tv Bloomberg Markets Americas Bloomberg April 20, 2022 10:00am-11:00am EDT
>> it is 30 minutes into the u.s. trading day on wednesday, april 20 read her of the top stories. are you still watching? netflix loses 200,000 subscribers and will lose 2 million more in this quarter with password sharing going on. time to buy treasuries. bank of america says the tenure is compelling and goes along with a target of 225. we speak with a member of the team behind the call. flirting with positives. the real yield briefly tops since 2020 before reversing. does that mean there is an alternative to equities? speak to the chief u.s. equity strategist at goldman sachs david kostin. alix steel and guy johnson are both off today. anna, it is a day where tina is
in question. anna: we have lots to talk about in bond markets. we have the existing home sales data breaking for the u.s. falling 2.7% to $5.77 million. yesterday we saw the housing stock come through ahead of estimates. we have seen a recovery since the pandemic but underscoring anything with the housing market you don't have to move far before you get interest rates and mortgage costs. that is interesting in the context of the rising rate environment. today we had the added excitement very early in the asian session, most people in the u.s. were asleep, but we did see the yields go positive. kailey: very briefly but still, it happened.
we are only negative four or five basis points. much less negative than earlier this year calls into question the multiples. that brings us to our question of the day, where do positive real yield leave stocks? let's ask david kostin, goldman sachs chief u.s. strategist joining me in new york. what is your answer? david: the answer would be on an absolute basis related to history the u.s. equity market is extremely highly valued. somewhere in the 90th percentile on a pe multiple basis, enterprise value, sales basis, all those metrics, equities are attractively highly valued. but if you think about your question about rates, that was the compelling argument for a long time why equities were attractive on a relative basis to interest rates. that is somewhat normalized and the valuation of equities, u.s.
equities, is more consistent with the average for the last many decades. therefore, inside the market where does one think about stability? and the idea of stable growth and low volatility, those are the attributes that are likely to outperform. we think about it in the context of why are real rates at the levels they are? the fed is looking to tighten financial conditions in the economy is slowing and that is our forecast. that combination of slowing growth and a tightening financial environment, that would suggest more stable will outperform. anna: you like stable stocks. good to see you. let me ask you more on the relevance of the positive real yield. it was brief. we are not trying to read too much into one number when it crosses 0% into positive territory. but does this make you
increasingly less keen on technology stocks, for example? that is one of the more obvious trades people .2. david: i think you want to think about it in two pieces. there is a group of highly profitable, strongly rowan companies on one hand and on the other there is primary technology stocks which have thin margins and are losing money. those performances are likely to be different and we want to think about it and suggest -- fund managers think about it in different ways. the ideas of rates having risen does call into question the valuation of some of that much longer growth into the future. those stocks have been de-rated by 50%. we are 12 times the sales. they have been cut in half now. on the other hand, if you look at the stronger growing companies a lot of which will be
reporting earnings the next week and next week. there is free flow cash generation and that will support stocks. inside the idea of technology there are some companies which have relatively more stable businesses. those are likely to do better. kailey: let's talk about stability. how do you differentiate between stability and quality or the are they one and the same? david: quality is difficult to define. i will define it in the typical way. stronger balance sheets, relatively more stable revenue growth, growing but at low amplitude, the idea of margins, high return on equity. some of those attributes would be consistent with quality. kailey: and stability is different how? david: in a similar. a particular component of
quality and the idea of strong growth over time. little bit of difference from quality. thinking about stability in an equity portfolio given the question you are asking about drawdowns and the relative valuations of equities versus bonds, the forecast is a relatively modest upside, maybe 5%, from the level today versus the end of the year. around 4700 on the s&p 500. where are the opportunities in the market? in our view, the quality and the stability stocks usually trade at a slight premium and they are trading at a discount right now. there is a value and stable environment that is compelling for the strategy. anna: you see this basket of stable stocks as something that is interesting at a time when the backdrop can look pretty volatile. one of the elements of that has been a surge higher in
inflation. how do these stocks deal with inflation or are they a mixed bag on that front? david: in the last decade we have been in a relatively low environment in terms of interest rates and inflation. and then we think about it in the context of the last five years and what you have seen before the pandemic, during the pandemic, and then think about it for this year. companies that have had pretty high margins and relatively stable growth margins is an attribute that they have pricing power in those decidedly different backdrops. those companies are areas we are looking for in this environment. the idea of a slowing economy and a tightening financial environment makes those attributes of stability more
prized going forward than they have in the past when it has been primarily about growth. kailey: let's talk about pricing power because one of the stories we are following so closely is netflix. you can argue whether it is consumer want or discretionary spending. can we expect customers to tolerate it? david: it depends on how the contracts work. you can think about what have companies demonstrated the last decade? you can take comcast as an example. different kind of business but generally pretty stable over time.
