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- [00:00]
Creative Planning Announcer
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- [01:00]
Lease End Announcer
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- [01:51]
Bloomberg Audio Studios Announcer
Bloomberg Audio Studios Podcasts Radio News.
- [02:01]
Jonathan Ferro
This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferro along with Lisa Abramowicz and Annmarie Horden. Join us each day for insight from the best in markets, economics and geopolitics. From our global headquarters in New York City, we are live on Bloomberg Television weekday mornings from 6 to 9am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen to. And as always on the Bloomberg Terminal and the Bloomberg Business app, we begin
- [02:26]
Host (John)
this out with stocks trading at all time highs as tech concerns continue to ease. David Levitz of J.P. morgan Asset Management writing hyperscaler earnings results reinforce our positive outlook for corporate profits. We maintain a pro risk view in portfolios. David joins us now for more. David, good morning.
- [02:41]
Lease End Announcer
Good morning.
- [02:42]
Host (John)
Since we got those earnings, those hyperscalers have been off to the races. I'm talking about gains of 10 to 25% over the last three or four days for a handful of some of the biggest companies over the on the planet. What was in the data, the earnings that started this move?
- [02:57]
David Levitz
Well, so I think what's really interesting is we've seen this over the past couple of quarters where coming into the earnings announcements, you see the skepticism begin to rise. You know, maybe profit growth won't be as good as it has been. Maybe margins will finally start to come back in and then they impress. And for the most part, you know, the numbers are good. They may or they may not be, but I think the market is focused on the fact that even if you exclude the equity investment gains from the overall earnings season number, you're still looking at earnings growth of 30%. And so these are just unequivocally good numbers. I think a lot of it ties back to the point you were just making. You're seeing this trade broaden out. You're seeing it show up in the manufacturing economy, the industrial economy, the real economy at the end of the day. And that's what's giving this story legs, right? That's what's making it a more durable trade. It's not just this flash in the pan. We're going to spend a bunch of money and then move on to the next project. This is really something that's transforming the growth rate and the growth trajectory of the US Economy.
- [03:49]
Host (John)
For much of the year, it was hyperscales or chips, one or the other, not both. It was chips or software, one or the other, not both. Is that still the story or things changed?
- [03:59]
David Levitz
So I think things are changing. And I think last time I was on with you guys, we were talking a little bit about how markets are becoming increasingly discerning between the different players. And so, you know, what I think you're going to see going forward is within software, who are the winners and who are the losers? Within chips, who are the winners? Who are the losers? You to an extent saw it in the hyperscalers throughout this earnings season. Who are the winners and who are the losers? What is the market looking for? They're looking for that roi. They're looking for that, that inclin and that there is going to be a profit benefit down the road. And I think that you're starting to see that come through in a more durable way.
- [04:30]
Lisa Abramowicz
How much are you seeing discernment and how much are you seeing relief that maybe some of the leverage has been pushed out of the system, either with situational awareness or with the situation over in Korea?
- [04:39]
David Levitz
So it's Funny, I remember being an analyst and like if the market moved 2% in one day, it was a really, really big deal. And now we have these 2% moves and people kind of like shrug their shoulders and 20%, we'll do it again tomorrow. I mean, look, clearly there was a technical element of what was going on here in, in terms of the sell, terms of the leverage in some of these ETF products. But that's the market that we're in today. And I think kind of thinking about the volatility angle and going back to some of the comments that you guys were making about Kevin Warsh and how the market's digesting everything there, you know, yes, on the one hand you could say the market is doing the work for him. My question is how long are markets going to be content doing the work for the chairman of the Federal Reserve? I think at some point you get market exhaustion and that's when they want a little bit of guidance as to what to expect. And so, you know, the Fed's walking a very fine line here and I think that the earnings are really what's bailing them out. At the end of the day, the fundamental story is just very good.
- [05:31]
Lisa Abramowicz
What's notable to me is that when we talk to people about at what point the long end of the yield curve will constrain some of the ambitions within the S&P 500, they say we're not there yet. And but it's because earnings are so strong. It's because we can look past this. When does that change?
- [05:46]
David Levitz
So I think that you're starting to see debt markets begin to push back on a lot of this financing. And it's not problematic when you go from a negative leverage ratio to a leverage ratio of one. I mean, you're still going to be able to bring paper to market at fairly attractive spreads. But we have seen spreads for the hyperscalers begin to move wider. You look at high yield, the picks and shovels trade, some of those issues are getting a little bit more wobbly. You know, one time subscribe instead of multiple times oversubscribed. And so that's what I think you want to watch there is when do these AI players recognize that they can't just do it with debt, they can't just do it with equity, they can't just do it with cash flow. They need to figure out a mix of all three. Because if this is really going to extend over the next couple of years, you can't be a one trick pony when it comes to financing this investment,
- [06:28]
Host (John)
are we close to exhausting what's available to them to issue debt, to issue equity?
