Cyclical recovery here. I guess thats something for the day. Based on the Technical Levels like the 200 day moving average, there are bullish signals out of the small and midcap space. Caroline what is the number one risk on your mind . Please ask that again . Caroline what is your number one risk . U. S. China . Deteriorating earnings . Coronavirus and a lack of a vexing . Vaccine . There are always risks that keep you up at night. Longerterm, ive never seen the monetary stimulation i have seen in the last six months were money growth is rowing at 80 annualized. I think ive been wrong that inflation has not surfaced but i do believe it will so longerterm i worry about inflation because it erodes the real return of the tone of stocks. I worry that post qqq earnings season as they move into the number that we have democratic sweep and what it does to the Corporate Tax rate, that is a risk as well. Caroline great to get your expertise. Breaking news. Microsoft out with earnings. The cloud revenue coming in at 30. 4 billion. The Intelligent Card revenue slightly ahead of expectations. Overall, a 38 billion number in the Fourth Quarter. It is a beat for microsoft and earningspershare also better than expected at 1. 46. The pc part of the revenue 29 billion, ahead of expectations. We forward looking guidance, might be tugging at lower or indeed the runup at such shares in the moment customer the microsoft is seemingly beating on all fronts. Romaine overall, this is looking pretty good. When you talk about the general expectations being high, particularly for companies that were expected to benefit from the stay at home, work from home and play at home environment, microsoft is one of those. Its a stock that microsoft was at a record high. Satya nadal a saying in the release that the last five months have made it clear tech intensity is the key to Business Resilience and he talks about how organizations are continuing to build up digital capability and how he thinks it will benefit microsoft. Of course he dropped buzzwords about modern technology, staff pattern, cloud, ai, security compliance, not a massive reaction on the share. The kneejerk is down on the day but we will see what happens here as we get a little more information out of this Earnings Release as well as the conference call. Caroline it is worth remembering the shares did rally up 1. 4 , moving some of what has been done in terms of todays market move. Plenty more after the bell. Deeper diveaking a into tesla. Be joining us taking us through what we can expect in terms of the numbers. This is bloomberg. Caroline from bloombergs World Headquarters in new york, im caroline hyde. Taylor im taylor riggs. Romaine im romaine bostick. Caroline powering through chinau. S. Uncertainty and coronavirus uncertainty and focusing on earnings. Up 6 10 of 1 on the dow and the s p 500. Silicon valley stays with much stocks already, managing to come out, tesla we await just getting started. Apple and amazon on deck for tomorrow. Predicting mega bankruptcies with the zscore at altman. Shares of now from what companies have filed for chapter 11. Thats coming up. Take us through what we see from microsoft. Romaine romaine earnings on microsoft, we talk about the threeheaded hydra. The cloud business, the gaming business, and office 365. There is intelligent cloud billion,t 13. 37 slightly above the estimate of 13. 12 billion. Personal computing at 12. 91 billion. 11. 9al computing at billion. They have. Appeared to beat metrics, but the earnings are little to the downside. We are getting a Little Information about what the numbers mean. Caroline all eyes of course on what we will see happen for tesla. The all important will it post a fourthquarter profit and enter the s p 500 . A key one for us to debate. Taylor tesla of course as we continue to talk about stocks and tech names priced to perfection. Tesla is one of them. Soeresting as we have seen Many Companies withdraw fullyear guidance. That narrative starts to be changing at least with microsoft as they can get some visibility to the future. Microsoft on the earnings conference call, they will be providing forwardlooking guidance, interested to see how they see the rest of this year going. More importantly, into 2021 as we at this point have not heard anything from these companies about what they see and visibility they have going into the future. Romaine we always love having leigh drogen on any time we have earnings. He is the founder and ceo of estimize, which tracks the buy and estimates for. A lot of the Companies Reporting microsoft has only been out for a few minutes, but what is your first take here . They basically beat on everything as you were saying. The azure 13. 