Debt. Joining us to discuss is a high veteran, Lehmann Livian Fridson Advisors chief Investment Officer martin fridson. I want to talk about this wave of downgrades we have had. Yet, itenomenal, and seems like we have not reached the apex. Do you anticipate more double and triple downgrades . Martin i think we will see that continue for some time. If is such a dramatic change in environment, it is taking a while to get through all the companies, but in addition to aat, some Companies Just had light switch turning off kind of change. Historically, you have some finance companies go down quickly if they lost their ability to borrow, they could sell quickly. Industrial companies historically have taken a long time to make the migration that we observed recently. 1100 basis points around march 23, and then we had a bit of easing. What do you see in terms of levels, spread wise, and default wise . Martin default will clearly rise. Defaults will clearly rise. We think double digits. The highyield market is not quite at that level. By that measure, the market is somewhat underestimating the defaults. Rising inking about the 3 to 4 range on a trailing basis. Vonnie do we top 10 . Martin it is likely. Ive been doing some work on that recently. Toot of statistical issues, esoteric to get into. If we had a stress comparable to the great recession, looking at 2009, actuallyn an improvement in the ratings market,the highyield we would get up to about a 10 rate. If the economy is worse, of course, the number will be higher. Vonnie the fed credits the zombie for staving off markets. Companies. In the lastad those cycle, those that should have ,efaulted but were kept afloat interventions by the fed are even more aggressive this time around. It is a pretty clear bet people have some of those. A lot of those companies from the last cycle did eventually default. We had a drop in the default rate from record levels, in double digits, to the low average the very next year, which cannot possibly happen in any kind of normal cycle. It would take a couple of years to make that decline back to an average default rate. We may see something similar to that, we will probably have some companies, and that can create some moral hazard in terms of Companies Taking risk, feeling that they will be bailed out under any circumstances. Although when they are facing a neardeath experience, im not sure they are counting on that, risking the companies to the extent that some may suggest. Vonnie we had a rebound returns wise last month, but it was a terrible march, still negative on the year for junk. Im curious whether you think utilities, tech, if they still have room to go, or if other sectors appear more industry interesting in the coming months . Utilities stand out currently as the only major positivethat has net rating prospects, including watch listings and rating outlooks published by the ratings agencies. Mix. Arily, there is some of the 20 largest highyield industries, usually some on the positive side, some on the negative side. Utilities stand out as the only one. That does not make them the most the best value in the market. Currently, the market is looking at that. , given the sense ratings agencies are telling you the ratings are likely to improve. But some of those that looked are prettydervalued chancy propositions, like energy. They are really making a bet on oil prices. Statistically, they are cheap or rating, but maybe they deserve to be. Vonnie we are well above 30 now, incredibly. What parts of the oil patch might be interesting at these levels . I dont know about that exactly,but patch but Transmission Companies provide the safest play. Within the oil patch, shale producers are properly viewed as the most in danger. They may get saved, in some cases, by the Rising Oil Prices we have seen so far, but 30 is a far cry from what we saw just a couple years ago when they were really driving. Deriving. Thriving. Vonnie Neiman Marcus, eightware have lost ratings notches in the last week alone. Any places that are so close to bankruptcy, it is a hairs breadth . Issues trading at distressed levels, you are really going out on a limb, investing in those. It is noteworthy, there are some that have bb ratings trading at distressed levels. I leave out the energy companies. But there have been, historically, that has been a good bet. Spread overoints treasuries. In some cases, with stable outlooks on them. Buta lot in that category, you dont have to believe the ratings are perfect. Managers,o a lot of they claim they pay no attention to ratings, and so on. The fact is, the ratings are not companyff, a typical rated bb is on the brink of the chances are not very likely within a 12month period. Vonnie give us some more names that look interesting to you at these levels. Well, i wouldnt want to butinto specific issues, within the sector, one of the attractive opportunities is in smaller issues. Ordinarily, the market charges a 400um to an issue of million, 500 million, as opposed to a billion dollars because liquidity has declined in the highyield market. It is easier to trade a larger issue. You have greater confidence that you can get out of it. Looking