that would be one area of thought process and then the high margins. which companies have high margins and stronger cash flow? are they buying back a lot of stock as a way of supporting share prices? those are the other attributes one would think about. we have $1 trillion of buybacks. that is very significant. we had about $1.2 trillion of authorizations last year. a lot of that will be put forward this year. dividends, a bunch of companies raising dividends. one of the mispricing's in the market is dividend growth. we think that will be around 9% this year and 10% next year. that is a huge differential. anna: you already talked about a slowing growth environment and pricing power. i wanted to bring those together because a couple of companies
anecdotally talked about having pricing power today. png in the united states selling things you would deem essential. heineken selling things you might or might not deem essential. both of these things talking about the amount of pricing power they had. if growth does slow and we see savings accumulated during the pandemic dwindle, is that something that will weigh on those kinds of stocks? david: there is always risks and some of the companies could be viewed as more consumer staples oriented in terms of demand for their products. stability in terms of their business model most companies have been raising prices and that is the commentary we have had with management. 5% for a lot of the companies
and that has basically been sticking for companies that are stable in terms of the business model as compared with discretionary spending. i think that is likely to put a risk on some companies more than others and the idea and definition of what this discretionary purpose would be characteristic of that. i was in atlanta visiting companies recently and the idea of raising their prices for lots of different reasons, part of that pushing through whether it is distribution cost, labor cost increases, those are challenges they are passing on to the consumer. thus far those have been sticking. kailey: let's talk about the other side of the coin and the health of the consumer which we heard on the bank earnings call. consumers are looking good. they are financially secure. the picture is still a good one. what is the macroeconomic environment?
how would that change your view if it was better? david: if you had a better accelerating economic environment, which is not the baseline forecast we would have, i would say we what are companies more leveraged to that? it would be those with better growth prospects. what is the source of the incremental spending that is taking place? i think the idea between the stay-at-home stocks versus the reopening stocks, i think the proverbial stay-at-home stocks which are benefiting during the pandemic, they have been facing challenges on a year-over-year basis. growth rates are slowing in part because of the nature of that business. you heard that from netflix on the recent call. we think about the companies reopening that have done better and that relates to the idea of inflation coming down, less so on the services side. anna: thank you for your time. david kostin, goldman sachs
chief equity strategist. we have been talking about consumers and how they are doing, what they're spending money on. coming up, bridgerton is the most english language watched show on netflix. but the stock plunging after subscriber losses. we speak with mark stoeckle, adams fund ceo. he has strong view on the subject. ♪
anna: welcome back to bloomberg markets. shares of netflix taking a dies. the streaming service started losing customers for the first time in a decade. more losses are on their way. joining as the ceo of adams fund, mark stoeckle. he is a netflix shareholder. thank you for coming to talk to us. let me ask what you take away from today's -- well, last night's announcement. is the problem with the company? is it across the sector? is the problem the u.s. consumer? is it about reopening trades? what has gone wrong for netflix? mark: can i pick e, all of the
above? [laughter] i do think it is a little of all of those things. clearly the streaming business is a hard business. it was easy when netflix got into it. they had first mover advantage. but they continue to spend a lot of money. but let's look at the competitive landscape. hbo max, disney plus, peacock, you have an amazing amount of dollars chasing talent. there chasing writers, creative people, and they are trying to do the same thing. what netflix has shown in the quarter before this and yesterday is it is really hard. they have made it very difficult to continue to dominate what they used to dominate which was the streaming business. kailey: how much is it an issue of saturation and everybody that is going to have a netflix account already has one? can this business operate is not at the growth it was once able