298 for numbers, which they slightly beat and i think it was a really important piece of this. It is an important thing to look at and read through for the rest of the market, basically as some of those transactional volumes during the quarter date decline and they spoke about that weekly. The broader sense of whats going on on the web and traffic, what volumes are still very strong. When we look at the go forward for this company, what will be really important to hear from them on the call is those clients that basically didnt sign up with them this quarter, did they give them access to everything and push back the billing a year or so . I think you are going to hear bunch of that, which is why i am bullish on the name. And we still see in the out quarters on the estimize upwardm, we are seeing revisions for q3 2020 one and q4 2021. They are on an offset fiscal quarter, that is three quarters out and four quarters out which i think would not be surprising if they took advantage of the fact that they are able to basically provide that to their customers here given the Balance Sheet and not take the revenue but gobble up the customer base. Caroline lets look at whats happening in terms of chipotle. We are currently seeing the fiscal secondquarter numbers coming out, beating in terms of earningspershare. Arent back at work, they ,re not ordering quite as much apart from our producer hannah, but we see them beating estimates. They managed to be on the right side of digital growth. Shares though still following around 3 . Romaine interesting entrepot late. We are still waiting chipotle. G on we are still waiting on tesla. Kind of divorced from reality or fundamentals, or even failed metrics. When we talk about the general enthusiasm in the market for a lot of these names, to poet lay which is on fire, and microsoft at a record high and of course tesla which is currently at a record high. Is there a need here to have some of those valuations backed up by the more traditional fundamentals, or are the folks comfortable with the general story nature of a lot of these stocks . Big regarding growth and value. It is going to take something on the macro side to change that. Priced for incredible expectations here in the three when theuarter range numbers on the Overall Index level have us getting back to growth versus the previous high quarter. , aboutsla specifically five years ago i was on this show and i said something specific that i said tesla was going to beat uber to robotech sees before uber got public and i was very bullish on tesla. About two years ago i came back on the show and said may i call paul, i was wrong, and that they would not get there and the tech was not there and tesla would not be able to do that. Im not sure i was wrong now. While it was still i would still take the loss for the call, the point being this. Musk hast is possible convinced the market that he is jeff bezos and tesla is a platform, and he does not have to generate profit by selling cars. Whether you believe that or not, who knows . But it does seem like that is what is going on here. When people say can they back it up with fundamentals, im not sure that is the variable to tell you whether the stock goes up or down now. The variable is basically is there a broader revenue story beyond cars that everybody continuously believes in . Romaine great point, leigh lpa for us. A mea cu i want to go back to microsoft. I want to point out the xbox revenue, which a lot of people see as a key here for the company, the content of Services Revenue was up 64 on a yearoveryear basis. The actual hardware part of the basis was down 49 , the idea that everyone bought consoles in the previous quarter and it tailed off. There are some concerns that with a lot of the companies doing well now, there has been a pull forward effect and a lot of the sales. Im wondering if that is a concern for the other Tech Companies out there. While they may have a lot of new business whether from consumers or businesses, it is a pull forward. I will rephrase it a little bit here. With a lot of the names and videogame names is that it is not necessarily that you are pulling revenue forward, it is that you accelerated the adoption curve. That is why the stocks have gone nuts. You go for Something Like zoom where they were growing 30 , 40 yearoveryear and now they are growing 200 , and thus the multiple has to be revised for that kind of growth. The question is now that it is baked in roughly, where does that revenue number go . Does it go back to 30 . Does it go back to 40 westmark we can 40 . Or do we go back to massive numbers . For Something Like zoom, the expectations are that it goes back to Something Like 40 growth rate. They have grown a lot for sure and the stock rice is somewhat deserving, price is somewhat deserving, but if they slip off or more entrants to the market destroyed margins, there will be huge problems with the stop. Stock. Taylor on the theme of the adoption curve and we talked about microsoft customers pushing out earnings to a year or so, how are you thinking about that adoption curve as it relates to the teams product, particularly with slack, which was an upstart competitor, filing today and antitrust lawsuit against Microsoft Teams in the eu . His teams were you needed to be at this moment . This is an issue for slack for sure. The teams product and all the remote productivity software, it is the same thing. We are pulling the adoption curve forward and it doesnt mean we are pulling revenue forward and there will be more revenue. Microsoft is throwing its weight around. This is probably illegal what they are doing by bundling the stuff up but it will be hard to stop them. I dont think it would be any real gumption. I dont think that will happen anytime soon. Caroline we are watching tesla shares despite how year after hours and we have the tests press release. Marketss coming from the and im sure as we start to see the posting of a prophet and that means a fourth straight quarter meaning secondquarter earningspershare . 50 versus a loss per share of 2. 