Meta Misfire, Market Selloff

Published Apr 25, 2024, 5:00 PM

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David Kirkpatrick, Founder of Techonomy, recaps Meta earnings, and also previews Alphabet and Microsoft earnings. Ira Jersey, Bloomberg Intelligence Chief US Interest Rate Strategist joins to discuss economic data in U.S. Barry Ritholtz, Founder of Ritholtz Wealth Management and Host of “Masters in Business” talks about today’s market selloff. James Abate, Managing Director & Chief Investment Officer, at Centre Asset Management, discusses the latest on the markets. Pascal Soriot, CEO of AstraZeneca, discusses AstraZeneca earnings.

Hosts: Paul Sweeney and Molly Smith

Bloomberg Audio Studios, podcasts, radio news. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on Affo, Cardplay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts, or watch us live on YouTube.

One of the stocks in the news you were right and a thick of earnings is Facebook. The kids call it meta. It's not about ten percent today. They put out some numbers last night after the closed revenue a little bit slower than expected, and then they ramping up spending on artificial intelligence, and that's setting the stock back a little bit. Here, let's get some perspective on Facebook, and nobody better there than David Kirkpatrick. He is the founder of Techomedy and he's also the author of The Facebook Effect In My Mind, the definitive book on Facebook when it just kind of bursts onto the public consciousness. David, thanks so much for joining us here. What were your takeaways from I guess their results, the conference call last night, Mark Zuckerber's comments about the investments required for AI.

How do you put it all together?

Well, first of all, their results were stellar. You can't say anything other than that they are making great growth and profit. The problem, such as there is a problem, is that they are spending so much money on capital costs, mostly connected to artificial intelligence, and the question of what the returns on that will be, I think is legitimately on investors' minds, and that, probably more than any other factor, explains the fairly dramatic drop in the stock.

How about for you, though, David, I mean, are you questioning, you know, just how good of an investment this might be, or you think it's this is perhaps like a you know, it will be a significant revenue driver at some point.

It's a great question.

Well, first of all, you've got to look at this company, of all the tech companies, has just skyrocketed in the last year or so, so you know, this is a very highly valued stock compared to what it was, and I think given the extraordinary run up, a little bit.

Of a correction is hardly a shock.

So probably you could say it's not at all problematic that the stock has pulled back a little bit. From that perspective, I think the most interesting thing. I'm actually here at the Council on Foreign Relations having just attended a meeting that was very heavily focused on energy, and you know, even Zuckerberg in his remarks yesterday, was talking about the energy costs of AI are going to be one of the significant capital expenditures they're having to deal with, so they have to build their own renewable energy infrastructure in many instances these days, and this is true of all these big companies. The thing that I'm thinking about right now is whether, in some sense, because of the sheer scale of the investments that are having to be made in data centers and the energy.

Associated with them, that these.

Companies are shifting to in the long run a fundamentally different business model that's a little bit more like a utility where they're just going to be facing these ongoing gigantic costs just to stay abreast with one another. I don't think we know the answer to that yet, but it could very well be starting to happen.

I gotta say, though, when you're looking at the estimates for the CAPEX here, to me, it doesn't look like it's all that different from what they had previously estimated. So they now think capex this capital expenditure is going to be in the range of thirty five to forty billion dollars before thirty to thirty seven.

I don't know.

That sounds pretty similar to me, is it not?

It is similar, and you know, I think you know, markets tend to overreact, there's no question.

I mean, I think that what people were reacting to in.

Zuckerberg's call yesterday was more a tone that he was conveying that the payoff for some of these expenditures maybe a little longer than people expected. They don't face any fundamental problem in the short term. So in that sense, you're right, And in fact, I think Meta has done an unusually good job of taking advantage of AI in the recent year or two in that they are doing a better job targeting advertising with AI.

That's a concrete benefit.

The thing that's also interesting, though to me, if I were an investor, that I would be somewhat concerned about, is that the Meta AI product, which they're just rolling out to their customers or their users across a lot of their services, effectively is a way of declaring that they're competing head to head with Google, because they're basically starting to do what is effectively search inside Instagram, inside Facebook using their meta AI product. So you've got to that's a different business model. If they go down that road too far, they still have an extraordinary ability to target advertising that is superior to pretty much anybody else, and that's going to guarantee a lot of profit for the long term.

