tv Bloomberg Daybreak Americas BLOOMBERG December 28, 2018 7:00am-9:00am EST
alix:alix: the big bounce. big swing. s&p, biggest reversal since 2010. the dow swings 800 points. global stocks lose $17 trillion in 2018. asia closes with a whimper. peak to trough, 20% of global gdp this year. cannabis m&a grows hostile. take over. we speak to green growth ceo, peter. welcome to "bloomberg daybreak," on friday, december 28. i'm alix steel. what an unbelievable week. did you make money or lose money? yes. in the markets, we are looking at a continuation of the rally we saw. up 6/10 of 1%. tremendous move on no news. is this short-term? pension rebalancing?
euro-dollar up 3/10 of 1%. broadly weaker dollar story as risk on continues. yields down one basis points. the curve continues to flatten. crude up 2%, participating in risk on rally. how long will it last? and peter coy. yesterday, what did you make of that? you were talking to people. peggy: a lot of people were saying to themselves, this is unusual. a lot of money these days is tied up in quantitative products and index products. when people are pulling money, it is hitting across the market earned index. i was asking a trader at
bank of america, what is the average age on your debt? the average is $32. when the crash happened in 2008, they were in college. me the crash is 1987. lifee, that changed my because it became so clear to me that markets don't have a natural level. there is a socially agreed-upon level. we think the dollar ought to be here. the s&p ought to be here. when something happens that knocks it off that false equilibrium, it takes a while for the markets to come around to agree -- this is the level. right now they are groping for the level. are we too high or too low? scientists have shown that volatility tends to persist.
you get a large boulder being thrown into a lake, the waves take a while to disperse. alix: you have pension funds that have to reallocate anyway into the bond market and you have volatility, a self reinforcing thing. the end of the year is traditionally a time when people move money around. peggy: they're looking at tax liability and looking to offset gains. sentiment has changed. volatility has been so extreme. investors are de-risking in some ways. if they are going back in like the last couple days and saying, there might be buying opportunities, they are not taking huge bites overall. we are bracing for more volatility early 2019. alix: the superlatives are staggereing. global stocks. loss globalt, 20%
gdp, $17 trillion. peter, what do you hear about next year in terms of growth and selloff in global equities? peter: economic growth -- i think, the markets swing more than the real economy does. october,s recently as world economic outlook was predicting 3.7% for global 2019, whichwth in was exactly the same as 2018. they may mark that down. they do this every half year, partly based on the markets themselves, damaging confidence of consumers and businesses. my point is that it is not like we are heading for a deep global recession, here, at least that is not in the outlook. the markets maybe got to optimistic -- too optimistic.
maybe they are too pessimistic now. peggy: last year it was all about europe. alix: european earnings did not pan out. peggy: globally people are on watch for brexit first quarter. that will create more tension and volatility. have donearkets better than expected over the last couple months, because in part the fed looks like it might ease tightening next year. emerging markets are holding up better than people expected. those are a couple things. alix: what do you think customer peter: americans are spoiled. -- what do you think? peter: americans are spoiled. the s&p 500 is pretty reasonable. europe looks weaker, and asia, that is where the real damage has been. alix: the outperformance is sustained. peter: in the u.s.. alix: economic perspective.
peter: there is always a question of whether the engine will pull along the rest of the economy or the economy will pull back the engine. i tend to think the u.s. economic growth can persist. figure current account deficits and so on as a result but, that is the fed perspective. that is another topic. alix: the third topic we want to outlook is m&a and the for next year. hostile takeover bid of a cannabis company yesterday. m&a is flowing fourth-quarter. why? when you talk to investors, what is the biggest concern? peggy: one of the concerns is this idea of the big conglomerate. we saw so many companies for so many years benefit from being conglomerates. they are now a target for activists and in terms of
breaking up. ge is an outlier. they are not the only one we are looking at for 2019 that could become the target of activists. alix: it raises the question, that conglomerate world is good for consumers. amazon. the bigger they get, the more pricing power they have, which means there is less money for me to spend on stuff. is it a good thing? peter: we are going into the middle of a tough debate alix: 60 seconds. peter: certainly amazon, the fact that they get so many customers and does so much business tells you people are voting with their dollars and yen to choose amazon. i agree. 2019, willsting m&a be the stock market decline. buyers want a lower price. sellers insist the old prices correct. the agreement goes away.
peggy: great point. they are waiting to see where things fall. people who are wanting to sell are saying, i am worth this. a buyer is saying, i will ride this longer. the pain breaks you. alix: peggy and peter, thank you. speaking of potential takeover targets, later we have an interview with peter, green growth brands ceo, a company that wants to acquire a canadian cannabis company. the company responding, they do not think the price is right. that is posing some difficulty. you can find all the charts we use and more on gtv on your terminal and browse features and charts. gtv . coming up, more on the market wild swing. this is bloomberg. ♪
>> this is "bloomberg daybreak," with your bloomberg business flash. falling to ax seven-week low, amid concerns the shutdown will last into next year. the greenback slipping against the group of 10 peers. no votes are scheduled. the italian prime minister thinks his country's high level of debt is not "so scary." he said it would be impossible for italy not to see robust growth next year.
he says 1% is the minimum threshold and that the fundamentals remain solid. the government is racing to pass the 2019 budget before a december 31 deadline. china will speed up approvals. the vice chairman the regulatory commission says the country must allow faster access to capital markets and improve stock trading links with hong kong. it is the latest sign policymakers are committed to opening up china's financial system. 500's wild swing, the last 24 hours. finishing almost 1% higher. the biggest upward reversal since may, 2010. it is not just that day. it is the last few. the high price minus the low price. the swings becoming more commonplace. so great to see you.
