability but a rising probability Lagarde E. C.. Maybe she's the you know the she could be the changes the miracle who had always been loath to do more spendings obviously leaving so I think that swap and personnel is actually net positive for the for the potential. You know listen when you heard Mario Draghi on his way out addressing policy makers. He's basically saying we've gone to the point of diminishing returns negative interest rates so. I'm trying to understand understand how much a truce is priced into the idea that we're gonNA see pretty good year next year. I think that's part of it. I think the other driving factor has been in liquidity. And when you look at what's happened in the US the last call it three months. The Fed isn't calling it. QE But effectively we're seeing qe four in terms of generating more liquidity. So so. I think there's this expectation that you're going to continue to have the Fed at your back in a tailwind in the markets and we don't see that this program ends early next year as we all know and so that could be a potential source of all tilting next year. I'm looking right now at equities. S&P NASDAQ A little little town. But the Dow up all near their hi is and how much of the gains of next year have already been brought forward and priced in now. So that's a key question and I think we would already Morgan Stanley a majority of the gains and we we rely not just our own on our own judgement experience but also on quantitative models and our earnings model a year ago was telling us that earnings were at risk. And what we've seen the last three recorders is a meaningful slowdown from two thousand eighteen. We've seen flat to down earnings and frankly our numbers for next year. Twenty twenty is predicting flat earnings once again and the streets at plus ten percent. So we're that spread to normalize in the street to come down ten percent. We think that provides the genesis behind a potential ten percent correction. I want to be perfectly clear though because we think that's all it is. We don't think it's more than that. We think we're still amid aged twenty year secular bull market that started in twenty Johny ten. And we're just going through some volatility and some potential hiccups so if you see the potential for perhaps a ten percent pullback in the equity markets what are you telling your clients to to do today to get some build some cash. Just get defensive. Let's call interestingly. Our clients are already a fairly conservatively positioned already so when you look at our system Cash levels are above average versus the last ten years so we wouldn't be telling folks to necessarily raise more cashier. It goes back to my earlier comment at the onset. About where are you. Position within the equity market were saying avoid some of the more crowded expensive areas of the market like technology like growth. That have really been on fire this year. And being some of the more EVALU- or is oriented areas of the market. If Tex not leading what will I think that's A. It's a really great question because you need something of size to lead mathematically and so if I look at what has size today the money center banks are really what could what could lead so that if the Fed stays on pause and we have a resurgence the yield curve. Like we've already seen the last couple of months later. I'm sorry we need to have a just data check because we are seeing an eighth straight day of yield curve flattening flattening today which I believe is the longest streak in about two years. So we're we're seeing a bit of a reversal already of that trade. And that's I think related to this day to day headline back back and forth around China and trade right but I think the greater point of the the larger point I'd like to make is that if the Fed truly is on hold next year you could see it an environment where the Jio curve does steep and eventually and given how cheap the banks are and given how big again their market caps are. That could be an area of leadership. Once you're once you're selling out of large-cap up technology. You need something else of size to buy into. You're not just going to go into Microsoft stocks or small cap stocks so that in our opinion is a logical source of funds. Dan skelly thanks so much for joining us. Really appreciate your smart thoughts there. Dan skelly head of equity model portfolios a market strategy. Morgan Stanley Wealth Management joining us here in our Bloomberg interactive interactive brokers. Studio kind of a little bit cautionary. Perhaps you know the potential for a pullback in the markets next year but not interrupting the longer term a bull market. I think it's interesting. The idea of yield curve steepening and this goes to something that Priem Israel was talking about of td securities earlier today where she was saying she expects the Fed to cut rates actually at the beginning of the year and some people are expecting the consumer to show a couple of signs of weakness heading into the new year as you see a stabilization in the manufacturing manufacturing sector and that that could push the Fed over and that sort of the base. It's increasingly becoming the base case of a number of these reflationary trade rats which is interesting because the market is pricing in a September. Twenty twenty eight cut not a March Twenty Rica. I just think it's an interesting kind of dissonance grants there. Yeah exactly exactly just a quick data check here we do. Have the again continues today up. Only one percent dow up fifty seven percent so at fifty seven points are so very quiet day on the US equity market. I want to shift gears. We've been talking about the auto sector and it was interesting. Ken Monahan was saying that he likes. Bonds of automakers have gotten a little bit beaten up a big question in my mind is resell values of used cars and joining us now. Is Carl Broher. Our executive publisher of the Kelley Blue Book uses sort of the Bible when it comes to determining what the value of your car is trying to Resell Carl. I'd love to