David, where is the metaverse these days in terms of mister Zuckerberg's the zeitgeist.

Well, in his zeitgeist, it's very prominent. I don't think it's really high in the zeitgeist of much of anybody else. I mean, it's so prominent he renamed his company. I wouldn't be surprised if he regrets that now. But he got out of a tight spot with Francis Hougan at the moment by doing that. I don't think the metaverse is nearly such a big deal as you would think listening to him, and I don't think any other company thinks it's that big of a deal in any kind of short term. The degree to which it could be a big deal long term is unknown. We know that AI is changing everything now. We have no reason to think that metaverse issues are going to change everything anytime soon.

Not that I would think that. Zacharbergo to commented on this, but I'm sure, he's got to be thinking, you know, what if TikTok gets banned and potentially what a boon that would be for Instagram and the reals product. I mean, how much you think is that getting priced into the stock right now?

Probably not at all.

There's also things that aren't being priced in, like extreme regulatory pushback in Europe that's really changing the way that Meta is able to target users in advertising across all of its product lines. So there's big shifts happening. It's very hard to know where these companies are headed. But yes, if TikTok really were banned, which frankly I do not expect, that would be fantastically great news for this company, and one would want to, you know, go along on them if you thought that's really likely. So yeah, there's so many shifting parts in this equation it is astonishing.

All right, David Busy busy week for tech earnings. Also Microsoft and Alphabet. Let's just go to Alphabet because that's kind of Dove's tails on kind of the digital advertising theme that we started last night with Facebook. How are they are good friends at Google slash Alphabet?

How are they doing? What do you expect here with their earnings, well.

I think I think again, earnings from the standpoint of the ongoing business will be good. The question again will arise, how much are they spending on AI and data center infrastructure and what's the chronology of the likely payoff? And you're seeing concerns being raised by analysts that the number of investment is going to be higher and the possible long term returns, just like.

With META, could be longer.

But these businesses are thriving for the most part overall. I think Microsoft in particular, which is also coming up, is a company that just can't really do anything wrong from the standpoint of investors, and I think they but they too are going to be spending even more on AI infrastructure and it's becoming almost like an energy investment as well as a data center and server investment.

So then it sounds like, though there has to be an investor's mind at least, there is a ceiling for how much investment in AI is too much. It sounds like that there is a bit of a threshole than.

To find let's figure out what the ceiling is. I have no clue.

Nobody really knows what's happening with AI. It's a frenzy. Everybody's piling in rightly so, but the exact terms of long term competition are effectively unknown. So to say the ceiling is X or the ceiling is why it's pretty hard to.

Do, all right, David, So stepping back here, who do you think among is is a.

How real is AI to you?

I mean, I think that a lot of people are trying to get a sense of is this just big data we were talking about four or five years ago, or is this something fundamentally different.

Well, it is something fundamentally different.

I think that's widely believed at this point, and I believe it. But again, the way it's going to manifest itself in business terms is extremely hard to predict. I know for myself, I am surprisingly often using chat GPT instead of Google, and I'm getting results that I really can use and I think many people are finding that. So this is changing the nature of these businesses in a fundamental way. And I think if it's if Meta, for example, successfully deploys meta AI across all its products and just while you're in the middle of using Instagram or Facebook, you can do a search using their their AI tool that you would have otherwise had to leave metas product.

To go to Google to do.

That's a strategic benefit for them, So it is worth making those investments. But you know, when you're talking about annual capital expenditures of forty billion dollars, you know it's hard to know what is it? Should it be forty five? Should it be thirty five?

Look? I wish I knew.

David, Thanks so much for joining us.

As always, always appreciate getting your perspective on all things tech. David Kirkpatrick, founder of tech Ominie and also the author of the book The Seminal Book I Think on Facebook is the Facebook Effect.

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Big economic data point coming out today GDP plus some inflation data coming out spooking the markets a little bit. Here, I'm looking at the yield curb the two year treasury seeing right at five percent, big move up seven basis points, and that kind of feeds into Like I'm looking at the thirty year fixed mortgage, it's now back up to seven point two four percent.

Better believe it's going to be higher next week, assuming you know that the trend right now still holds. And I'm sure you know Powell next week probably gonna have to rip up the script say something a bit more hawkish. Yep, we're gonna have Ibra Jersey come in and tell us all about it now. So Ira Jersey joining us on Zoom from Princeton, New Jersey, where we definitely need to host our next show from.