catherine: thank you. . alix: is this the new normal? low, noe: the vix was volatility, no trading, a big difference from what we were complaining about. things over the next month could make this market fine direction because that is what it is doing , it is looking to find direction. the speech from the fed in january, a more conciliatory tone from the fed chair, earnings growth and trade talks with china, the combination of factors could turn the tide for momentum in the markets. alix: when you look at yesterday, who is buying? is it pension? daytrading? kathryn: there is very little of the buying at this point. there's so much fear. the average investor is scared. even institutional guys are
sitting sideline and waiting for a better entry point. the timing is difficult. what a lot of guys are doing, if they buy the story, which happens to be my story, fundamentally strong u.s. economy, there coming in little by little, taking this last quarter as an opportunity to accumulate positions over u.s. and em assets. alix: strong u.s. leads us to the fed. there are two views. inflation at 2%. why hike? inflation at 2%. you should hike. we spoke about the inflation issues. about best way to think the president is background noise. that is the way the fed should think about it. they should focus on the facts. the facts are, with inflation below target and financial markets having some stresses not
just here but around the world, it is not such a great idea to go fast anymore. alix: does president trump have a point? does the fed governor have a point? the fed should not be hiking the way we think it is going to? kathryn: the dual mandate is met. we have full employment. inflation is came. -- tame. i don't think we get more than one hike next year. the idea that we get three or four, is absolutely not going to happen. alix: it is a strong economy. you want to pick your position. does not suggest the fed should be hiking? kathryn: the market is exaggerating the risk of recession. you hear it all the time. recession 2020. because the market has fallen, guys are saying, it is time for recession. this expansion has gone on too long. it is due. just like the correction was due
for the past five years. now a recession is due. economic expansion does not die of old age. fundamentally, we are strong. we are goldilocks. inflation is low. growth is above potential. potential growth is 2.2%. alix: here is what i don't understand for the fed going forward. if you look at fed fund futures, no hikes in 2019, a cut in 2020. if we do not get the dialer u.s. recession scenario, do they have to rerate and doesn't that effect u.s. equities? emerging markets to downside? kathryn: 10 year treasury will go higher. at current levels it is pricing in, no hikes and then a cut. economic deceleration of a greater magnitude. i think we get one hike next year. i do not think it will rock the boat that much. we will see the 10 year treasury
yields go higher because the combination of acceleration of inflation, rather than deceleration, which is what we saw in the past 2 months, combined with good economic 3%a, a dose elevation from to 2.7% is holistic. -- a deceleration is holistic. alix: talking about more volatility, there was a great article on bloomberg talking about there is a press conference at every meeting. every meeting is live. there will be more volatility. rate strategists say you will take shorter positions. you will have to hedge and be more flexible. is that true for emerging-market debt, u.s. equities? kathryn: absolutely. every meeting being live is an impetus for markets. in january, if markets remain volatile, the fed will sound more conciliatory and market friendly. what keeps me up, my biggest
concern is the threat of a self filling prophecy. we had consumer confidence data come out. economic fundamentals are strong. they are strong. if you get a vicious cycle of consumers confidence falling, that puts a freeze on spending and investment, then you can get that reflected in real data. alix: when you talk to institutional investors, what does that mean? more cash? what do you do to buy? kathryn: how do i move defensive? what do i do at this point? i would not sell into this market, certainly if you are more conscious with regard to risk of recession, you would want to increase cash positions. i am more bullish. hold onto positions. accumulate. for example, emerging markets equities or fixed income. that is a sector where you can find value. my strongest conviction for next year is that em will have a better year.
alix: staying with u.s. equities, where in the u.s. equity market? kathryn: sectors, financials, industrials, energy, tech. if you buy my view that the u.s. economic acceleration is going to maybe decelerate but not fall into contraction, you have financials pick up, u.s. treasury yields go higher, strong correlation with financial prices, less regulation in the cyclicals. industrials i like for the trade tensions. you will get a de-escalation there. there is incentive. incentives are aligned for president trump and xi to come to an agreement because markets are so volatile, i don't think the president approves of that. that is something we can expect over the next six months. alix: you are sticking with me.
alix: global stocks have declined by $17 trillion this year. europe and asian equities falling into a bear market. it has been a brutal year. trillion, 20% of global gdp has been wiped out. on a global level, where are the opportunities? kathryn: there has to be something, right? look to em. i don't love europe. asia presents value, especially china. em space, i like latin america
and emerging asia. you can find value and fundamentals are pretty good, then ishan is what -- currently priced into their assets. alix: why do you like it so much? they do not have exposure to tech. you wind up with resolution and italy. the ecb is paring back. kathryn: they have done homework. the u.s. has tax reform, deregulation. japan has increased participation of women in the labor market to a tremendous degree. they have done corporate governance reform. those are structural reforms. structural europe needs labor reform, desperately. a needs additional reform, fiscal union or something else. they have not done it. economic growth has been disappointing.