30 year on year. Also they are saying theyve got million 535 million increase. Romaine cash flows looking decent. The Free Cash Flow number at 418. Cash on hand is around 8. 6 billion and i believe we have to double check it but on a historical basis it might turn out to be one of the best quarters in terms of cash on hand for this company. As you said, the fact that it posted a profit will increase speculation about the potential addition into the s p 500. Taylor huge given we have already seen expectations from deliveries and coming out and saying the shanghai factory remains on progress as expected even through 2021. There was a lot of concern that they had reduced subsidies and how would they compete against other competitors in the market . Here within the u. S. , starting ,o get a bit of a reopening where is the demand and output . Interesting to see the numbers come through. , ontrackbout capacity still about 500,000 cars to be delivered this year. Caroline lets get leigh drogens take. Were the buy side people were expecting . How are you looking at these numbers . Ande were at 5. 5 on revenue . 17 on etfs. I dont think the court are necessarily matters that much here from how much did they beat by perspective. This is all going to be about forwardlooking stuff. They had to put up the positive number really for the general sentiment into the s p 500 because there was some of that baked in. Again, i want to go back story here, it has to be predicated on longterm, what is the platform they are building to sell other things or become f Services Company . There arent enough cars they could sell in the whole world to make up for what the valuation is right now. No sense logically whatsoever. Forwardss of what the looking numbers are. Has to keep really spinning the story of what is the Services Business longterm . Romaine and we should point out with regards to the s p inclusion, the general rule is you need to put up basically four straight quarters of gap profitability and it would take him to three straight quarters up. A bit of waste ago before they would meet the base qualifications. They do appear to be at least on the right track. I want to talk about the general ittiment about the stock and is not really a bet on the quarter to quarter earnings and sales growth. This is more of a play that right now if you want to be invested in autonomous driving or electric vehicles, or the future of transportation, there are not any play stocks out there. Tesla is it. Im wondering if that is what continues to drive the stock even higher. There are two pieces. That is one of them. When i worked for Keller Capital at the beginning of my career, we ran a model that was basic. It was high Revenue Growth companies early on in their life cycle were about to cross into profitability. What happens is at that point not only are we seeing what happens to the inclusion and indexes, but a lot of mutual funds are allowed to invest in that stock and under the charters before they hit profitability, they are literally not allowed to invest. We used to get in front of that i quarter or two corridors porters and you get massive expansion. One of my favorite examples is what happened to linkedin. When they went public, stocks do not do that much. They are going through the cycle and eventually the Institutional Ownership is going to get more saturated and that is the point at which you want to take it off the table. Taylor you hinted at this earlier saying it isnt a car company. The valuation doesnt stand a chance if you think of it as a car company. Argue but you could about a Software Company and a battery company. Is this increasingly a battery and Software Company . I think it is software. Look at amazon. Amazon is a Software Company. It is a logistic company. They dont even sell books anymore. They dont even really sell anything physically anymore, it is not really the business. It feels like the sentiment around tesla similar. They are starting by selling cars, yes. Batteries as well will become part of this. But it feels like longterm, the bet is on a broader Services Business where they have a platform to offer all sorts of things and the technology sits behind that, but they do have a really incredible set of software. While we would all love for the driverless stuff to be further along, it does feel like they are close to where it needs to be for the next step in building the platform business. Caroline its interesting the amount of cash, they are managing to increase to 8. 6 billion and it seems a new high. They was much talk about have seen such a rally in the stock and maybe we would see them dine out on a Capital Raise. It feels as though that is on the back burner for now. I would still be surprised if they did not do it Capital Raise and take money with the stock trading where it is. The other piece of it, the reason why you might think they wouldnt, is because musk really is a savant here at juicing the stock. He understands whats happening ith the momentum trait and may not be something he wants to put on this second, but if this thing stalls out, i would guess that is something they are going to do. Romaine so what is next year . At some point here, you have to look at this company and if you are an Institutional Investor and you look at the runup and potential inclusion, you jump into this, but once you get Institutional Investors, the demand for companies become greater to meet certain metrics that