We will do that at some point.

So IRA's archiefus Interest Rate Strategies at Bloomberg Intelligence. Thanks for joining us.

Ira.

We've been looking at these GDP numbers and obviously the inflation print really seems to be driving the market action today. Tell us what you're looking at.

Yeah, So obviously that inflation print just implies that the monthly number that we get tomorrow is going to be is going to be much higher than economists are expecting, and that is a big driver. You know, when inflations is high, that the market has to continue to reprice the expectations of when and if the Federal Reserve is going to actually cut interest rates, And the market now is much more symmetric in thinking not only yes, it's like fifty percent chance that they're going to cut interest rates, but there's actually a growing chance that's being priced into markets that the Fed's next move may actually be an interest rate increase, right, a hike at some point. I personally think that that's a relatively low probability, still probably lower than what the market's pricing. But on hold is I think a growing default scenario for the next nine to twelve months for the Fed because inflation is just too high. It's way above their comfort level.

So, you know, Ira, I guess one of the questions is, here, did the FED in j Powell back in December when it kind of had that Fed pivot started talking a little bit more dubbish in hindsight?

Was that a mistake? Well, it was a mistake because their forecasts were wrong, right Like, at the end of the day, the FED makes forecasts just like everyone makes forecasts, and their forecasts for how quickly inflation was going to slow down was incorrect. And you know we, I mean we were incorrect too, and we were among the more hawkish or less dubvish, probably strategists on the street. You know. The issue that's come up is that when you looked at the survey data, a lot of the survey data back in December and even in January and February, it was pointing toward a slow down in the economy. So a lot of the traditional indicators for economic activity, like ism, new orders, like some of the consumer confidence surveys, they were all pointing to a potential slowdown. But and even though those have rebounded just a little bit, the hard data, so things like retail sales, personal consumption, spending, the jobs data obviously is probably among the most important and visible of these numbers, those have all been reasonably robust. So there's this disconnect between what people are saying and what people are doing. And I think that that's really been a challenge for forecasters who rely on these surveys for forward looking indicators and they just haven't been realized. So, you know, so they made a bad forecast, so therefore they made a bad pivot, and now they have to kind of take some of that back. And that's exactly what you've heard out of a lot of the FED speakers the last couple of weeks during the quiet period now, so you're not going to hear anything from FED speakers until next Wednesday. But when you go back and you listen to what Jay Powell said and a lot of the other speakers, you know they're going to probably continue to say, like, look at unless inflation goes down more significantly and substantially, we're going to keep interest rates on hold, and think that that's probably what Japowe will say next week.

So it sounds like you think, then, Ira that this you know, print that we got today, the robust inflation prints that we've gotten to start this year, who knows what we'll see tomorrow, doesn't seem to really change the narrative a whole lot. That the economy is still proving, you know, to run really strong. Doesn't seem like interest rates are really denting that a whole lot, And that's still the narrative that they're going to go with. Or do you think that anything has changed here?

Yeah, I don't think very much has changed. You know, interest rate sensitive sectors have certainly been affected by interest rate hikes, But what's happened over the last fifteen to twenty years is that we've shifted away, firstly from interest rate sensitive growth to non interest rate sensitive growth. So things like the services sector. When you dig into the details of today's GDP report, you see that on a seasonally adjusted annualized basis, the retail the services sector so a four percent growth, whereas the durable goods sector so a negative one percent growth. Right, So, so and durable goods where things like autos, right, so, auto sales have slowed down substantially. Part of that's on price, you know, certainly prices have gone up, but that's also credit availability. Right. Large purchases like automobiles and houses you tend to buy, tend to be purchased on credit of some form or another, and so those are very sensitive to these higher interest rates, where whereas service sector, the service sector just isn't you know, services aren't a you know, services spending have more to do with wages, how much disposable cash you have as opposed to as opposed to you know, you're not going to probably go out and go to the movies and then you know finance that over ten years, Right, that's just not something you're gonna do. You're gonna spend. But but if you have. You know, if you get a pay raise, you might go to that an extra movie every month. And that's basically what you're seeing in the data. And if those trends continue, then you can wind up having an okay economy and the Federal Reserve, you know, might not have to move interest rates very much at all.

Well then what can they do about inflation? Then? If our economy is just structurally more resistant to higher interest rates?