finally, possibly most importantly, valuations. i would say to guys, look, europe is not the best story fundamentally but valuations are attractive. now that we have had the u.s. retrace so much, valuations are more attractive in the counterparts, u.s. and japan where you have earnings growth, stronger, better economic story and valuations are more attractive. yieldsapan, 10 year turned negative for the first time in 2017. you mentioned china. this is the widening credit premium, over 200 basis points. why would you like chinese debt? kathryn: i like chinese equities and consumer discretionary space. china has been decelerating for many years. 10 years ago, china was growing double digits. now it is growing 6.4%. safe deceleration every year for the past 10. this has been due to an intended
readjusted of the economy, based not on government spending and exports to one based on domestic demand. the stocks you want to look at are the ones severely beaten up by the trade war. the concessions we have seen from china over the past month, after g20 and when a series -- uenos the g20 in bune airies, my contention is we have seen over selling of u.s. and chinese equities in front of the trade war. alix: we just heard china will allow imports of rice from the u.s. emerging markets, favorite? argentina, the tailwind from brazil has good upside. we liked brazil before the right-wing president won earlier
this year a couple months ago. equities have rallied double digits. people say, i will take my gains and go home. if the current president does even 1/5, if he does one or two things of the things he has proposed, brazil will continue to rally. brazil needs to do that homework. fundamental structural reform. we could get it. privatization of big names. the biggest companies are nationalized, sorry, are owned by the government. deregulation and cutting taxes would be good. alix: coming up, m&a in the cannabis industry. this is bloomberg. ♪
swing since 2000 and. buying into the weekend. -- since 2010. european stocks participating in the rally. we see the rebound. the dax, outperform are in europe at 1.7%. tradewinding of the fear early on yesterday morning. the dollar broadly weaker. euro-dollar up three tents of 1%. .- 3/10 of 1% a surgeon the 10 year. 19 basis points is that spread. -- a surge in the 10 year. the vix is elevated. crude flat, 2% rally, giving up that rally, $45 for wti. business headlines outside the business world. >> the united states may ring in
the new year with the government still shut down. no further discussions expected on day seven. house republicans have no votes this week. democrats take control of the chamber on january 3. president trump is ready to billion to fight for $5 for the portable. an electrical substation lit up sky in queens. a brief electrical fire produced a bright blue light across the sky and cut off power to the airport. delta and american airlines flights had to be diverted before power was restored. u.s. cannabis retailer green growth brands is planning to launch a hostile takeover bid. it would value a canadian marijuana grower at more than $2 billion, 46% premium over
closing price on monday. global news 24 hours a day on air and @tictoc on twitter, powered by more than 2700 journalists and analysts in more than 120 countries. this is bloomberg. alix: thanks. bid, saying ithe undervalues the company. hria says the proposal undervalues the company. joining me now, is peter, green growth brands ceo. good to see you. what do you do? peter: we let the shareholders decide. there has been interest in combining businesses in this industry across the border. last february, when the memo was rescinded by the attorney general, canadian licensed
producers were unable to acquire u.s. companies. there was interesting combining companies across the border. this is one way to do it. u.s.-based company on the canadian stock exchange make a bid for a licensed producer. we think this is a great opportunity. ultimately we do not get to decide this. we are putting the idea out for shareholders to respond to. would you beh willing to up the bid? peter: i do not know yet. there is always negotiation. there is the valuation of our stock and their stock. we will see over the coming weeks how those are considered. alix: what was the trigger? part of the reason aphria could become attracted to you, there was a report that there were short-sellers in the market saying that the equity price was
destroyed. how much of the bid was related to that? peter: that was an element. the overall contraction of the global markets in the last week and the cannabis market over the last two months have made all cannabis stocks more attractive. at the same time, our company started trading after a reverse takeover november 13 and the entire cannabis market dropped 30% but our stock more than doubled. we felt like there was a nice gap between values, small enough that this was something we could do. alix: how much shareholder support you have now? peter: i cannot say for sure. we fill in our statement, we mentioned 10% to begin with. once the news gets out, we will find out for sure. it has been 12 hours. i have not heard updates of late. alix: you're willing to negotiate when it comes to price. if it -- sorry, go ahead.
peter: that is ok. alix: if it goes more hostile, what does that mean for integration of the companies? play hereimately, the is not so much about the assets. it is about the talent embedded in these companies. we have a respect for the team there. we are focused on their assets in canada. people are talking about other acquisitions. we think the majority of their value is in their ability to grow in canada and fulfill supply agreements they have with the canadian government. we think their team is strong. re-think combining our teams make sense. the only way this could happen is for us to acquire them. alix: do you anticipate any other bids? peter: that is always a possibility. we will see. alix: would you be willing to get into a bidding war? peter: up to a certain point, of
course. it is a matter of where the limits are, which no one knows yet. at what point is it not worth pursuing? we are at a good starting point. alix: part of this is the retail of cannabis. cannabis producer, retail guys. you have been in retail for 35 years. what is lacking in the cannabis retail world that you can change? you are looking at a market to enter, you look at what is there, but what is most important is what is not there. the entire cannabis interesting, what is not there is seasoned operators. people who have saturated mature markets and come out on top as we have. that is the first thing. it is important to understand how you win in the u.s. is different from canada. in the united states, we believe it is consumer focused.
brands, consumer experience, quality products. in canada, the situation is that the government is who you sell to. a licensed producer in canada is the way to win there. as the laws change in both countries, as they will and continue to, combining over the borders will absolutely make sense. the first opportunities to take their experience, cultivating it and applying it to our opportunities in nevada and massachusetts, take our experience in product development and personal care products that have cbd and bringing them out to their opportunity to sell in europe and other countries. alix: peter, great to catch up with you on this. thank you. continuing m&a conversation. outlook 2019. here is where we sit. slow fourth quarter. pretty good year overall. the highest and's 2015.
-- since 2015. what i found interesting in that spreads.ion was the will that be a persistent problem in 2019? phil: that is telling. he was talking about accumulating talent. executives are thinking about getting more technology. in themore transactions technology and talents based. that has an element which is cross-border. the imperatives for that ceo are to expand the business geographically, to leverage advanced placement of cannabis in canadian market -- they have been at the vanguard of monetizing and distribute in cannabis as a commercial product -- and he needs to bring more talent into his organization. he was adapting in terms of
answering your questions about competing bids, going on about purchase price. he is obviously facilitating this transaction through capital market movements. the driver is not that his stock is up and the target is down. the driver is his pursuit of more talent and technology into his business. alix: how is that different? bill: the key point is that when you look at what is happening, capital market fluctuation, we had corporate tax reduced in the u.s. finally from 35% to 21%. we had single events that moved m&a a bit here and there. whateal point to m&a is, are the fundamental drivers looking like? is there a need to do m&a? is there a climate that facilitates execution of m&a? onng forward, we are focused boards of directors, do they feel like they need to do m&a? do they feel like they have
predictable outcomes? can they see a path forward to a successful result? in terms of need, these executives and boards have competitors, activists pushing them offensively and defensively and they have expectations from shareholder base. then they have terrific balance sheets. they have learned since 2007, they have repaired their balance sheets and put themselves in a place with capital. you can only do so many stock buybacks. alix: you were nodding. kathryn: how much does the environment, how much is the environment conducive to acquisitions of new businesses? are there companies that want to commit capital in a deceleration environment? bill: you're right. i do not think the executives for the investment bankers are thrilled to see the capital market destabilized. i do not think they are happy
when they read twitter. they are still confident looking forward. there clients positions are so fundamentally strong. sentiment plays a big part in the volume and value of m&a that occurs in the marketplace. no question. capital market deterioration or destabilization does have a chilling effect. at the end of the day, if you are in the boardroom and looking at your business going forward and you have a ton of cash on the balance sheet, or if you are a sponsor in the private equity world, which has access to tremendous capital, you cannot afford to sit on that. alix: even if the leverage loan market seizes up, the high yield spread continues to rise, private equity funding these deals? bill: grade-point. atare looking first quarter the availability of capital on the sponsor side. we know, we have a good sense of what will happen with the fed.