tesla to this point has been inconsistent in meeting. Is that actually a benefit to tesla as a stock if you get that institutional involvement . Arem not quite sure if you an institutional manager that at this point, your play on this is they will meet any given quarter or specific metric. Dont know that there is a i thinkch about its mostly a systematic momentum trade taking place as well as just i have to have exposure in this specific industry group. That actually may help tesla down the road because its not like some institutional manager at fidelity is going to be scrutinizing the quarter, like they did not meet certain cash flow, i dont think we need to be invested in this going forward. I think musk has, in his own weird way, he has emotionally trained investors to count on specific things and not care about others. It is interesting, as we push the story forward, so much of it is about autopilot and a fully selfdriving vehicle they are with me, the press release is in six point font. But they talk about being on autopilot and saying ultimately the necessity for confirmation to have a stock at that stoplight will be withdrawn completely and talking about trying to be a fully autonomous vehicle. How much of that is or is not baked into the stock at this moment . Is the reality distortion field. There is an idea going around tech right now and the concept 90 of things can be done with this kind of technology, where it is right now, and that encompasses a lot of things, but it does not encompass driving on the road where you get stuff 10 of the time wrong, people die. This is the kind of thing where the last 10 might take 10 years. Its hard to understand where it is. I dont think any of us really know. Anytime elon musk talks about it , hes most likely lying. He may be lying to himself because he doesnt even know. In terms of the stock, is it baked in or not . I think it is. It is baked in that they are going to get there before anybody cares about the fact that the numbers right now are outrageous regarding selling cars. Romaine always great to have you and get your insights on days like today. Leigh drogen, estimize founder and ceo. We will go to the other end of the spectrum and talk about bankruptcy with the father, the creator of the geforce, edward altman. That is coming up next. This is bloomberg. Welcome back. More. S. Has seen bankruptcies year to date than any full year since 2009. Filed byuptcies companies. Our next guest is edward altman. He is a director of debt Market Research at the nyu solomon center. I want to start off with this idea that we are not in a normal recession. The amount of fed, fiscal policy support differs in a much more fundamental way than in previous recessions. People continue to buy lower rated companies. With your model and your general knowledge over the decades of research you have done, is there a way to distinguish between distress and default . Absolutely. Thank you for having me. Thesey to investing in distressed debts is to avoid default. That is difficult to do with most techniques. We think you can do it with a looking at market indicators, volatility, etc. However, i should say there is going to be, in my calculation and just about everybodys, these megabankruptcies will break the alltime record even greater than 2009 and much inater than 1 billion liabilities. They are close to that and theably will be over 70 by end of the year. What is really interesting is that there are not many at the very small and leading size firms. And personal bankruptcies, which are quite a bit down from what we have known in the past. That is a real dichotomy in the market. To get back to your question about distinguishing between distress and default in, that is really the key defaulting, that is really the key. Funds do notequity care too much of the distressed defaults, because they are in a position then to be first in line to buy the equity very cheaply, or to provide more debt and end up taking over the companies they like. Some proposalse in congress right now to help make sure that those smaller and mediumsize firms get out of bankruptcy and reorganize successfully. About congress and the dichotomy, when individual dichotomies are down and why we are not seeing Small Companies filing so much. Is that because of the level of support we have seen . All that continue or come to sudden drop if we see the fiscal cliff come to an end . Absolutely. The level of support, there is mainly mediumsize level for direct loans, etc. It is also what the larger from level larger firm level, with the fed supporting loans. So investments are less concerned with the price of the bombs falling. Different types of support. But having said that, we are still going to have a record year in bankruptcies. Hopefully, they are not going to support the zombies that do not deserve to be supported. The key then is to support those firms which have a good shot at ,etting out of bankruptcy organization, which is a wonderful tool for restructuring a firms balancing a firms balancing. I dont think the feds activities are so terrific with respect to supporting companies by encouraging them to issue more debt. They are already overleveraged. They had at that level going into this covid19 situation. They had a debt level going into this covid19 situation. Professor, given some of the structural shifts we have been talking about, the feds involvement in the market, i