- [06:32]
David Levitz
I think that there's more room to run. I think you look at some of the hyperscalers this year and part of what happened was you had so much debt coming to market in such a short period of time and not really giving investors the heads up that it was coming. And so, you know, if we begin to see a little bit more of a seller, steady drip instead of a fire hose, I think that that will help markets digest. But you know, clearly the fact that markets are requiring a greater spread in the IG space, in the high yield space to take down this paper tells you something about the sheer volume we've seen so far, year to date.
- [07:00]
Host (John)
Back in the day, if you saw a move like that and spreads are still super tight, but if you start to see them widen out, you'd worry about equities. Is it the same story?
- [07:08]
David Levitz
So I think what's interesting to me is that up until this point the equity market and the credit markets were kind of two different things, right? You didn't have a huge hyperscaler presence in the IG space. You didn't have a huge data center presence in the high yield space. You had a bunch of software sitting in private credit and direct lending. But you know, hey, that only marks four times a year. So you only need to pay attention to it four times a year. Now you're seeing that the tech trade and the AI trade is infiltrating both the debt and the equity side of the equation. So I think that there is more signal coming from what's happening with small spreads than there was previously. But at the end of the day, you look at where spreads are. I mean, they're still pretty tight by historic standards. And you look at what's going on in high yield to 70 over. I mean, I struggle to get overly concerned about the trajectory of the economy when that's what we're seeing. From a financing cost perspective, does 6040
- [07:57]
Lisa Abramowicz
have any relevance whatsoever anymore in the backdrop that you're just explaining?
- [08:01]
David Levitz
So I think it, it does. And I think one of the misconceptions that investors have is that when you say 60, 60, 40, you mean a public 6040, right? Private equity and public equity are still equity at the end of the day. Private credit and public credit are still credit at the end of the day. And so one of the things we're encouraging investors is, hey, 6040 might make sense, 7030 might make sense, but beneath the surface, what does your credit allocation look like? What does your equity allocation look like? And do you need to think about other alternatives, things like real assets to help play defense against higher inflation volatility going forward.
- [08:33]
Lisa Abramowicz
At the end of last year, a lot of debt investors, credit investors, were saying there was more of an opportunity in equities than there was in credit, just simply because the upside looked so much better and the potential downside was potentially worse for bond investors. Has that pendulum shifted as yields have gone materially higher?
- [08:51]
David Levitz
So I think that it has become more balanced. I'm hesitant to say that it's completely shifted because the earnings story still is so strong. And so if you believe in the idea that over time stock prices will fall, follow profits and profit growth is still going to be there, then maybe there's more juice to get squeezed out of that orange. But you know, seven and a quarter, seven and a half on high yield, which we know is a higher quality asset than it once was with a fairly low duration, to me, feels pretty interesting in an economy, in an economic environment where growth is clearly above trend. If I think about the skew to risk free rates, it's very much to the upside. So if I can pick up some spread on top of that and maintain a below benchmark duration, that's going to be interesting. From an overall portfolio you've indicated also,
- [09:31]
Host (John)
maybe the bigger concerns this time around are in IGN and not in high yield.
- [09:34]
Lisa Abramowicz
You've got a duration concern and you've got a much more concentrated concern. So at a certain point, tight spreads, more duration, more exposure, that potentially is fraught with disruption. Suddenly starting to look at IG that has potentially more risk than a lower duration high yield portfolio. I mean, it's just sort of an interesting kind of turning upside down of risk.
- [09:55]
Jonathan Ferro
Stay with us.
- [09:56]
Host (John)
More Bloomberg surveillance coming up after this.
- [10:03]
Creative Planning Announcer
Salary bonus 401k stock options, investment accounts if your wealth manager only sees one piece of the puzzle, who's connecting the rest? Creative Planning's integrated team of specialists coordinates all of it so everything fits together. Creative Planning where wealth works together creativeplanning.com
- [10:23]
Barry Ritholtz
BSP hi, I'm Barry Ritholtz inviting you to join me for the Masters in Business podcast. Every week we bring you conversations with the people who shape markets, investing and business. I speak with CEOs, Nobel laureates, market innovators and legendary investors. Whether you own stocks, bonds, real estate, commodities, even crypto, these are discussions you absolutely need to hear. Subscribe to the Masters in Business podcast on Apple, Spotify or anywhere you listen.