,2 rate increases next year? they are open to looking at one to two. they signaled maybe there would be none. they have not said that. when we look at the cost of capital, that is a key driver to activity and strategic activity. i don't think we will run into a situation of having a shortage of capital. i do not think we will get in a position of capital becoming so expensive it is a deterrent to continuing nonorganic transaction. alix: the sector with the most activity? bill: technology. the reason is, it is the sector that runs across every sector. alix: great point. every industry. bill, thank you. kathryn, you are sticking with me. flights delayed at laguardia after power turns the sky-blue.
danske shares dropping. what we are talking about here, electrical explosion lights up new york. eerie blue light in the sky. let's start with blackrock. this was interesting, about the sponsors versus liquidity providers. etf's versus asset managers and their really bad year. >> it is in some ways emblematic of what has been happening across the industry this year. products have continued to swallow dollars from investors but not as much as last year. you are seeing a slowdown because investors are taking risk out of the markets. also the pressure has continued to mount. blackrock is doing better than a
lot of competitors because it has a range of offerings from passive to active to technology, where the solely active managers have been collaborative this year. kathryn: active managed funds must be doing worse and when investors come back to the market, those continue to underperform in terms of mutual funds. etf are more attractive with lower fees. peggy: the stock and bond pickers of the world have been under pressure. we have seen that time again. wait until things get worse. we will have our day in the sunshine. hedge fund manager say the same thing. volatile markets with sharp swings have been hard for active managers to deal with. we have not seen investors flock back to active yet. danskehe next story is bank. the stock is down 50%.
the money laundering scandal blowing up the company. this feels like a story that will not go away. peggy: one of the greatest lines out today is that investors who stick with it need to have nerves of steel. a great line. a lot of people are saying, the bank could have the capital it needs to get through this. these investigations into money laundering scandals, which are giant in terms of scope, could take a long time to settle. alix: what do you make of these headlines with banks? they come across with european banks like sanctions and standard chartered. what is that about? kathryn: that is with heavy regulation and negative interest rates. danske was interesting because it made money during this long phase of negative interest rates because it acted like a tax on banks. i am wondering if we get this scandal working through, as
interest rates come up, possibly by the end of next year in europe or further out, if bonds could come up and outperform over the next couple years? benefit if they stick. alix: if the fines are lower, that could be a bounce. now the coolest story. the electrical explosion that happened at laguardia airport. the cool part was what it looked like. the explosion was not cool. .ou see the sky turn blue peggy, you were at home and saw this. i was in a cab and missed it. peggy: i looked out my window toward the empire state building and thought, that looks incredible! is the empire state building lighting the sky? it flickered. then i thought, wait a minute, that is not right.
this could be bad. kathryn: how beautiful would that be from the air? but to newark. all: what i loved are twitter. nypds, et cetera, responding. transformer explosion. no evidence of extraterrestrial activity. awesome. i love it. peggy: i love that they had to put that down in words. alix: interesting phenomenon. kathryn. peggy and coming up, the mexican peso leads the gains. this is bloomberg. ♪
watching. mexico 2019. it is interesting. domestic change. political conflict with president trump. industries -- should i get in? you were just there. what is your take away? kathryn: massively bearish. i heard the name hugo chavez thrown around. there is pessimism and fear locally in mexico, fearing the new president is going to nationalize enterprises or intervene aggressively in private sector. that is something to watch. the budget came out ok in line with expectations. i would contend, there is value in mexico, especially with locals so expecting absolutely the worst. bond,t the fixed income the 10 year benchmark, in
dollars, the high 7% yields. that is attractive. you have a divergence so phenomenally interesting. the very same day, brazil voted for the most market friendly candidate in a long time. you have the referendum in mexico squashing the airport deal. you have a diversions and credit risk between them. you can see it manifested in the bonds. see, the fear that we will that referendums dictate public policy, is that a real thing? kathryn: that was scary but now he is president. alix: he will be for that. do you have to make sure you can manage that? kathryn: it is scary for institutional stability. he has to use the congress now. is president. he cannot mandate referendums. -- he is president.
the other concern is, how much will he go around the institutions? the central bank. how credible is it? we have had these banking fees. they want to regulate and eliminate the capacity for local banks to charge commissions. he is trying to do that by subverting the central bank, which is the entity that is supposed to be in charge of these types of things. alix: bonds, something to look at. thanks for hanging out. the biggest allocation to banks. what about trading? this is bloomberg. ♪ place, the xfinity xfi gateway.
and it's strengthened by xfi pods, which plug in to extend the wifi even farther, past anything that stands in its way. ...well almost anything. leave no room behind with xfi pods. simple. easy. awesome. click or visit a retail store today. alix: the big bounce, the big swing. s&p biggest reversal since 2010.
the dow swings 800 points. new normal? the former fed governor says the fed could slow rate hikes despite the president's background noise. the wrong kind of volatility weighs on the big investment banks. the sector fell the most since 2011 this quarter. one analyst predicted a selloff six months ago. welcome to "bloomberg daybreak," i'm alix steel. david westin is off. congratulations, you made it to friday. it was a whipsaw shocking week in the markets. 1% sincees up 5/10 of the biggest intraday reversal since 2010. huge rally on wednesday. euro-dollar up, losing steam upside. watching the 100 day moving average. yen is the currency of choice
today. sloppy five and two-year option. crude losing luster this morning. it was over 2%. now we are up a bit lower. outside the business world, the first world news. >> the united states may ring in the new year with a partial shutdown. no further discussions expected on day seven. house republicans have no plan readys as democrats get to take control on january 3. -- no planned votes. here in new york, an explosion at an electrical substation in queens lighting up the night sky and causing delays at laguardia. a spokesman said a brief electrical fire produced the bright blue light in the sky.