to enjoy? mark: i think you bring up a really good point. it is definitely an issue especially in the u.s. but netflix has said for years there are good opportunities outside. some of the stumbles they had, they had to bring prices down in india and in other parts of the country the uptick has not been as good. they had a first mover advantage because netflix was one of the first streaming services that actually went to provide local programming. shooting in india, shooting in the u.k., and bringing local programming. but everybody is doing that. everybody is doing that now. it makes it really difficult to differentiate yourself. anna: and south korea as well. let me ask you what does this mean for the management team? what does it mean for reed hastings, the company he cofounded? is he under more pressure then
he has ever been? mark: i think that is fair. but let's not for big what reed hastings did -- but let's not forget what reed hastings did. to take blockbuster entered into netflix is amazing. i will have to say on the margin i am a little surprised. netflix has continued -- they're going to spend $17 billion on content did. . it has not resonated with consumers as much as it has. i think a lot of that is competition. let's also take the sharing of passcodes. that was an obvious issue, that until their business started to slow, they were really not addressing. his management on the hot seat? i think they are. they talked yesterday about lowering ads. that is something we have been kicking around for a while. in many respects it is like instead of being ahead of
everybody, they are behind and they are catching up because the growth is slowing. what do you pay for a low double-digit revenue growth and flatish margins? it is trading at 22 times 2022 earnings. that is too expensive. kailey: talking about what do you pay, netflix this morning and this year significantly cheaper. is there a buying opportunity yet or is there, too much weighing on the company to have that you at this point? mark: we don't think it is a buying opportunity. could you possibly trade if you are a real adept trader? maybe. but for an investor i think there are too many question marks on what is going on. i know i said it a couple of times but the competition is not going away. disney is not going away. hbo max is not going away. the fight for talent, the fight
for writers and all the creative people are going to continue. i think there is, if i was an investor who did not own this, i would say let's step back and wait a better opportunity where management is addressing these issues. anna: i remember some 10 years or so ago i talked to a hedge fund manager who did not let netflix and used to talk about the barriers to entry for other players were not that high. he was expecting that other broadcasters were put their content online in some fashion in a similar way and then eat netflix. it took a long time for that to happen but now it really is here. is there a sense that netflix needs to re-trend? or does this remain volatile for some time? mark: i think it almost has to remain volatile. because the competition is not going away. in many respects, i think if you are competing against netflix, you have seen where they are vulnerable. they detailed for us last night
where they are vulnerable. if i have an economic man running ceo of a company i'm going to say, how can we take advantage of the big gorilla in our business? how can we hit them at different places to make it more difficult, better for us, and more difficult for them? i think we have some of that ahead of us. kailey: finally, this is the earnings story we are following today. but come the bell we are going to be watching out for tesla. you also have tesla in your portfolio. what are you looking for? mark: one of the big metrics with tesla's deliveries -- is deliveries. free cash flow is another item. those are the things we are looking more closely at. although we do own tesla we are well underway. kailey: why is that? mark: because we think the
business models are tough. we find it hard to value. we think it is difficult to value and you have to have a 10 or 12 year view of this. the numbers don't make sense to us. because it is so volatile from a risk control standpoint we own some but we are quite underweight. kailey: mark stoeckle, always great to get your candid thoughts on these companies. thank you for joining us. he is the ceo of adams fund. this is bloomberg. ♪
that means i am continuing to monitor elon musk's twitter feed. i do not have an answer for what he had tweeted overnight, blank is the night. is it tender? anna: i don't know. i was looking for other song lyrics thinking if we get more, we really do get the message. will he be on the tesla call? that will be interesting. getting numbers out later from tesla and he said in 2021 he was not going to be on all of the calls. i know that is about the car company and there's going to be plenty to talk about but will he be dragged in? kailey: we will wait and see. very interested to see how that goes after the bell today. coming up, bank of america sees inflation peeking and buying opportunity in 10 year treasury. we talk about that next. this is bloomberg.