Yeah, well, there's not much you could do. You could either raise interest rates a lot more, and you know, that would probably ultimately be recessionary because you'd wind up with a recession in housing, a recession maybe in the auto sector and some of the other interest rates sensitive sectors, and that could to start ultimately to bring down the entire economy. Or you know, you could do things that are politically unpopular, things like raising taxes for example, just reduce the ability for the household sector to spend money. Or and this is something that I think a mistake that the Federal Reserve made. The Federal Reserve could come out and just say like, hey, we're not worried about two and a half three percent inflation anymore. You know, that's fine, and if you go back to the nineteen nineties, for example, like we were running at around two and a half to three percent pc deflator, So you know, why not pivot back to that, you know, I think the mistake that the FED made was having a hard target of two percent on inflation as opposed to something just a little bit more flexible. And the fact is that inflation's not increasing, right, Inflation is not going up anymore, it's just not coming down. And because it's not coming down, it's they're not reaching their two percent target. And I think that's where the disconnect really has come.

All right, Ira, thank you so much for joining us our Jersey chief US interest rate stratag just Bloomberg Intelligence joining us from the Princeton campus down via zoom there.

So interesting to see.

So the GDP print again the takeaway, as I understand from you, Molly, the headline very disappointing, but if you dig underneath it a little bit less.

So yeah, exactly, I think, you know, one of the parts of the headline that was disappointing was the fact that trade subtracted from growth, as in higher imports relative to exports. But higher imports also mean that there's a lot of demand. The idea is just that we're we're seeing it from outside the country rather than producing it here. So I think that still bodes well for the story of the consumer and the health of the consumer, and that demanding the economy is still strong, and obviously that's still making inflation not go away.

You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on Apple Car playing Android Otto with the Bloomberg Business App. Listen on demand wherever you get your podcasts, or watch us live on YouTube.

Molly Smith, she's sitting in for Alex Steel this week on Paul Sweeney.

We're live here on Bloomberg Interrector Brooker's.

Studio, streaming live on YouTube, so you can head over to YouTube dot com and search Bloomberg Podcasts and that's where you will find us. We had that GDP print that came out this morning, significantly weaker on the surface than the forecast and showing a pretty market decline from the last month as well, and that's kind of having an impact on the market sins. John Tucker is just reporting yields up, stock prices down. Let's get perspective here. We can do that with Barry Ridholts. He's host of Masters in Business on Bloomberg Radium. It's also the founder rid Holt's Wealth management. Hey, Barry, So we get the economic data, it kind of freaks people out as it relates to where this economy is going a what did you read into the economic data that came out today, both on GDP and inflation and maybe how the market's reacting to it.

Yeah, So I always love I always love the attempt to impose rationality on what is essentially a free for all. We've we've had the FED crank up rates five hundred and twenty five point basis points from zero, and we continue to hear the phrase long and variable lags on the growth side. And at a certain point you have to assume the root. You know, the chickens come home to roost, and this is the natural impact of the higher cost of credit, higher rates. We've already seen housing slow because there's no real supply around, but now you're seeing an impact things like automobile sales. Remember went through a big period where you couldn't get cars easily. Now that's behind us, and car sales are starting to slow down. Gasoline sales are starting to slow down. You have to lay this right at the feet of the FED. And yet at the same time, when we take apart the inflation data, you know, the FED BLS data includes renewals as well as someone moving into a new house or apartment. If your lease renews, if you just renew your lease that was set in motion two years ago when you did your priorly lease, the FED has nothing. What's over to do with rates, have nothing to do with it. But two years ago lea that lease had a heavy high number built into it. Back that out and you're at the two percent inflation target for the FED.

I think there's got to be more to it though than housing right now though, no, Barry, I mean, it sounds like there's so many other broader services costs right now that are so expensive. I mean one of them that was in the GDP report was financial services and insurance. I mean we talk a lot about in this show, especially homeowners insurance, car insurance. I mean, those are things you can't really avoid.