it cut off power to the airport. a number of delta and american airlines flights had to be diverted before power was restored. the syrian military has taken control of the kurdish held town. the militia invited the government to seize the area in order to prevent an attack. nokey says the kurds have incentive to do so. the u.s. provided support for the kurdish militia, which turkey considers a terrorist group. global news 24 hours a day on air and @tictoc on twitter, powered by more than 2700 journalists and analysts in more than 120 countries. this is bloomberg. alix: whippy. the index dropped to .8%, erasing it in the afternoon yesterday, finishing the day 1% higher. the biggest intraday upward reversal since 2010. over the last few weeks, we have
seen whippy action in the s&p. burns and david, joining. david, what did you do yesterday? david: i watched. that is not the most apt thing to say as a manager but you saw yesterday, ifn you are well-positioned, a day like yesterday confirms more of your stock that you are not computer leading and selling -- that you are not capitulating and selling will be the best to own across the board. yesterday, you are validated by holding and not panicking. alix: do you expect that philosophy and action to be the new normal? is this a 48 hour thing?
it will be volatile for some time. as long as you have someone in the white house with an itchy twitter finger, things will be volatile. year, democrats take control of congress, the robert mueller report coming out, the continued issues with china trade tensions and the deadline in march. when you think about those factors, the question i have is -- is twitter more or less erratic? volatility should continue in the coming year. in the last few years, a lot of that has been paved over by easing monetary policy, but now it is tightening. that allows investors to focus on volatility more. alix: yesterday there were no headlines. what happened? i got nothing. you can see how volatile.
on the s&p. make it through, it's going to be ok. do you put money to work? burns: you put money to work. david: it is weird you get back to back negative years in the market, especially if there is no recession on the horizon for 1.5 years. so many stocks are on sale. a couple days ago, the average s&p stock was 29% below 52 week high. plenty of places to go shopping. u.s. small caps are more on sale today than they were. emerging markets look attractive. we are waiting this rotation of stocks with a good 12 months to run. ideas, of manys
that are on sale for the free cash flow and growth rates are positive. alix: in the value world, do you agree? burns: i absolutely agree. side,ve valuation on your which you did not have three months ago. stocks are all of a sudden priced in line with long-term average. you're getting good values. likewise, 5, 10, 20% pullbacks not accompanied by recession tended to bounce back. i also agree with my colleague. you have the consumer balance sheets in good shape. recessionost of the monitor show as low as 16% probability of recession taking place in the next 12 months. although we are certainly late
innings of this expansion, there is definitely good opportunities for investors to chip away and at least rebalance long-term allocation targets. value is a good place to be. small caps is good. mid-cap is an area where investors can get value in companies that are growing the way small caps to but at the same time you get an undiscovered asset class. companies are paying and raising dividends, also a good place to cushion volatility. alix: i wonder what this has to do with a goldilocks fed? lauren lindsay spoke yesterday to bloomberg television on how president trump may have a point. >> the best way to think about the president is as background noise. that is the way the fed should think about it. they should focus on the facts. the facts are -- with inflation below target and falling and financial markets having some
stresses around the world, it is not such a great idea to go fast anymore. view if you want to get into small caps, e.m., what does that mean for the fed? david: nobody can forecast. we are more often wrong than right. having said that, the operative 2 hikes is probably the likelihood next year. at roughly 2.5% today with 2% inflation rate, the real cost of borrowing, inflation-adjusted cost of borrowing is still quite low, such that a company's return on capital is still positive relative to cost in capital. i do not think the fed is deserving of this criticism. i don't think the fed should be pausing at all. they should still be raising interest rates slowly.
the cost of capital is not prohibitive for business or the consumer. alix: on that point, what are individual equities that can thrive in that environment and or be insulated from that environment? david: three quick ideas. commodity prices are likely to dupontxt year, dow splitting into three companies held an investor day in the last month. growth rates look favorable. pricing is favorable. a spin out from the hilton hotel division, this is the hilton on 6th avenue, the big one in chicago, the hawaiian hilton in honolulu, a great yielding stock that yields better than 5%, spin out looks attractive. wyndham hotels spun out the travel division. worked inat has not
2018. it sure has a greater probability of working year. alix: more into utilities and a second. what are some names insulated from volatility and the fed? burns: i think one of the challenges investors face is with volatility, there is a natural inclination to go defensive. more defensive sectors have become historically expensive relative to market. utilities have been expensive. one of the things to do is look for more cyclical value sectors and more defensive names within those. for example, with industrials, industrials relative to market are as cheap as they have been in a long time. they have priced in a recession. you might look at defense stocks. lockheed martin. you have 3% dividend yield. they have been raising that by over 10% per year over the last
several. they have a backlog that gives a fantastic degree of earnings visibility that you typically do not get from something you might call a cyclical stock. lockheed, you look for value. they traded at a steep discount to defense peers. alix: thank you for joining us. we dig deeper into defensive stocks. what do you do with utilities versus consumer discussion? where is the value going to be? this is bloomberg. ♪
aid programs. the department of agriculture saying there would be a halt for any producers who have not certified production. could reach $12 billion with soybean farmers taking the bigger share. the world's biggest food company plans to launch the incredible burger next spring under the garden gourmet label. unilever is trying to find alternative foods that resonate with younger, healthier consumers. vegan business reaching $1 billion within 10 years. deadline day for tesla. the sec has told the carmaker to add 2 independent directors by today. this will include setting up a board committee and a lawyer to
ts.rsee elon musk's twee alix: defensive stocks outperformed peers into thousand 18 amid the turmoil. the status is not likely to hold. -- in 2018. this shows the recent rotation is relative to 2015 market bottoms. do you see a shift in utilities as signs of a bottom and a turn? >> at looked that way when you had, markets look like they did in 2016. one of the things that makes us cautious is valuation of things levelsilities, valuation as high as it has been relative to market in a long time. within utilities, there are valuations to be had. utilities are trading premium to b to market.