what caused the turnaround? >> the biggest index move will be netflix. a 37% drop what it comes to netflix shares and it's weighing on the broader index, the worst performer just from its overnight action. look at all these other etf's. a lot of average investors were not actively on wall street, they can see the pain in some of these tech focused stocks. you also have some of these other ones that are very internet focused. it's not just netflix dragging the move lower, it's also disney, all of which will be part of the telecom industry. it will be a key focus in terms when the micro starts to affect the macro picture bread let's talk about the next steps in the markets and talk about twitter and i believe we have a terminal charge here, this will be
important when we talk about how much these tech stocks are bringing volatility. you can see comparing it back to 2012 some of the subscriber growth is bringing back so much volatility print that line all the way down in the far corner really shows you how much pain is in the market now. this at a time when there is less volume in the market creating this environment where you feel a little bit more volatility which is amplified by selling and not buying. which brings me to a bigger macro picture. let's assume out one more time and talk about what the yield is doing as well. so very much relevant, the s&p 500 actually higher so you are seeing a bid when it comes to energy in those commodity names. economic sectors outperforming tech right now. i think one of the major stories will be that 10 year yield. the real highlight is the real
yield is now positive. what does that do to asset allocations when it comes to people switching from the stock market into the bond market. that remains to be seen. kailey: thank you -- >> thank you very much. that the conversation we were having at the start of the hour, whether they move we'll yields -- real yields into positive territory. whether that would exaggerate the effective had paid nobody is suggesting bending a couple of seconds over into positive territory will make a material difference but it indicates the higher yield environment we've been talking about and now we are talking about on the real level as well which will be filtering into people's thinking. kailey: i think it is the velocity of the move. the quickness with which we've gotten here less so the actual
absolute level at the end of the day and it reminds me when the yield curve was inverted for a brief. of time. -- brief period of time. for so long the case i'm hearing from those bullish on the market is you still have negative real yields which will continue to provide support and some of those areas in which valuation may be richer. that i think is the question not so much how it affects the equity market as a whole but which pocket of it. what does this mean particularly for some multiple -- high multiple growth stocks. >> something we don't need to tell people is the way they are cutting up the technology space, software developers, a consumer facing tech over the united states, it gets much more complex than that. we will break down these markets
>> you are looking at a live shot of the principal room. this is bloomberg. >> keeping you up today with news around the world. a small but growing number of senior kremlin insiders are questioning vladimir putin's decision to go to war. they believe it will set the country back for years. they believe there's no chance he will change course. in shanghai, businesses are gradually resuming operations in the midst of that massive lockdown. many factories are able to use a close loop system where they can
undergo regular testing. two thirds of shanghai's 25 million residents are still locked down. amazon is taking another step towards getting its -- by 2025. they reduce its access to renewable energy. it will be used to supply amazon's offices. global news 24 hours a day on air and on bloomberg quicktake, powered by more than 2700 journalists and analysts in more than 120 countries. this is bloomberg. kailey: thank you. let's talk about renewables and turn to president biden's climate agenda. they addressed some of the country's progress on fuel emissions. >> on the transportation side, light-duty vehicles, cars and trucks. we fuel economy standards that are propelling more and more efficiency, we are making tremendous progress towards the
president's goal. kailey: here to talk about the transition is jeremy baines, of the company is the largest producer renewable diesel and jet fuel in the world. he is here with me in the new york studio. in that conversation as well they talk about the action president biden has taken with the war in ukraine and the tapping of the spr, trying to combat the higher prices consumers are facing. in the face of these higher prices what does that mean to the overall transition to cleaner alternatives. >> i think this is really an opportunity to accelerate the transition towards more sustainable renewable fuels. this is a good price signal that these fuels work. if you look at california, today nearly 20% of all diesel consumed in california is actually renewable. if you took that out what would he do to diesel prices in
california. kailey: put them way higher than they are ready. jeremy: it just -- demonstrates they are powerful and the transition is part of the solution to fight climate change. anna: tell us more about what exactly renewable diesel is because there has been controversy when talking about other products that are divine from biofuels, controversy about a product that could otherwise go into foodstuffs for example. tell us how you navigate all those other difficulties. jeremy: ruble fuels, we make them predominantly from waste. used cooking oils collect from restaurants all across the country and we convert them into a drop in diesel. we put the renewable into diesel if you want. kailey: let's talk about that.