long ago, within the bb category, pickup of about 15 basis points to go into a smaller issue. That recently widened out to as much as 66 basis points. While that increase in risk premium is justified because the market is even less liquid than usual, it is an opportunity for those managers who claim to be the Warren Buffett type investor. We do the opposite of what the market expects, we are contrarians. We get greedy when others are fearful, on and on. Here is the opportunity to show that that is what they actually do, as opposed to what they say. You are getting paid well. You can pick up extra yield while you are holding the smaller issue, and utterly take out a good profit on the trade when you reverse it, as the yield premium comes back to normal levels. Vonnie you are infamous for this wonderful valuation model you have come up with. Im curious whether some of the inputs needs to be changed . What you have learned from the cycle that makes you want to tinker with the model . Martin i have added to the model, lets say a dummy variable, either on or off, meaning the fed is engaged in quantitative easing. That has recently been on with what the fed has been calling, providing support that we saw in the great recession. That mitigates the risk premium required. Now we are reaching a different level. That is clearly having an impact. Somehow you try to take that into account, the market will look overvalued. If that support disappears for some reason at some point, or as critics suggest, is not enough, what they are doing now, then the highyield market will prove to be very severely overpriced. Over time, you could keep adding these oneoff situations. Say, overs more to time, looking at factors like credit availability, the economic conditions, the level of treasury yields that really drive the spread over time. Vonnie thank you so much for joining us. That is martin fridson, Lehmann Livian Fridson Advisors chief Investment Officer joining us. Lets get a check on the first word news with Mark Crumpton. Starting. Airlines are to see signs of life after the unprecedented economic collapse in april caused by the coronavirus pandemic. Southwest said in a regulatory filing today that bookings are again outpacing cancellations and travel reservations or the next month are showing modest improvement. Reportedrlines moderate strengthening in the u. S. And some international routes. Pressure is on british Prime MinisterBoris Johnson to be more open about his coronavirus strategy. A panel of lawmakers has called on the government to publish the scientific advice behind britains actions. Meanwhile, teachers are demanding clarity over plans to reopen schools next month. Make it morell difficult for some Chinese Companies to list on the exchange. It is set to unveil new rules for ibos that include tougher accounting standards. The rules dont mention chinese firms specifically. One of the new requirements, companies will need to raise 25 million in their ipo. President trump is dismissing safety concerns about a drunk he is taking to protect against coronavirus. The president says he has been taking hydroxychloroquine for a week and a half. There is a lack of evidence that it prevents people from getting the virus, and physicians have warned the drug can have deadly side effects. Global news 24 hours a day, onair, and on quicktake by bloomberg, powered by more than 2700 journalists and analysts in over 120 countries. Im Mark Crumpton. This is bloomberg. Vonnie this is Bloomberg Markets. Im vonnie quinn. Loop Capital Markets cut disney to a hold from a by surrounding several concerns. Joining us now is analyst alan gould. He has a 185 dollars price target and has downgraded disney to a halt with a preference for old with a preference for hold with a preference for netflix. Explain why somebody else could not do the job that he has pretty much got going . Alan thank you for inviting me. Kevin has done a great job at the company. That was one of the reasons that we decided to lower the ratings to a halt. Kevin was in Strategic Planning behind the acquisitions of all the great Franchise Companies lucas,ve, marvel, pixar, the fox acquisition. Then his first operating job was running direct to consumer international. He did a flawless job rolling out disney plus. Disney plus was supposed to have 60 million to 90 million subs by 2024. Maybe they were giving us a lowball number, but nobody expected them to be at almost 55 million subs six months. Vonnie exactly. That is one of the bright spots for the company. Can his replacement just continue the job . Alan probably. There have been a number of changes. Bob iger has done a spectacular job at the company. He has stepped aside as ceo, still executive chairman, therefore the next 18 months. We have known bob for a long time, he has done a great job running the parks and other businesses. There have just been a number of changes. There is a new person running the parks, a new person running dtc and international. Disney is a great company, they have a strong bench. Ma transaction that kevin yer was responsible former some of the best transactions we have. Een in decades in the industry as