exxon is one, 1314 times earnings, utilities are steeper. you have a story. they have been de-risking, moving away from the merchant power business, becoming more of a pure play regulator and utility. point, when you talk about going defensive, everyone talks about health care and valuation. valuations are up. health care shares trading largest premium to market since 2015. staples, whitest premium since 2015. -- widest premium since 2015. burns: it is one of those sectors where you get growth characteristics and earnings stability that allows them to play defense and be considered a value stock as well. some of the things we look for our companies that are buying back shares. you have shareholder friendly
attributes there. medtronic are trading at a deep discount to medical service and supply peers. that has been a legendary name for growing dividends over the last several years. they have good relationships with hospitals, good i.t. protections that provide a moat. those are names for defense. alix: when it comes to cyclicals, we have seen so much flows out of etf cyclicals. where else is there value in cyclicals? what will offer you protection? if we see a downturn or we have a lot of volatility in washington dc, first hit is cyclicals. burns: when i think cyclicals, the ultimate is the industrials space. because of concerns of a trade war with china, industrials have priced in a recession so you're
getting good valuations. lockheed is one place. another interesting place would be something like a united technologies. one of the themes is you have, they have otis elevators and air-conditioners and do a lot of the work in making aircraft. one of the key themes we look revenues0% of their are aftermarket service parts and things like that. that provides a good deal of stability you don't necessarily get -- maybe it dampens the cyclicality of a name like that. alix: energy? burns: right now, we think it is an interesting space. you have a lot of stocks in the space that don't even necessarily require sharp rebound in oil prices. near-term, one of the things we are hesitant to jump right in, you have inventories that may
continue to build into the new year. i always worry that opec compliance has been high. at the same time, the best cure for low prices is low prices. you have a space where the dallas fed stated that for drilling new shale wells, you need a floor of $52 a barrel of west texas intermediate. right now you have oil prices below that. that could give investors a place to hang their hat. there are also good valuations in that sector. alix: coming up, markets shrugging off record buybacks. it was supposed to lead the market higher, right? this is bloomberg. ♪
of the new mandate that tesla have more independent board members, basically trying to keep a leash on elon musk. they will be joining those boards. stock moving higher. comesen wilson thomas from walgreens. before that she also worked at kellogg and global hr. many many decades of experience. course, larry ellison is from oracle. cofounder and cto of oracle, he is currently still there, also managing partner at another firm. a depth of experience when it comes to technology and hr and trying to lead companies. larry ellison and kathleen
wilson thomas joining tesla's board of directors, set by the sec as a requirement for tesla, as well as the fines they had to issue as a result of elon musk's tweets. much more on that story coming up. tesla up 2%. is it enough to keep elon musk from tweeting? bottom line. three companies worth watching. companies.s then buybacks. a great piece from bloomberg news. the amount of buybacks no longer supporting the s&p. some analysts saying this is good for stocks. >> companies have announced this quarter they would do $260 billion worth of buybacks.
$600 billion in the first nine months of the year. buybacks are not propping up stocks anymore. investors are saying, why are you not investing that money into your businesses? apple has bought back $63 billion this year. if they were buying that now, they could pay $10 billion last. alix: bad timing. insider buying picked up over the last few weeks and yet that did not necessarily do anything to find a bottom in the markets. thela: companies are now biggest buyer of stocks in the market? that cannot be a good sign. they make iphones. alix: moving on to more companies, we were talking yesterday about the ipo market for 2019. >> one of our predictions into thousand 19 -- in 2019, will be
this will be a big year in ipo's for the unicorns. more than $1 billion in valuations. alix: you cover deals. what are you hearing on the ground? uber coming and next year. ge health care, ranging $20 billion. some banks have put out $100 billion. it is early days. thanks might say a few things to get on the ticket and figure out what the valuation is. tech and health care will be big areas. one thing for investors to know is that some tech ipos come with hype. ipo'd into thousand 17, it is the worst of the decade, down 19% -- in 2070. alix: softbank was going to be
the hot thing. -- in 2017. the first trading day, it was much lower. the market is not as open as it would be to ipo's. will that change the game or the valuation? nabila: all of those things. this quarter, some ipo's pushed into next year because the market volatility. people are hoping that in the new year, people will feel better about valuations and ipo's and in january if you make a bad trade, you have the whole year to make up for it. if you make that trade in december, like softbank -- alix: down 15%. not a good headline. the conversation of the morning has been the explosion at laguardia. nabila: it was near my home but i was on netflix. sorry. you do not want
to hear those headlines. you do not want to hear that. nabila: luckily, there were headlines about is it et coming down? aliens? i love the nypd statement. no injuries and no extraterrestrial activity. it is not good news for them. they are investigating the cause of the fire. it was an electrical fire. cause delays at laguardia this morning. it is never a good headline. alix: a transformer explosion apparently. united airlines, delta, had to reroute flights. for the airlines under so much pressure already, fuel prices might be down but jet fuel is linked. prices are still high. military headlines, you never want to be a part of. nabila: the holiday season has
not been great for airlines. the drone issue at gatwick as well. it has not been a great season for airlines. i will be interested for the earnings for q4 next year. alix: some people thought it was northern lights. have you seen them? nabila: aurora borealis. alix: that would be amazing. thank you. let's look on the markets and will be a trading. followthrough buying from yesterday. dow jones up 98 points. we are off the highs of the session. unbelievable yesterday. how much will be traded today and into another shortened holiday weekend? in europe, upside. euro stocks flipped to bear market yesterday, being led higher by tech. industrial and cyclical names leading higher for the dax, up
1.7%. inflation coming in in europe as well. other asset classes. safe haven bid we saw yesterday morning, unwound yesterday afternoon, continues to unwind now. euro-dollar up 1/10 of 1%. losing steam off the highs. 1.14 is how we print. japanese yen and norwegian krona, and swiss bank, out performers. 2-10 spread continues to flatten. 19 basis points is how we print. good seven year auction after the sloppy five year and two year. tesla has named the board members that the sec said they must by the filing date. larry ellison and let me get this headline, she is the head of hr for headline, the head of hr for walgreens. ffat us for more is anne mo
joining us from london. can you tell us how we got to these two names? >> it is exciting news for tesla. people have been asking for more accountability on the board and having these new directors is a big step. kathleen comes from walgreens. she had 17 years of experience at kellogg. she is an experienced corporate director. i think investors will be excited about that. she is a woman of color. she brings a lot of experience to the board. arry, some might consider him silicon valley insider, so i don't know if he will bring the same independence investors might have been looking for. he is a tesla shareholder. he certainly believes in the mission of the company. bring newat lets him
eyes, we will have to see. alix: this all started a few months ago when elon musk said he had funding to potentially go private. finecaused the sec to elon musk and tesla. will these changes be enough to change elon musk? >> i think that is what investors are looking for. tesla has been long criticized for having poor governance. small board, and five of the eight directors had ties personally or professionally to elon musk. we will have to see if they are able to rein him in and help the company make decisions. ben has proven so far to unimaginable. alix: exactly. how seriously do you think musk is taking this? we still get the frenetic tweets sometimes. >> he has talked about what he