when you look at sustainable jet fuel, it's been more expensive than that of regular jet fuel. as we see regular fossil fuel prices increasing, is that gap closing, are we seeing sustainable options becoming more cost-effective? jeremy: it's true it's more extensive than petroleum jet fuel today but that's because it contains the cost of carbon and pollution unlike jet fuel which puts the cost of pollution and carbon onto society into climate change. the gap will narrow but i don't think it will necessarily close. that's not really the aim. this is a sustainable fuel. with these high gasoline prices i don't think anyone is arguing going back to leaded gasoline or going back to burning another
hole in the ozone layers in >> -- ozone play or. -- ozone layer. >> taking the last delivery of russian crude, looking to replace it with other sources. i know that's for other parts of the business to deal with but i wonder how the war in ukraine is impacting on your universe and the part of the business you manage if at all. is it although making the push towards renewable arrive sooner. jeremy: obviously it's a tragedy this war is taking place in ukraine and it's impacting people across the world. in the u.s. we see the demand for renewable fuels continues as strong as ever. in terms of sustainable aviation fuel, a demand at this point is exceeding what they can produce. today we produce about 34
million gallons and by this time next year we will have the capability to produce 550 million gallons. so about half a billion gallons. kailey: let's talk about what demand looks like. we will focus on the fact you don't of the where you mask on airlines anymore, they want to reduce the carbon intensity by the year 2025 which isn't too far away. how has the demand story involved -- evolved for aviation customers as well. >> the demand for eva should have been amazing. it's really started picking up and it being driven by the consumer. it is the consumers who want to be able to travel more sustainably. customers want to make sure the next day delivery is done in a sustainable way. we see all of the major airlines are jumping on board with this
but we also see on the production side that are petroleum companies are now looking to transition to producing sustainable aviation. >> lots of companies operate in all kinds of sectors have goals around sustainability and net zero by 2050 or some other data. do we get there through sustainable aviation fuel alone or do we need other ways. >> the aviation industry has made huge progress in making planes more efficient, but at the end of the day they're so burning petroleum jet fuel, there are no electric cables long enough to power those planes so they will need to have some kind of liquid fuel. we argue it should be a sustainable aviation fuel and there are many ways of getting that. so i truly believe this industry is about to scale up and take
off actually. >> we know president biden here in the united states had some goals when he came into office. he wanted to have billions of dollars for funding of climate initiatives yet in many ways they think he hasn't done a fantastic job of that especially in the face of the war in ukraine. what would you like to see from the biden administration on renewables and transferring infrastructure into cleaner sources of energy. >> there was a white house roundtable at the end of last year which set the ambition of 10% sustainable aviation fuel by 2030 and 100% by 2050. we fully support those goals. now it's up to regulators and legislatures to see if we can put in smart polities together in the technology and vendor neutral way so we can all compete in the markets. >> this concluded tax credit
which would be a good strong signal to the market, but they could also be some local incentives or some targets for how to get there. there could be changes to the renewable fuel standards that would put aside a specific win for aviation. >> what about circularity. we talked for renewable diesel and sustainable aviation fuel. and environmental spaces they like to talk about circularity of the economy paid are there incentives the u.s. should consider to make the economy more circular, to enable businesses to play their part in the lifecycle of a product. >> i think many companies are already participating and finding ways to reuse their waste. we have many partnerships with the city of oakland for example,
we work together with mcdonald's. there are many companies out there this can only help accelerate the trend. >> jeremy, thank you for joining us. let's move on with the conversation. the 10 year treasury rate at an attractive level to buy. they expect inflation to peak this quarter and fall steadily into 2023. joining us as the bank of america u.s. rates strategist. thank you for joining us and for sticking with us. let me ask you about this call in more detail on what it's based on. it is a long-term view of where 10 year yields should be or is the short-term tactical. >> we recently recommended going long on the 10 year treasury rate and there's three core reasons why. levels are quite far from fundamentals. we think fundamentals are driven by two key things here, of the