i said, the rollout of disney plus was flawless. Vonnie i want to ask you for some other reasons for the downgrade, kevin mayer has gone to tiktok. What can he do that may bring it up a level, are the acquisitions that he will be going up against u. S. Companies for . What else should we be thinking about when it comes to kevin mayer . Alan tiktok has been one of the fastestgrowing internet assets, they are into programming, he is talking about gaming, could be looking into music, could be making acquisitions there. There has also been a lot of questioning about tiktok being a chinese company, bringing in an american executive with a lot of respect like kevin mayer may help. I believe all of their content, information is in u. S. Servers. Bringing in a person like kevin mayer should be able to help them politically as well. Vonnie i want to mention a couple of reasons for the downgrade. Andtalked about film entertainment, about 40 of the box office. Will consumers return to theaters, what is disney planning for . Alan i think it is a lot more than that. Covid19 is accelerating some of the negative trends we have seen for traditional media. Cord cutting has accelerated, especially true with the absence of sports. When sports come back, hopefully, we see those trends come back. Tvertising is migrating from to at an accelerating pace. There was no tv upfront season this year. There will not be a new fall tv schedule for most of these companies. Theaters, you could see as many as 25 of the theaters in america close. Disney has blockbusters. When they have a big opening, and avengerstype movie opening up, you want 40,000 screens in the u. S. , and probably will not be able to get past covid. In terms of parks, when they do reopen and they reopened fully, there will be higher costs. Parks had the highest margins they had in three decades last year. There will be higher costs. Screenings, temperature checks, etc. When they open up. It will be a little bit challenging for disney. Disney has put together liquidity. Ed they have raised 17 billion in debt, 14 billion in cash, increased their credit line. They are a very conservative company, they raised the debt tremendously, beneficial rates, little over 3 . And had set aside a pot even suspended their dividend just to prepare for an ultimate downsize scenario, which is a pretty scary scenario. You so much, a fascinating conversation about disney. This is bloomberg. Vonnie this is Bloomberg Markets. Im vonnie quinn. It is time for your latest Bloomberg Business flash. Home construction in the u. S. Fell last month the most on record, back to 1959, in fact. Housing starts plunging 30 in april. That is the lowest in more than five years. Building permits for future construction fell almost 21 . Walmart showed how it is one of the few retailers to thrive during the coronavirus pandemic. The chain posted strong Quarterly Sales fueled by consumer stockpiling. Comparable store sales rose 10 in the u. S. , the fastest rate of growth in almost two decades. Grew moreter sales than 7 at home depot. They say sales trends carried over into the Second Quarter. Still, home depot suspended its fullyear forecast. The company says there is much uncertainty around the coronavirus and its impact on the economy. That is the latest Bloomberg Business flash. Lets see how we are performing markets lies. Wise. , holding00 is at 2955 its own but barely higher. Some of the homebuilders leading the way with lennar up 5 . The viacom up, a great quarter for viacom cbs. The dollar index a little bit weaker. Gold slowly creeping higher. 71 basis points on the 10 year. Gdp data next week. This is bloomberg. Mark im Mark Crumpton with bloomberg first word news. Home construction in the United States took another dive last month. Housing starts fell by 30 in april to an annual rate of 981,000, the lowest in five years. Applications to build, a proxy construction built 21 . President trump is vowing to permanently cut off the was a two the who unless there are reforms. To the whoevances and reputed a previous demand that the organization demonstrate its independence from china. Pressure is mounting on british Prime MinisterBoris Johnson to be more open about his coronavirus strategy. A panel of lawmakers has called on the government to publish the scientific advice behind britains actions. Teachers are demanding clarity over plans to reopen schools next month. The leaders of germany and france have agreed to support a 546 million package to help the European Union recover. That is a major step toward tighter integration of the block. Angela merkel and Emmanuel Macron discussed the plan by videoconference. Countries hit hardest by the virus will get grants finance by additional borrowing. Global news 24 hours a day, onair, and on quicktake by bloomberg, powered by more than 2700 journalists and analysts in over 120 countries. Im Mark Crumpton. This is bloomberg. Amanda live from toronto, im amanda lang. This is Bloomberg Markets. Shery we are joined by our bloomberg and bnn bloomberg audiences. Here are the top stories we are following from around the world. U. S. Stocks looking for direction after a round of congressional testimony from fed chair jay powell and steven mnuchin. Inell worked to stay neutral the debate about whether congress should add on to its record setting stimulus. Cases of the coronavirus topping 1. 