That's right, But you have to look at what's driving those prices higher. Is it monetary policy? Is it you know, pent up demand? Look at what's been going on in Florida with both homeowners and automobiles, it's very difficult to get insurance. And you have to turn around and say, you have all these cars that have gotten flooded out from repeated hurricanes and repeated flooding events. You have all these homeowners who live right on the water. This isn't These are prices going up, but you have an externality driving it. It's not inflation, it's global warming and climate change. And just maybe Florida is a crazy example, because you know, Florida is Florida. But when we look around and look at the things that are going higher, like healthcare and the cost of education that's been in the backdrop for twenty five years and has been the most expensive side of the services thing, insurance is a very specific reaction to an externality and not what we think of. Hey, if the FED raises rates to ten percent, are they going to make the cost of waterfront homeowner's insurance any cheaper in Florida? Or when you have all these cars flooded out or being destroyed in places by weather, the FED has zero impact on that. You have to put that into a different context than usual inflation.

So barring with today's pullback, you know, we got the S and P off about you know, five percent from its highs. That feels like it's just a healthy kind of pullback in what may be an otherwise upwardly trajecting market.

Is that how you view it? Is there anything else going on here?

You read my mind? Paul. Look, look, we finished the first quarter with the Nasdaq one hundred up eight point five percent and the S and P five hundred up ten point two percent. That's a good year forget quarter that's on average eight to ten percent is what you should rationally expect from equity market. So a little bit of a pullback is healthy. Let me also point out, even though we have very strong earnings and revenue numbers, a lot of it was built into the expectations and they're a little disappointing compared to Q four. So look, what are we about. A quarter way through, about one hundred and forty companies have reported plus four point five percent on profits and plus about ball parking. This because as the numbers come out, the shifts, but plus three point five percent on revenues go back to Q four. And as good as these numbers sound, it was plus six point eight percent on earnings and plus nearly four percent on revenues, as it almost makes Q one look a little disappointing. I also suspect a lot of these strong numbers have been built into expectations, and so it's never the actual numbers but how the market reacts to those numbers that are so revealing.

Well, market reaction today has been rough, and we've got now like the traders bets for the timing of the first FED cut fully priced for the first meeting now out to December. I mean, remember, not too long ago people thought that first cut was going to be coming last month. So tell us a little bit about the the environment for the for rate cuts here, and I mean also that possibility if we don't get one at all in twenty twenty four.

Right, my, this is a little bit one part analysis, one part wishful thinking. From reading everything Jerome Palell has been saying and talking about and just looking at the arc of the data that's been coming in, I suspect the FED very much recognizes that the economy is beginning to slow, not dramatically, but a little bit, and they're now at the point where they're looking for an excuse to take rates down marginally more than half of people, So about half of the homes out single family homes don't have mortgages, but of those that do, half are four percent or less and something like sixty five percent are at five percent or less. So these people have golden handcuff with their mortgages. That's why there's no supply or such limited supply of homes out there, and that's the biggest single component in the inflation numbers. I suspect J. Powell understands that the sort of paradox we've been living with is that if the FED lower's rates, which will ultimately bring mortgage rates down, you'll see a whole lot more supply hit the market, and that could have an impact, especially in the rental market, of driving that aspect of either PCE or CPI inflation lower seems kind of counterintuitive for lower inflation reduce FMC rates, but that's the odd situation we find ourselves in after underbuilding single family homes for a decade post GFC.

Hey, Barry, you know mothers is you know, referencing the Werp function, how the market was discounting maybe six rate huts cuts some beginning of the year, and here we are now down to like one. Is that unusual for the market to get it so wrong or change.

Its bets in such a short period of time? Does that typically happen?

But one of my old time favorite authors is William Goldman, who wrote Marathon Man at the print says Bride, and he won Academy Awards for the screenplay for Butch Cassidy and The Sun Dancer Kid. He used to very famously say nobody knows anything, and that when you're looking out forward, look at the track record of economists, of the Fed themselves, and of people who are forecasting, including the market, when rate cuts are going to happen, where rates are going to go. It's been so consistently wrong for so long. I mean, look at the dot plot is hilariously wrong. At a certain point you have to ask yourself, why are we paying any attention to these forecasts. I know it's a necessary evil, and it's all part of how we do our jobs. I think we have to dramatically lower the weight we put on these sorts of forecasts. You know, occasionally even a blind squirrel finds a nuts, so sometimes somebody gets it right. But when you take the average when look at the overall consensus. Not only were we expecting was the market pricing in rate cuts last year, because perhaps because they.

Were pricing in a recession.

But look how wrong they were on the round of increases, how quickly it came, how far it went. Of all the many things that the human genius can do, predicting things like FED funds rate just ain't one.