first is longer-term inflation expectations. the second is were longer-term potential growth can be. so really from that first core question are we thinking this is short-term versus longer-term. right now levels became dislocated from where we think is longer-term levels should necessarily be paid probably something closer to 2.5% for example. the second core reason is we are already seeing signs of a growth slowdown in the u.s.. signs that consumer and business confidence is begin to cool and we are seeing increased discussion of recession possibilities. the third important consideration is from a positioning perspective, investors have been positioned very short rate. this has done very well in recent months and when we get the shift in momentum, investors who have done well on those trades are probably going to do profit taking to cover those
positions. >> how does your call on the 10-year treasury yield factor in your assumptions about the federal reserve. essentially you're saying the fed won't be as corrective as the market thinks it will be. >> it's not necessarily a call on the fact it's relative to the market, it's mostly the view that longer-term rates which should be more anchored based on longer-term inflation expectations and growth are really quite dislocated. the fed has a tricky job right now. they want to tap on the brakes to be able to cool demand and inflation while at the same time if they press too hard they risk sending the economy into a recession and we think as the fed really begins to tighten policy and cool demand, that will ultimately result in the market becoming more worried and concerned about those longer-term growth concerns and drive demand. >> today -- we seen the trend --
10-year treasury yield coming down. still quite elevated. what stops your call coming to pass if you'd like. what gets in the way of your call becoming a mainstream view because of the moment it seems like a lot of guests apart from yesterday and today queue up to tell us how it will be. >> there are certainly risks here, one is the fact we see longer-term inflation expectations really become meaningfully unanchored. really beyond the fed's 2% target. if we see that way into market pricing that something that could drive the back end higher. the second and very important consideration has a lot to do with demand for treasuries, securities in general. if we see multi-asset investors who look to treasury for that risk off protection against a
lose more faith in the back end of the treasury curve, that ultimately could shift demand discussion as well and because the back end to cheapen also. >> can we talk about real yields as well? very briefly earlier today, how do you translate over to real rates? >> we have 0% as our target 10 year rate for the end of the year. we don't think from an economic fundamental perspective we can see the longer 10 or real year rates pushing past that range which is consistent aware longer-term growth expectations for the u.s. are paid you can see it's really drive further above that level, that becomes a very important trigger for the economy enters of can tribbett to the slowdown pressure. they would ultimate have this feedback loop currently in the
range of where we see real rates at that zero level where you have higher rates, a particular higher real rates driving that flow in terms of longer-term economic concerns as well. >> we will watch to see if that's -- zero is where we stay paid you mention the growth slowdown in the u.s. getting air time, also recession fears getting air time. what percentage chance do you put on a recession in the u.s.. >> we probably will see the economy slowdown as the fed raises rates. this is ultimately what they are trying to achieve. when the fed was really raising rates, falling inflation wasn't a problem. the fed is purposely trying to raise rates and cool the economy and tighten financial conditions
>> welcome back. a half-hour to go for the closure of the european session and this is where we are on the stoxx 600. it is a day when yields have been coming down. is he buying of bonds which is given room for some of the equities and risk appetite to recover. stoxx 600 moving higher catching up with the united states moves
and they are not being shaken -- quaked by the moves around tech. treasury story, a guilt story. you see money coming back into the markets to some degree in those yields coming down just a bit. the euro real interesting area of focus. is that dollar weakness because the dollar is weak, we have an interesting briefing from marcus , one of the governing council members at the ecb. we will talk about what that's done for markets and we will talk with the global market strategist who joins us shortly to get us ready for the closure of the european equity markets. this is bloomberg. ♪
europe. this is bloomberg markets, a european close with guy johnson and alix steel. anna: both of them having well-deserved arrests. european equity markets today as we head towards the closure in around a half hour time. stoxx 600 up by 9/10 of 1%. in a day when we were focusing on not a higher yield environment. here's the german bund to illustrate that point but it was true it treasury and true broadly as well. also the earnings story, we
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