5 million in the united dates. Governor cuomo saying the Capital Region will be open tomorrow as new york city remains under lockdown. Shares of walmart higher after a strong Quarterly Earnings report. They say coronavirus stockpiling led to a surge in Quarterly Sales. We will go through the numbers with oliver chen, next. Amanda lets get a read on the markets. Settling down a little bit after yesterdays wild ride, a combination of factors. Enthusiasm for the vaccine but comments from chair powell. Ing some of the gains. We see consumer and tech stocks moving higher on the day. Energy is a weak spot. Energy sensitive groups is also week. Nothing like what we saw yesterday. Also weak. Mentioned walmart. I want to check on a canadian retailer. They are in restructuring here in canada as they look to renegotiate with some of its lenders. There is the fiveyour picture on reitmans. Dealing with everything that all retailers are dealing with, but in many cases, it is mallbased, and they are among the last to reopen here in canada. Lets check in on walmart. Bigboxth other retailers, it is showing that it can do well here, partly driven by that stockpiling. Oliver chen is with us, Senior Research analyst at calvin and company. He has an outperform on walmart. At cowen and company. There will be your shortterm affect how much are you building in as a permanent for this retailer . Oliver the big story is the digitization of retail, rethinking retail, Curbside Pickup, shipped from store. The numbers were solid. 1. 18. We were looking for . 93. What is happening with grocery pickup, as new customers experience this, they are staying with the system. Our view is Curbside Pickup, in a safeg groceries manner, will be important for the longterm. We see that getting bigger. We also appreciate what walmart is doing across the supply chain , as well as being focused on everyday low prices, which is particularly important as we face the recession and cautious trends. Hese trends should stick Curbside Pickup is not easy to achieve, it requires robotics, a lot of logistical techniques. Furthermore, what we are seeing across the sector is rethinking stores in terms of integration points. 90 of america is within 10 miles of a walmart. Stores, another key point of difference, and what is rapidly happening. Retail at large, bifurcation. You spoke about the mall being a difficult place, apparel is difficult. Jcpenney is in a tough place right now. Walmart, costco, target, they are not. As consumers stock up, they are benefiting. Comparedw does walmart to others like target, especially when their share value aims to be a little higher than others . Oliver we had an outperform on both. From a stock perspective, 19 es pe, more fearful favorable than walmart at 24 times. We also like target and its private label portfolio. They both have great Curbside Pickup options, which is huge, and they are both seeing nice gains in digital. We like them both in that respect, too. Just in terms of how you see things unfolding, this move to ecommerce, as you say, is likely to have real traction. Do you expect major, structural changes or others out there . Mallthinking of those big tenants. Jcpenney obviously stands out, but others on the edge. Are you looking at them and saying the future for them will look different . Oliver it will look different. Today, spoke to kohls thinking about clothing, how you try it on, return it, that is ke a key consideration. Curbside pickup, a lot of the grocers were early to that, but others are having to execute quickly. Rethinking safety. Safety has been one of the most important topics for both employees and customers. Dwefer experience is less ll time in a store, less traffic. How do you rethink your whole Story Experience in terms of safety . That is happening as we speak. These are changes that we will see unfold. I also think size income inventory, management, the need for speed, vendors across the supply chain a lot of pressure. Retail was under pressure prior to covid but a lot of those trends have accelerated. Shery great to have you with us, oliver chen. Coming up, loaded with cash and ready for action. We will discuss the biggest Real Estate Investors standing by to take advantage of the lower prices created by the pandemic. This is bloomberg. Amanda live from toronto, im amanda lang. Welcome back to Bloomberg Markets. Earlier, david westin spoke to Brian Moynihan and asked the question about the shape of the recovery. This is a health care crisis. As you are seeing the healthcare crisis be mitigated, not solved, you are seeing the economy start to recover. The approach to winning the war against the crisis for us has been a customer centric, consumer centric, employee centric move. We have been supporting our clients, making sure they have the credit and capital to do what they need to do, help them through this activity in the Second Quarter. Extended to ppp loans. Customers have the ability to have better cash