do it again? absolutely. we don't know. he doesn't have to like with the sec is doing, he just has to follow it. have seen one earnings calls a little more restrained from him. alix: what other changes has tesla put in place? i know they are supposed to have some communications person in place to vet these tweets. robin denholm as the new cfo. it is too early to see if she has changed much. there is already someone else in a position of power at tesla, person making all the decisions. they had not told us exactly how
elon musk's tweets will be vetted going forward. we assume that will be happening because that also have the same 90 day deadline. they have not laid out the process. if we see fewer inflammatory tweets, i guess that will be working. alix: elon musk has been chairman for three years. what about the board appointments? >> there is nothing that says>> she only has to be in place for three years. if she does an excellent job, the board may ask her to be there for longer. about giving up more management control and being the lead innovator at the company. he might like to be more in a creed of role. we will see. alix: thank you so much. 5% intock is up nearly
premarket trading. we will bring you any headlines as they come out. having arkets, banks hard time this quarter, the sector following the most since 2011. what will the trading revenue be like going forward? tougher revenue quarter. make of america says volumes go up, but there's not a lot of risk and by definition not a lot of reward. joining me is charles peabody, bearish on banks. you have warned of bad volatility for a while. walk us through what you see. >> it has been my belief that we entered a bear market in the first quarter of 2018, and the faang stocks will not -- bank s
tocks will not stop falling until we hit the trough of recession. i think we have concluded the first leg of the bear market, and there is an opportunity to make money on the long side. alix: where? >> i think it is going to be the big banks. a lot of it depends on the nature of the relief rally. there are two scenarios that are possible. we could trade sideways within a 15% fromge, up 10% or the lows this week. the other would be a more robust rally. that would require some movement in terms of the fed pulling back on tightening or progress on the trade war. alix: when we talked to brian moynihan last week, here is what he had to say about the kind of volatility we will continue to see. >> the equities business is doing fine because the trade
volumes are up. volume that wer don't make as much money on it as we do when we do derivatives and financing. the volume is up. there is not a lot of risk and not a lot of reward. alix: top about the volatility. if you come inside the bloomberg, you get the vix, the treasure volatility, and the jpmorgan volatility index. what is meant to be good and bad? >> let me point out something that brian said. he talked about equities being good, but if you look at the mix trading revenues versus equity trading revenues, you need a 30% jump in equity trading revenues just to offset a drop of 10% in the fic trading revenues. that is what happened in the third order, the fic component was very weak. i would point out that they are
going to be flat to down or flat to up year-over-year. last year included huge write-offs of the steinhoff loan. fic in rates in currencies and commodities probably got hit by that volatility. alix: is there going to be a bank that is more positive in this environment? >> in terms of taking advantage of the volatility? alix: yes, not having the same margin issues. >> i am looking to goldman sachs, who have typically been good managers of risk in these kinds of environments. i think everyone is like to have a tough quarter. no one is buying the banks based on fourth-quarter revenue. everyone is buying based on what is going to happen going forward. the yield curve actually starts to steepen, and that could be a positive backdrop for capital markets and spreads. alix: that brings us to the
other part of the equation, which is loans. we have seen that capital markets blowout, some banks keeping more leveraged loans on their books, repricing some of the loans they were offering. is that a short-term or long-term issue? >> it is a short-term benefit, but is creating problems for the next downturn. loans, theyat cni are accelerating. they are up 5% of the year. this is where problems are made for the next recession. you see some drawdowns in utilization. you have situations like pg&e, which drew down 100% of its bank lines. that is not good lending. alix: what is the lending environment? you see the yield curve steepening. tot banks are best set up
take advantage of that scenario adding in volatility? >> i think bank of america. all the banks are on sale. that is why we have a relief rally going forward. you want to buy quality, and bank of america is probably your steadiest earner. if you are more interested in a challenge, goldman sachs presents some interesting values. alix: thank you so much. charles peabody of poor talus partners. very accurate in what happened. with with me is burns allianz. do you agree with charles that potentially bank of america is the potential to win and goldman sachs if you have the stomach for it? >> those are certainly once to look at. -- ones to look at.
anytime you can get goldman for 80% of book value, you can stand to benefit. across the sector, investors can fit from low expectations today. places we are focused on is the larger u.s. banks. there is a 40% discount to the market since 2011. they have gotten hammered. in the near term, investors might be weary of fighting the take. you have a flattish yield curve. you have slow loan growth. a lot of the big banks have spent the last decade cutting costs so that are more profitable and less cyclical. they're earning streams are a lot more resilient. they have adapted to a world in which loan growth has been slow, and they have been doing more with less. alix: where does that leave
regionals? that's the outlook for the big guys. regionals, some of the smaller banks have had a smaller time of investors demanding more money for deposits. they have had a bit more challenge with that. the larger banks have been better positioned. the bigger regionals we have looked at, we like comerica. you can get them for eight times earnings. they have a 3% dividend yield they raised this year by over 70%. they have been buying back a lot of shares. the other thing we look at, they made money during the financial crisis. they have been criticized for sometimes being overcapitalize. they have good demographics in places like california, arizona, and texas. alix: good to catch up with you. thank you so much. just to recap the breaking news,
tesla adding mary allison and kathleen thompson. ellison and kathleen thompson to the board of directors. allison was the cofounder of oracle. thompson was the chief human resource officer for walgreens. the question becomes will they have the governance and oversight to tame elon musk after he claimed in august that he had the funding for a buyout of tesla. they have to have a communications officer come in tweets, the new independent chairman, and new independent board directors. we now have those board of directors. that stock is up 3% in the market. turning to the credit market, it
is the sears cdf showdown. sears capital sold credit default swaps. then sears declared bankruptcy. to avoid paying out on those credit default swaps, they traded on liquidity. funds now want a payout and are accusing sears of manipulation. joining me now is someone who knows all the intricacies of the credit default swap battle. firm's cochair of the structured finance practice. thank you for being here. >> good morning. alix: this is a complicated topic. at the heart of it, what is the problem? >> what omega is upset about is that the market for cds is a front deadly broken test
effectively broken. companies will attempt to pay their debts when they can, and if there is a default, the payouts will be related to the intrinsic value of the debt. onare headed to a situation account of manipulations where the payout will be completely unrelated to the value of sears debt. alix: what position did omega have? do they have a naked short? >> they were relying upon the fact this would be a market absent of manipulations, and if there was a default, the payout on the cbs would be based upon the actual value of debt. alix: these are sophisticated investors. this is not like me and my mom. you know there is risk. you are selling something you don't own, buying something you don't own. that is a risk. >> one of the risks you should not have to face is improper
manipulation of that market. one of the participants in the market, cyrus, effectively cornered all of the debt in that market. in other markets, corners are considered to be improper, illegal, and they should be considered to be a such in the cds market. alix: if that debt comes to market, that means sears will have to pay more on the credit default swaps. day, what is the to dislike about taking money from hedge funds who made derivatives bets and giving it to real companies? why is that bad? >> the reason why the situation here is problematic is you have a $10 trillion market in cds.