- [10:54]
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- [11:11]
David Levitz
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- [11:29]
Host (John)
The president slamming Exxon and Chevron as high prices from the war in Iran weigh on consumers and fuel profits for the oil giants. The company's ranking In a combined 29 billion in the second quarter, more than triple the same time last year. Stephen Schalk of the Short Group joins us now for more. Stephen, let's talk about where the profits are coming from, how the money's being made, what happened to Exxon, what happened at Chevron, the subset of the president so much?
- [11:55]
Stephen Schalk
Well, it's understandable here. I mean, we finally found an issue that Trump and a democratic socialist can agree upon. He's chastising an industry that has made money in a quarter on a war that he started and has no apparent plan on ending. And now he's going full Bernie Sanders on the market, telling us now Exxon has to turn up money over. Chevron has to turn that money over. He said it himself, they're making money from a shortage and making money relative to a year ago. But the shortage that he created and he has again no plan from the market's perspective of alleviating. So yes, companies are going to make money when you start and you artificially inflate the price due to your own actions. So he is flailing right now, reaching out and slamming everyone because it's not going the way he had expected. Clearly when this all started going on
- [12:50]
Host (John)
six months ago, Stephen, clearly refining is a major feature of what's happening here. What kind of utilization rates are you seeing across the industry? Where is the capacity to bring more refining online and to to help get the gasoline price lower, not just stateside, but around the world?
- [13:05]
Stephen Schalk
No, virtually not. I mean, because we are looking at a market where crude oil is going up and down every time the president changes his rhetoric. Last Thursday he went full Doctor Strange Love. I'm going to blow Iran up to 24 hours later. I'm John Lennon. Let's give piece a chance in oil prices are reacting to everything the president says. What doesn't React is the reality. Refining margins, the product markets, the market is telling us the forward curve, both in the diesel market, in the gasoline market, that we are short of product and hence now the margins, the difference between diesel and gasoline and crude oil are massive. Therefore, the refiners are doing everything they possibly can to capture those margins. And therefore they are running. In the Midwest, they are running at virtually 100% of capacity. In the refinery epicenter in the Gulf coast they were running at 97% of capacity. So the refining industry has already pushed to its max at this point. So there's a very little more margin that the industry can do to get more gasoline to the market. They just can't wait a while and there's a pixie dust on the market and all of a sudden bring retail prices lower. No, retail prices are higher because there is a shortage of product and the ability refiners to bring more product to the market is already stretched to the max.
- [14:26]
Lisa Abramowicz
Stephen, can the President do anything along the lines of what he's suggesting? I mean, if you channel Mike Worth and you try to get into his head, is he just sort of rolling his eyes and saying, what a bunch of hooey and it's never going to come to pass?
- [14:39]
Stephen Schalk
No, absolutely everyone. I mean, I don't know Mike Worth personally, I haven't spoke to him, but everyone I do speak in the industry, yes, they are rolling their eyes at a situation where you go on and you could take such a populist view that stems from a war that you created when the industry is responding the way you would expect to be responding. The old adage is that high prices are the cure for high prices. We have those high prices. And why are they a cure? Because you're going to bring product to the market, to Britain to exploit those high prices. But we're already there. What we can address now is the shortage of product is once again, there's very little that the industry. The industry is doing essentially everything it can. It's responding to high prices. What it cannot do is respond to the uncertainty. Look, I could price a $95 war. I could price a $75 piece. What I cannot do and what the market cannot do is press a $95 war and a $75 piece when it alternates, it ping pongs within every single news cycle. So there's a price to be paid for that uncertainty and the market is paying that price right now.
- [15:44]
Lisa Abramowicz
Do you like the oil majors as a group in terms of the share price, given the volatility that we've seen in oil prices, the shortages that are ongoing and the fact that high prices haven't gotten high enough to spur demand destruction in a real way, at least not in the United States.
- [15:59]
Stephen Schalk
Yeah, absolutely. And that's the fear that we're having because there's two ways to impact elasticity of demand of any commodity. Bring more supply to the market or kill demand. Well, our ability to supply the market, as we've said, is already pushed to the margin. So therefore the only other issue to bring prices down is demand destruction. And of course that's economic contraction and that is the fear in the market as the longer we go and as we have the uncertainty of how long this war, how long this disruption to the flow of oil around the world through the straight of moves or through the Bob Elmdeep into Red Sea, how long does that remain disturbed? And right now we don't have an answer to that. Therefore, we have extreme uncertainty, volatility in the market. And when the market's uncertain, when the market is volatile, prices are going to be high. You're going to have to pay for that, for that uncertainty.
- [16:50]
Jonathan Ferro
Stay with us.
- [16:51]
Host (John)
More Bloomberg Surveillance coming up after this.