am curious as to how you are rethinking your model. Different index to reduce ecbs shifts underway as permanent . Each within a different index. Do you see these shifts underway as permanent . The model, when i built it, was in an environment with very little debt outstanding, no highyield bonds, very little shadow banking. Now theres a ton of liquidity available, and the fed really has heightened that dramatically. Theres much more leverage. The return on assets are lower. The liquidity levels are lower. Overall, the scores quite a bit lower. The score is quite a bit lower. We calibrate the score and calculate an equivalent based on norms by different ratings, doublea, aaa, etc. That is how we adjust our scores from 50 years ago. That is a great question and great insight to say in a structural shift in the riskiness of companies. Look at how many triple ds are out there. Those need to be doublea and singlea companies. Are atmost corporates the tripleb level, because they can level up the company, get a higher return on equity as a result, and they are still investmentgrade. Being downgraded to junk. When you talk about the model, if you start to go down to smaller companies, you talk about shadow banking in the affected had in measuring default risk. In this particular recession, you have companies that do not need that 50 million or 100 Million Dollars threshold. There seems to be a lot of data out there that businesses are failing at a much faster rate. It is possible to track those businesses that possibly do not have the same amount of public equity . Another great question. It is very difficult. Most of those are private companies. We are in a land where privacy is supposedly a haven. Most private companies, you can get that on. There are lots of them out there. I 30 to 40 of all companies of the United States are owned by private equity firms. I didnt answer the other question asked before about the feds actions in the treasury actions and what is going to happen when they disappear, so to speak. Then, you are going to see a big increase in defaults at the small and mediumsize level. And at the personal level. The bankruptcy courts now are not that busy. Except for texas, new york, and delaware. Are saying,ourts where are all the bankruptcies . We are in a recession. The treasury has supported those companies with the payroll protection program, etc. One study goes away, and it will, think congress will definitely expand that probably fall, at the earliest, maybe later, but it is going to go away, then youre going to see those companies, a lot of them zombies, will fail. Professor. Ing, he have to come on every other week and how things continue to unravel. Edward altman. Edward altman. Lets get the first word news. California has reached an unwanted milestone. The state is reporting more than than000 number more 12,000 coronavirus infections. California has surpassed new york with the most confirmed covid19 infections, according to data compiled by Johns Hopkins university. Than 400,000 confirmed cases in california. Brazils president is still testing positive for the coronavirus. He first announced he had a confirmed case july 7. At least four members of his cabinet have also been diagnosed with coronavirus. The president repeatedly dismissed the disease as a little flu and often mingled in crowds without wearing a mask. Today,eported 648 deaths for a total of nearly 29,000. India has passed spain, ranking seventh globally and in deaths. Rate was lagging partially because of the countrys population being younger. Trump Administration Officials and Senate Republicans are discussing a shortterm extension of Unemployment Insurance. Lawmakers and the white house appear unlikely to reach stimulus deal before the benefits and at the end of july end at the end of july. Several republicans did not support the original 600 a week Unemployment Insurance provided under the cares act, saying it provides a disincentive to work. Global news, 24 hours a day, on air and on quicktake by bloomberg, powered by more than 2700 journalists and analysts in more than 120 countries. Im mark crumpton. This is bloomberg. It is time to chat with abigail doolittle. Abigail, take it away. Joining us this week is the market technician override his company, frank. It is great to have you as part of our segment. We have this massive bull rally. , a series0 right now of small moves nonetheless. Where to you think we might be at the end of the year . What about this big surge for silver . Thank you for having me. When you think about it, theres been a series of bullish patterns. Those patterns have breakouts. Right now, we are looking at relatively nearterm. Kenexa objectives we have in place are 3300 the next objectives we have in place are 3300 and 3500, and you can expand. Interesting stuff for sure. Of the other. Bring on think the uptrend might continue, as well. You are making the point silver is perhaps a little bit expended here. You think 26 or so over the long term. Lets turned to another hot topic. Turn to another hot topic. Prettyn having a difficult time. You have an interesting chart. Spikes is forfor how oversold the value has gone. Value has gotten. You go back to 2006, where the channel began. Growth began to outperform valley. Value. The lines have gotten severely depressed. You can see it there. Straight down. That is not the last two weeks. That arrow is pointing