that is based upon certain fundamental expectations by institutional investors and other investors in cds. if you start undermining those fundamental principles, the market breaks down. you have a situation where sears than $.10.th less because there has been a cornering of the market, when we had into the auction for that debt, that auction could clear at par. we should all be concerned when thatne tells you a bond clears at eight cents is worth par. alix: if you had more of those bonds, it would not trade for park, and you would get more payouts. this is not in isolation. we have seen it with blackstone and goldman sachs. lis talked to bloomberg about this as well. they were upset with how this
worked. >> the current structure is incomplete as to guidelines on what market participants can and cannot do. there is a narrative that there is a loophole. we don't think there is a loophole at all. it is basically intended so that a buyer of bonds and protection can assert the protection on their bonds. it is not to conspire with a company to create default. alix: what did you learn from that case? >> there are similarities across a number of cases. they all go to what i was mentioning earlier. there are fundamental expectations in the market. one of those was companies are going to pay their debts when they can. fundamental principle is when there is a default, cds
will payout relative to the intrinsic value of the bonds. that is the issue with sears. we have parties that were manipulating the cds market to undermine the fundamental principles. alix: what is the solution? >> there are multiple solutions. we are in front of the bankruptcy court. we believe the bankruptcy court is likely to unwind one of the transactions with cyrus that occurred. there is also the determination committee that might take steps to determine when there is options for bonds, those options get to a true intrinsic value. there are regulators out there. they have been clear in other contexts that short squeezes are illegal manipulation. we think they should make equally clear that in manipulation of the cds market
is impermissible. we also think short squeezes are improper as the sec has indicated in the general equity market. we think they should indicate that is the case in the cds market. alix: there are some that think this is a technicality or one hedge fund that has a leg up on another hedge fund. a judge in the recent court case for sears said they did not act in bad faith. >> what the judge in that case was looking at was not the broader question of whether cornering a market heading into an auction is improper. the judge was looking at the particular sale that occurred. he thought there was a fundamental component of that sale that have not received court authorization. what that judge did not evaluate, which would be in the whether of the sec, is
cornering a market heading into a cds option is improper manipulation. alix: what is the appetite for real regulation to take place? >> i think anybody who has participated in the cds market should welcome changes to ensure this kind of conduct cannot occur. .hose could occur through isa they could adopt certain rules. it could occur at the regulatory level. alix: what happens next week? the next 10 or 12 days. >> there will be a hearing next week when there will be a specific question as to whether which of bonds to cyrus, involved a lockup of $1.4 billion of other bonds, is going to be unwound.
we believe that should happen. we believe there is additional value that could be obtained by the sears of -- estate if that sale was handled in the proper way. we think the court is likely to unwind that sale. we are hopeful the determination committee steps forward and takes steps. alix: it is definitely an issue that is what you hot 2019. thank you for joining us. coming up, equity futures in the green after yesterday's wild price swing. the markets are what i am watching. this is bloomberg. you can interact with us using gtv . this is bloomberg. ♪ ♪
alix: watching the markets. futures in the grain. 30 minutes away from the u.s. open. i feel if you are a 26-year-old trader or if you have been around for decades, the last week has been memorable. >> yes. alix: what is your take away? >> the equity markets are not supposed to trade like this. this is something i would be comfortable seeing in the fx markets. i did see it in the fx markets. trading,ks of latency al gore trading, where you have a lot of machines tweaking similar words, similar language, similarly programmed to create
1000 point swings. i wonder where the sec is in all this. this is obvious to me that this is a handful of machines that are making these market moves. equities trade on fundamentals. there is nothing fundamental about what we are seeing. alix: if you were still trading the market, what would you be doing today? would you just the turning off your machine and waiting until january. >> it depends. if this was a prophet i could books wereif my closed for the year and that was not much i can do, i might be looking for 2019 opportunities be these are the times where you make great deals of money on swings like this if you catch it at the right time. in 2003, i had a summer of this kind of volatility in fx and make more money in those three months then i have made in many years.
these are great trading conditions. alix: are these trading conditions the same as they were in 2003? could you make that kind of money in the market now? >> you could. it is interesting because the volatility in the fx market has declined rapidly. now you see swings in the equity market that we would normally see in the fx market. you have to wonder, will the next step be in the fixed income market? that will get everyone's attention because that is a completely separate market. alix: that would be a big shift. thank you very much. coming up, bloomberg markets, the open. ♪
alix: coming up,'tis the season. stocks posting their biggest reversal. whether swing is the new normal. 20% of the world's gdp. slowly but surely, one former fed governor urging jay powell to block out the presidents criticism and slow the pace of rate hikes down. the biggest intraday swing to the upside since may 2010 for the s&p. dow, you sought a huge 800 point swing. buying seen falling, but off the highs of the session. euro-dollar is up 0.3%. 477 is the 100 day moving average.