flow in their house. We have helped our teams by saying no layoffs, getting them secure, working from home. Contributions from our community in cdfi institutions. About 170 million is already out. All of that is offsetting the impact of the Second Quarter downdraft we see with the unemployment numbers. We dont see it differently but we see is coming out of the other side, frankly. Expresseseral reserve some concern that as this pandemic continues, there could be a threat to the overall system, for example, commercial real estate. Are you seeing some parts of the market that are particularly vulnerable on the credit side . The u. S. Economy will be dependent on the activity of the consumer base. You always have to start their when you talk about the u. S. Even though we have this year being 5 , plus 5 next year, the real question is how consumers behave. What we have seen since the low point since the first couple weeks of april, in terms of their spending, because of stayathome edicts, transfer of money, you saw all of that fall to the lowest level. Travel, hotels were most affected. As you saw, going through april and into made, you are seeing their activities pickup, even in the states under stayathome. You are seeing activity pick up quicker and the places they are going back to work. For the month of may, we are seeing down 2 versus last year. Year to date, a couple percent. The question is how the consumer behaves given the high levels of unemployment you have seen published. People get back to work, jobs coming back in. The stimulus payments are hitting the streets in the last few weeks. Chair powell and others, the concern i have is have we changed Consumer Behavior looking out over the next six quarters . That is maybe the key question. When it comes to the consumer, i know you have taken a credit against losses. Which is unemployment stunning, do you think that will be enough . Seen witht we have consumer health, we have granted about 1. 5 million payment deferrals. About 40 of the people asking for credit card payment deferrals went ahead and made a payment. See, leaving aside the issue of where the money is coming from, you are seeing higher balances in accounts. Payments,e eip enhanced unemployment, these measures taken by the congress, the fed, have worked to offset the unfortunate aspects of very high unemployment. You are not seeing the deliverance he seas and other things rise. Payment deferrals increase, but they are starting to level off and come down. We expect to see chargeoffs coming later on as this goes on. The reality is right now you are not seeing the kind of credit damage you would expect to see with this kind of downdraft in activity. The question is what happens next. Shery that was Brian Moynihan. As economic slowdown hits economies across the world, commercial real estate prices are expected to drop. The worlds biggest investors are sitting on piles of cash, preparing for a onceinalifetime opportunity created by the pandemic. Joining us for the story is john gittelsohn. Powderh is there in dry ready for deployment, and how soon could we see some transactions . I cannot imagine the market being too active right now with so many restrictions. The restrictions are a big deal in a lot of cases. People cannot go out and look at buildings if they are going to buy them. If you are going to buy something that is a few hundred million dollars, you want to actually make sure that the doors were, the windows shut, all of that stuff. Work, the windows shut, all of that stuff. There is 328 billion in dry powder, and that is just in private equity, ready to buy real estate. They need a lot more clarity in the market before they start putting that money to work. Playerssome of the presumably are those who will also feel the pinch. I am thinking of brookfield, who retailmercial tenants, property, and maybe uncertainty about the future. How are players like brookfield playing this, as opposed to those that have a pure private equity interest in it . John brookfield is talking about liquidity, the fact they got all of this money ready to put into new stakes. People will have to be doing multitasking who have any exposure to real estate now. They have projects out there that are threatened. Mentioned, as you have a lot of shopping malls that are seeing no business right now. They have to get those up and running. They may be filling those with lots of tenants filing for bankruptcy like Neiman Marcus or forever 21, or in your retailer name your retailer. They have to work at those issues. Got 5eld said they million in a retail revitalization fund. At the same time, they are looking for deals from other distressed sellers. Se distressed sellers nobody wants to sell that a price. Sed they are waiting to see it either they can hold on or get a good price. John, we are going to leave it there. Thank you. Coming up, the wti june contract rose for a fourth day in a row in its last session before expiring. We will discuss the state of the oil market would kpmg global head of energy regina mayor. This is bloomberg. Amanda this is Bloomberg Markets. Im amanda lang in toronto. We are keeping our eyes on the price of