get your sense of what we're seeing in terms of trend lines For car and truck values. Great question and You know for years the used car values so you have been very strong And we kept thinking they were going to drop with all these cars coming off lease so many So many times in the last three years a lot of vehicles coming off lease we are are finally now starting to see shifts down in used car values not tanking not a dramatic shift but shift down you know to to a degree. We hadn't seen in years so it looks like The new car pricing. That's gotten you know high keeps going up. It's up around thirty eight thousand dollars for the average new car. I think it's finally starting into drive some new car buyers back into these markets And I used car. Values are are are dropping a little bit as well so Karl. I know you guys just published your were Blue Book at Twenty Twenty Best Buy Award winners what are some of the highlights. Well you know there's sixteen categories and we've got a bunch of vehicles that we've been testing team for resale value ownership costs plus of course things like fuel efficiency safety and technology. And how well they drive and I think the big winner this year was the Kea telluride. All right first year the key is made three row. SUV and at one. Not just the three zero S U B category but also our best new vehicle category which is Kinda like just the overall car where most impressed with for the year so really a lot of value packed in that car. Starting around thirty two thousand dollars in a loaded one for low forties. That has he didn't cooled seats and all sorts of great pictures. All Right Carl. I'm sorry we can't have you on and not ask you about the cyber track. I mean you must have known that it was going to be coming the Elon. Musk cyber truck. ACA that was tested on stage and failed the shatterproof window test. What he did you like it? You know He threatened to have some kind of a sci-fi you know blade runner truck and he didn't he didn't disappoint he had a A truck that nobody I think thought was real myself included. I kept waiting seriously for for him to say all right right. This is kind of an early sketch. Here's the real trucks. No it was it was that was the truck and I'm going to be interesting to see if the final production version looks like that but I really think that it's good. There's this kind of built up. Fan Club for Tesla models because There'll be plenty of people who want that truck as what you really think of this truck. That's what you're saying. I think it's just going to be hard for traditional truck buyers to buy into it. I think if it had been a pure electric truck with traditional styling that would have been somewhat of a leap for traditional truck buyers. But you add in styling. I don't think he's going to get much of that. You know one. And a half million volume full-size truck market. which is a great market to tap into now a couple of years? Go by. It's dependable doesn't have any issues. Maybe you'll start to pull you know stifling off some of that huge segment for the near term. You'RE GONNA MOSTLY GET TESLA ORDTECH oriented fans not really truck fans on that truck so car looking again at your twenty twenty best buy award winners outside of the pickup trucks and again the Zebra truckers. Lisa's favorite. I think now you're trying to get back to real south I think I don't see it's pretty much all international nameplates where the US carmakers in terms of quality right now. They've come a long way and the truth is that markets more competitive than it's been in a long time every you know. Continent continent is contributing great cars whether it's Asia or your or the US But you're right that set you know when it comes to resell value which is a key part of Kelley Blue Book you know and and how we value vehicles and we want people to buy a car and hadn't suffer the least drop in value over time that's one of the biggest most expensive things people think about by the car and they don't often think about the drop in value and the and a lot of the you know Japanese cars and Some of the European cars do better in those areas and a lot of the. US Car still. It's a much tighter race. US cars keep getting better in their closer but Honda's Hyundai's Audis they still have a lot of the advantage in that area crawl just real quick quick thirty seconds. I'm wondering which kind vehicle is seeing the biggest price drop in resale values You know sedans as you know. The market has just kind of up the end in them. So I think when you got Sedans especially Non Popular Sedan still have strength in like Honda the court or a Toyota. Camry but I think the reason that all the domestics bailed out of this sedan market is among other things beyond not selling them. When they're new they don't hold author value when they're used they're just not just not popular cars with consumers? Today call brower. Thank you so much for joining us. Carl is executive publisher of Kelley. Blue Book joining a phone. They're based in Irvine California giving us some thoughts about the some of the hot and maybe not so hot cars coming for twenty twenty and of course I guess we now when let me think about twenty twenty one we can think about cyber truck. I thought what he said was actually a really important point. which is it's one thing? If they had a truck that was the corporate electric technologies. It's another if it looks like it's yes. I'm going to repeat this doctor. Who all over again if you start to you know have this sort of sci-fi aspects you're not going to get the rank and file truck buyer? Exactly which is an interesting point but that probably wouldn't have been in keeping with WHO Elon. Musk is anyway. Thanks for listening to the Bloomberg Piano. podcast you can subscribe and listen to interviews at Apple podcasts or whatever podcast platform you prefer on Paul Sweeney I'm on twitter at PT. Sweeney and Lisa Lisa Abramowicz. I'm on twitter at Lisa Abramowicz one before the podcast. You can always catch US worldwide on Bloomberg radio.