Of them real quickly for you here, Barry. So next week Fed's going to be presumably holding interest rates. We're not getting any new forecasts thirty seconds, which we look out for.

I mean, I want to see how we continue to do earnings wise. We're running a pretty reasonable beat rate, although obviously the better companies, the better earnings come out earlier. It's that it's the components of inflation. And I want to keep an eye on consumer spending. That'll let us know if the FED has kept us too tight for too long and it's really beginning to bite into the economy.

All right, Barry, thank you so much for joining us. As always, Barry red Hooltz. He is the host of Masters in Business on Bloomberg Radio. Highly recommend you check out that podcast. He gets phenomenal guests week after week after week, and a lot of smart discussion about investing and about these markets.

Oh and he's got a day job.

He's the founder of Ordholts Wealth Management, so we appreciate getting a few minutes of his time.

You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on applecar Play and Android Auto with the Bloomberg Business App. You can also listen live on Amazon Alexa from our flagship New York station, Just Say Alexa playing Bloomberg eleven thirty.

James Abatte joints us.

He's a managing director a chief investment officer at Center Asset Management. Joining us from New York via zoom.

James, thanks so much for joining us here.

What did you take away from the economic data we saw this morning and what it may be mean for the Federal Reserve?

Well, when you look at today's release of annualized GDP of one point six percent, it was much well within expectations, and it was combined with a higher inflation reading with the PCE coming into three point seven percent. Now we may see you know, some offset to that tomorrow with the with PPI numbers impacting the flator, which is the Fed's preferred metric in terms of its two percent price target. But the bottom line is that when you look at equities and the fact that we see no safe harbor in the equity markets today is that the margin of safety for markets, and US markets in particular, is that the expectations have been that the FED would be reducing rates at least two or three times through the end of the year, and we would see the economy move strongly ahead to support what we have in terms of double digit earnings expectations for the S and P five hundred. So neither of the data points that came out today are consistent with either of those pillars that's been holding up the market since the rally began in October twenty twenty three.

Right, that's the PCEE data coming out tomorrow that you are just referring to. So we'll get a look at the March inflation data there. But coming back to this GDP report today, I mean, when you're looking at the service level of slower growth and higher inflation, doesn't really sound like that soft landing story that we've all been betting on.

Huh, Well, not everybody's been betting on that.

I think you know.

Our view has been that when you look at the major economic indicators, there has been somewhat of a disconnect, meaning that the market was highly dependent upon both interest rates declining and earnings expectations, which were consistent with a booming economy. So if you just want to look at top down indicators that would give some indications of economic activity, I mean, ism, indicase or leading economic indicators, they remain in kind of flatish or recessionary type levels. They seem to be bouncing or pivoting higher, but not yet to any type of booming economic recovery. So from that perspective, when you look at what's happening from an earnings perspective, you've got essentially flatish sales growth. Still, you've got profit margins across the S and P five hundred stable but with labor costs continuing to be pressure, potential for a degradation of profit margins. And when you can look at what expectations are embedded in the S and P five hundred, it's essentially mid single digit's revenue growth with double digit earnings growth. Now, how you get to that two times operating leverage. When sales growth is relatively mnemic. Outside of things that are tied towards AI and profit margins, declining doesn't really reconcile with essentially the expectations that are embedded in earnings expectations as well as some of the top down indicators is mentioned via the manufacturing statistics like the PMIS, as well as leading economic indicators.

I'll tell you where to make money.

Chipotle Mexican grill sas a four percent today all time high. People are still buying their tacos and burritos.

It's because they're not letting the employees eat the chicken.

I know, that's exactly right. We talked about that earlier.

So James, how about in a fixed income space here, I can get five percent sitting into your treasuries.

Is that a fair trade? Or should I go out and maybe take some credit risk here?

No?

I think if you look at premiums and credit premiums are high yield premiums in particular are consistent with the equity risk premium. And the equity risk premium is nothing more than the anticipated return of stocks versus the risk re alternative, which is as you mentioned. You know yielding five percent right now. So you know our view at this point in terms of the market. Why we've been very defensive, have re implemented hedges in our American Select Equity Fund is the fact that the way we calculate a forward equity risk premium, it's at the level that we last witnessed in early two thousand and I hate to say it, right before the crash of nineteen eighty seven. So both credit premiums and equity risk premiums leave no margin of safety, which is something that either leads to a flat equity market or potentially some type of major drawdown if there's the implementation or instigation of some type.