oil after the drama with the expiration of the may contract in west texas. We wondered what would happen in june. It is gaining strength as that contract closes out. Regina mayor is the head of energy at kpmg. We wondered if we would see negative again this month. We have seenength under the various prices of crude, is driven by optimism of growing demand, are we on the right side now . Regina i dont know if we are finally on the right side but a far cry from where we were. The price has changed 70 when you think about where we are today. There are some bright spots. Production has come substantially and a lot more quickly than we expected. Play,lus cuts come into and u. S. Production has come down. And we are seeing signs of recovering demand. I see houston, a lot of traffic on the roads. When you look at gasoline consumption in the u. S. , we went from a low and april at 5 Million Barrels a day off of a 9. 7 million average, and the week ending may 8, back up to 7. 4 million. Still more than 2 Million Barrels a day off of the pace. But the difference in a week as the market optimistic. Little, potentially a euphoric, but better than we were. Shery let me ask you about the supply side of things. This chart showing what is happening to storage in cushing, oklahoma. Sincee first time, a fall february. What are we seeing with oil here in the United States, how much lower couldnt go . Storage. The supply glut. Regina we have seen the supply demand differential close that we still have an overhang that we have to take into account. Up to 70 capacity even at its peak. Getting your arms around exactly what storage looks like is a difficult thing to do. Their estimate that it goes anywhere from 800 Million Barrels a day up to 2 billion barrels a day. When you have people trying to watch tankers, how many vlccs are floating around the world, it gets challenging. With cushing going down, that is tangible evidence that things are loosening up. Cushing is a chokepoint. Amanda it is worth remembering some of the drama year it will be remembered as one of the saudisssible time, the starting a price war as the pandemic was starting. But the saudis were after something. Did they get it . Everything changed for everybody involved, but did they get what they needed out of that maneuver . Regina i cannot predict what is in their heads. Typically, when the saudis create a price challenge, which they are known to do, have done so in previous times in history, usually, those price was last 18 to 24 months for months. Maybe they did not get what they wanted, or maybe they did, but the good news is, it is over for us now. Shery talk about what is happening in china. Sources say oil demand is back to levels from before the pandemic, but at the same time, we see a second wave of infections. What is the risk there . Happeningat is relative to chinese demand, they are taking advantage of the low fossil fuel prices, so they are buying finished products, crude, they are filling up everything they can on their side of the planet. Im not sure that is being consumed yet. The evidence we have on the economic data, at the personal level, you are not seeing the train,er movement by rail, by road, by plane, the way that we would anticipate. That is where i go to the market is euphoric, i like where it is headed, Higher Oil Prices are better. Nobody is going to throw a party at 30. At the same time, im not sure the fundamentals are there to support that. A lot of risk of a Global Demand continuing to retract. Both of what you mentioned in china, but we have not seen covid19 play through other parts of the planet where it could, latin america, africa. I still see recessionary activity and demand depression, but too early to get hopeful. Amanda on that front, when do you think obviously, we are worried about a second wave. Is that the big worry when it comes to the price recovery . Regina i think it is more about the supply glut and how quickly we can consume that. Regina mayor of kpmg, great to have you with us. Thank you for your insights. Course,or futures, of june futures, of course, expiring today. From toronto and new york, this is bloomberg. There are times when our need to connect really matters. To keep customers and employees in the know. To keep business moving. Comcast business is prepared for times like these. Powered by the nations largest gigspeed network. To help give you the speed, reliability, and security you need. Tools to manage your business from any device, anywhere. And a team of experts here for you 24 7. Weve always believed in the power of working together. Thats why, when every connection counts. You can count on us. Scarlet im scarlet fu. Romain this is Bloomberg Markets the close. Welcome back. Of the best days of this market has seen for about six weeks. Fluctuations between gains and losses. We seem to be pushing deeper into the green as we get closer to the close. Some of the discretionary and industrial names getting a bid. Thing er cohort of faang names keeping us further in the green. Also at a record high, nvidia. Moment. 1. 6 at the that is largely your outperform or of the day, at least among some of the top line indexes