to a change that began in the Fourth Quarter of 2019. Think about whats happened since then. I think the lime seems to persist, as it appears now. Here is if tension growth starts to underperform and value starts to outperform, that. Ed to fix that is 46 of the nasdaq 100 falling off the cliff. How do you see that playing off . Namesyou had the biggest all back together, there is no the s p could avoid doing so at the same time. You have seen pockets, but nothing more than that. There is your chart right bxneof the b relative to the ndx. Back in march, it was not so pretty. Right. This has not been reflected in the vxn. Beverages will always play out. It looks similar to what happened in the weeks and months before the february crash. Volatility did show things were going to change. Now, it continues to hold in place slightly higher. Lagging in higher lows recently. That chart might actually suggest there could be some sort of a mega selloff. C. , great to have you with us today from new york. This is bloomberg. Welcome back. Lets check in on what will probably be the stock of the day tomorrow. Tesla. Tesla neededt out, to post four consecutive quarters of Profit Growth on a gap basis in order to get the threshold for inclusion at the s p 500. Have only done that three strict quarters. This quarter was the fourth straight quarter. That is a lot of the enthusiasm you see. It is really because of the potential for tesla to potentially move into the s p 500. We were talking about one of the plays for the future of transportation. Lets talk about what is going on in the world of deals. Businesses that have not gone public, be advised, bill ackman is out there with 4 billion in his back pocket willing to put toward in a position to what an acquisition. Toward an acquisition. I have with me tyler dixon, who coleads the Investment Banking businesses at citigroup. They were the lead left on the deal for this they have been working on. Say that the ipo model has broken, because we have had a lot of ipos. With that said, theres clearly thing different the market once of these listings. How does the model need to change . Spac as an alternative to ipo. We continue to see vibrant ipo markets for the right situations. We see other situations that are fitted for spac. What are those situations . What is the push for change people want . I think theres a lot of interest in the Equity Capital markets. The opportunity for investors to buy ipos order by spacs is a direct result of them trying to em outside of this market. We are giving them more alternatives today. Are the facts taking up a lot more of your feed base now than in the past . I think they have gotten mainstream in terms of their activity levels. We have been prying pioneers in the spac market for decades. The quality of the structure is more effective. And lead to larger spacs more of them. They are a natural part of the Capital Raising landscape and most in most today than ever before. Lets talk about traditional deals here for a second. I doing it. Spacs but when will we see returns to the market for acquisition . Uncertainty is a challenging environment for mna. We saw the uncertainty about the economic consequences. We are starting to see mna discussions. Some of that is coming from defensive mna, to have the opportunity to growth and get to the other side of the economic venture. We are seeing winners in this market looking to expand their lead. They are thinking about how they can buy in this market. Conversations are on the rise right now. The conversation that seemed isbe dimming a bit are the debt piling conversation. Rates are going to be low for quite some time. Surprising from our perspective to see the record boom and debt issue once that came in the Second Quarter as a result of the covid pandemic. Been seeing record levels. A lot of the companies we saw might be issuing debt in that calendar accelerated. Think it is important to note that we have seen Many Companies access the market not only one timesbut two or three since the pandemic hit. We are not concerned about the Capital Market activity levels. We thought the natural spike would be followed by a natural slow down. A number of companies are excited to the risk their Balance Sheets. I know this is something you have been thinking about a lot. How are you thinking about recruitment in the coming years . Wheree you thinking about you look for new candidates, especially younger ones . That is a great question. We are one of the most evers companies in the world, in 170 companies. We are committed to diversity and inclusion is a comes to the talent base we develop. We are changing our approach. We love recruiting great talent from schools you mentioned. But we are engaging with Diverse Talent much earlier in the lifecycle. We are talking young talent of diverse backgrounds while they are still in school. This is a top priority. Were taking advantage of using , andreshman discovery day Leadership Programs that bring people of diverse backgrounds. We hope to catch up with you again soon. This is bloomberg. Welcome to bloomberg businessweek. Im emily chang in san francisco. Tesla shares spiking after hours after the carmakers says it is on track to deliver 500,000 cars this year. Microsoft shares declining after the bell. On the back of its earnings results, sales of its azure cloud prod debt product disappointing. Overall, stocks closing slightly up