Of cattle Looking at the two year yield coming up on five percent on the day, got to think if maybe you know, you didn't hash in on it when it was five point two in October, maybe a little bit of a second chance here? Is this a good level?

Yeah?

I think that's very important because the expectations are that, you know, the FED, even if they do see continuing economic weakness, or maybe there is some type of financial event in regional banks, or even the further escalation of some kind of geopolitical crisis, which would really be the only cover that the FED would have to reduce interest rates. I would tell people that, you know, if you're relying upon a reduction in interest rates from these levels, be careful what you wish for. Bec When you look at market draw downs over many periods of time, some of the most significant market draw downs happen when the FED is aggressively easing in response to a crisis. And our view going into the year was that the Fed was not going to reduce rates unless there was actually the introduction of a slower economic environment or a crisis. So to lock in, you know, a five point two percent yield at this point in time, I think, is you know, a wise choice VISA VI other investment alternatives right now, particularly since the premium that you're being paid for owning equities as well as owning credit is an essence zero.

All right, James, thanks so much for joining us there.

James Abode, Managing director and chief investment officer for Center Asset Management. Decidedly conservative outlook there, and that is being born out today with the market down.

I don't know.

I guess you could look at today's data and say, all right, economy slowing down. Maybe the FED will in fact cut rates. They're not worried about an overheating economy, but you did have that inflation for in that kind of.

That really is just taking the entire story today. And you know, as we've been saying, some of these underlying measures of growth underneath the GDP figure still pretty strong, so I'm sure the Fed will definitely a tune to some of those as well.

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It is earning season in full, fast and furious. They are coming a good print coming out of a large farmer company, astro Zenica, just early early this morning moving matstock here and we are fortunate right now to check in with Pascal Sorio. He is the CEO of Astrosenica. He is in London, joining us via zoom Patrick. Thanks so much, Pascal, Thanks so much for taking the time. We really appreciate getting a few minutes of your time. You guys reported numbers this morning. What are the key takeaways from your most recent quarter for your investors?

Hugbar, thank you so much for having me. Yes, we had a tremendous out of the year. Like Shittys sales, our revenue I should say, grow by nineteen percent. But the exciting piece was that every portfolio of products grew very strongly. Oncology plus twenty six percent to five billions for the quarter, cardiovascular twenty three percent, rare disease sixteen percent growth, ge geographies grew nineteen percent in the US and Europe. The most remarkable was forty percent growth in the emerging markets outside of China, and China itself is returning to grows. So really a very very strong start of the year. And beyond the financials, our portfolio pipeline is making a tremendous progress, and we started new face rituals and we announced very positive results in particular in oncology, which we present to the ASCO in Chicago very soon.

Yeah, you've got an investor day coming up next month, and it seems like like you just said you're going to discuss the pipeline, including the timing of future treatment and their revenue potential. So can you give us a little seat peak for some of us who can't wait.

Yes, exactly, Actually, Marti, thank you for that question. What we're going to try and show to investors is that we can be a strong growth company not only for the next seven hs to twenty thirty, but even beyond that. And so the growth over the next period of time to twenty and thirty is going to be driven by what we have in our hands today and what is going to come out of our first three pipeline very soon. So we're going to add pact attention to investors of investors to the major growth drivers. We're going to show them where consensus is actually underestimating some of our products and the opportunities we have in our pipeline. We have a very large pipeline of new projects and some of those areunderestimated. Beyond that, we will also want we also want to show investors what our strategies and what our plans are for the long term. We've been investing in new platforms, new technology which we believe will shave the future of medicine in cancer, immune diseases, and beyond form stand search therapis ginsrapis, antibody, drug conjure gates, radio conjugates. So really this is our goal show people that we are focused on today but also tomorrow to twenty thirty and a long term.

The CEO we're speaking with, Pascal Sorio, the CEO of Astra Zennic. I'm looking at the stock here. A z N is the ticket. It's a big company, two hundred and thirty billion dollar market cap. Stock is up six percent today on the back of those strong earnings, up twelve percent.

Year to date.