- [16:59]
Ed Ludlow
Get essential news on the people and companies pushing the tech sector to new frontiers. Hi, I'm Ed Ludlow. Join me for Bloomberg Tech, a daily podcast focused exclusively on technology, innovation and the future of business. Every weekday we bring you the latest insights on Silicon Valley's top companies and conversations with tech's biggest decision makers. Listen to Bloomberg Tech on your commute home and stay ahead of the news cycle. Subscribe today on Apple, Spotify or anywhere you listen.
- [17:33]
Host (John)
Let's talk about chips, a massive month behind us. They declined by more than 20%. A big afternoon coming up. AMD said set to report earnings after the bell, the chip makers lofty second quarter goals aiming to close the competitive gap with Nvidia. Angela Zenof, CFR maintaining a strong buy in the stock and a $600 price target rising. These ambitious targets reflect AMD's confidence in capturing a significant share of the expanding market. Execution will be critical. Angela joins us now for more. Angela, welcome to the program. Let's just start that that story. How big is the gap between AMD and Nvidia right now? Is it closing and why does that gap even exist? What is one company doing better or have done better than the other?
- [18:14]
Bank of America Announcer
Yeah.
- [18:14]
Angela Zenof
So John, thanks for having me. I'd say overall, listen, there's a huge gap here and the biggest reason for the gap is you've got Nvidia which essentially has been doing their Cuda software for, let's call it two decades at this point in time. So they had a huge massive lead in terms of the start of this AI revolution. They've essentially dominated the whole AI accelerator market over the last couple of years and more importantly within video, they've kind of shifted to these large scale rack solutions which everyone has kind of the whole industry has migrated to. When you kind of look at AMD here, they are now starting to kind of shift to large scale rail rack scale solutions. Actually their Helios platform is ramping here, will ramp in Q3 more. The kind of the upside going to be in Q4 and into Q1 of next year. But also when you look at what they're doing on the software side of things, they're now really starting to make some good progress there and you're going to see more developers on their platform and that makes them a real kind of threat to Nvidia kind of looking here over the next couple years where they've got a very small share and actually negligible share when you start thinking about the actual large scale rack solutions. So there's a lot of upside here for AMD and that's why it's our top pick here over the next couple of years.
- [19:30]
Lisa Abramowicz
AMD has announced relationships with some of the frontier models of AI we've heard just generally chips chip companies have gone after deals with the likes of OpenAI and Anthropic. To what degree is that a benefit and attribute and to what degree is that potentially detrimental?
- [19:49]
Angela Zenof
No, I mean it's important. These, these partnerships are absolutely important for a company like amd. They need to kind of prove their, you know, their position in the market at this point in time. And the best way to do that is with these partnerships, whether it be Anthropic OpenAI, which they now have good partnerships with, as well as recent announcements with the likes of Metta as well as Microsoft. So they're in a pretty good position here and it's also kind of help to now build a very good pipeline for them over the next couple years of years.
- [20:21]
Lisa Abramowicz
Are there margin levels that are too good from your vantage point that potentially are so high as to essentially ask for some competitive pressure?
- [20:31]
Angela Zenof
If we're looking all across the kind of the, you know, the semi ecosystem? Yeah, I mean there's, I think there are points there, you know, where you get to two points on the, on the margin side of things where it gets a little bit too lofty, too good. But you know, for, for a company like amd, you're not there, nowhere near there at this point in time, especially relative to some of the other players across the semi ecosystem.
- [20:55]
Host (John)
Angela, I know you're sort of bottom up and you're covering single names, but I want your reaction to what happened with situational awareness last week because a lot of bulls willing to buy this sector now pointing to that as a clearing event. Would you point to the same thing? How do you think about that kind of dynamic?
- [21:10]
Angela Zenof
Yeah, no, I think that's a good question. You know, when we think about that situation and its. Yeah, I mean I think there was a lot of momentum that's really kind of been built within the entire semi ecosystem and to an extent you needed to see some sort of kind of washout which you know, that probably attributed to here over the last couple of weeks. I think you're still in this kind of price discovery phase as far as the semi ecosystem is concerned. We've kind of essentially kind of hit peak growth rates back in Q2, so you're going to see growth rates start to decelerate for the semi ecosystem over the next couple of quarters and years. The market needs to digest that and find kind of a proper multiple for the industry. I do think kind of some of the pullback you've seen over the last couple of weeks or months, whatever you want to attribute to, I think helps get us to that point maybe a little bit faster than we would have hoped for. But yeah, I mean I think there's, there's to some extent a clearing event that took place place over the last couple of days, weeks call it, but at this point in time, you know, it's hard to say whether or not we've seen the absolute bottom within the space.
- [22:17]
Jonathan Ferro
This is the Bloomberg Surveillance podcast bringing you the best in markets, economics and geopolitics. You can watch the show live on Bloomberg TV weekday mornings from 6am to 9am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen. And as always on the Bloomberg terminal and the Bloomberg business applied.