Pascal, I always joke to people and I say, in my next life, I want to come back as a healthcare mn A banker, because it seems like every Monday we come in and pharmaceutical company A is buying pharmaceutical company B or biotechnology company C. How does MNA growth via acquisition fit in with your growth strategy vis A V organic growth that comes from your own in house R and D.

Yeah, thanks, thanks, another great question. We identified a number of years ago the technology platforms of the future, as I said a minute ago, So if you look at seal therapy, for instance, we have our own internal efforts and we've been complimenting this with acquisitions or licensing agreements. Particular, we bought a cell therapy company and that is bringing us technologies but also products, and we've been putting all of this together to actually build a portfolio of products in cells therapy, engine therapy, in aultiboty, drug conjugates, and beyond. So we target mead small to mid size Burton acquisitions. That really has been our strategy, so we can integrate them much better and then we can add value along the way before.

We launch Pascal. What can you tell us about drug prices right now? I mean, this is such a sensitive topic here in the US, especially in an election near something that's really close to the heart of so many consumers and voters. I mean, how can can you tell us a little bit about the pricing strategy? And you know, are people able to afford a lot of these medications?

Yeah, you know, it's important for us of all to remember that in the United States, of course, you know, price is an issue like everywhere in the world, but in the United States, patients have access to innovative medicines that can save their lives much faster than in Europe or in other parts of the world. Innovation is rewarded and access is much faster now. Price is definitely a consideration. Of course, the IRA, of course has some challenges and some issues we are trying to work to addrese but there is also a big benefit for patients, which is that starting in twenty twenty five, there will be a copy cup. Patients will not pay more than two thousand dollars a year who are on medical PATHYP products, and this year it's too three five hundred and six hundred dollars as of max. So ultimately, if you're a MEDICA patient, you will not pay more than two thousand dollars a year for your medicines, regardless of how many medicines you have and how much the cost. So that will be really an enormous progress for patients. And of course some of these rebates that are discounts that are required to compensate for for this, we will be paying. But suddenly we see that as a big improvement for patients and hopefully also an incremental revenue for us, because patients will be able to afford their medicines and take them and stay on them longer. So you know, win win, really better for patients and hopefully better for the industry as well.

The PASCAL I'm looking at the on the Bloomberg terminal, the PGeo function which shows me kind of your revenue by segment, and I see that oncology is your biggest revenue line there about thirty seven percent of total revenue. What are the opportunities there in your oncology business. I know it's a competitive business, but you have in the pipeline. What do you have to bring to market? How do you think about that business?

Yeah, ourcology portfolio of products go by twenty six percent in the first quarter to five billion dollars five billion dollars in a quarter. So we are on a very strong trajectory driven by a number of products that we have in a portfolio for lung cancer, briacet cancer, prostate cancer, or variant cancer. And there's more to come. And the future of oncology really is about combination therapy, combination of antibody drug conjugates, as I said before, those products that target the tumor cells and deliver a toxin at the site of the tumor cell and essentially kill the tumor cells without affecting the helcy cells around and combining this with immuno oncology products and then in long run adding cell therapy to this. So there's an enormous amount of innovation that's going on in cancer. The clogy of cancer. He's being improved very rapidly and as a result, new medicines are coming up. There are still cancers, unfortunately that are difficult to treat. But one of the other aspects of cancer that is very important is diagnosing patients early so you can intercept the disease early. If you look at breast cancer, mamographies have really helped diagnose breast cancer very early and survival right at five years is ninety nine percent when patients are diagnosed early. Lung cancer is the opposite diagnos too late. So there are no technologies that will enable to patients and doctors to diagnose cancer very early and treat it only. So the combination of these plus new treatments gives us hope that there is a possibility that in the near future we could actually turn cancer, cure cancer, or turn it to a chronic condition that people can live with.

Pascal thirty seconds left here one of our readers rights, and it says on if your May twenty first investor day. Are you going to give a big sales target for twenty thirty?

I think I will have to invite people to our meeting and Cambridge in the UK, we've even you know, offered to offer them at lunch, so I won't disclose that today, but they we suddenly will show people our strategy and why we believe we can be a gross company and what would be the gross drivers. But I can't say today whether we will be disclosing your target at that point.

All right, Pascal, thank you so much for joining us. Really appreciate you sparing a few minutes of your time today. Pascal Sorio, he's the CEO of Astra Zeneca, joining us from London via zoom.

The company reported strong numbers this morning.

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