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Inflation: ‘The Fed is going to keep its foot on the gas,’ TD Cowen president says

Cowen CEO Jeff Solomon joins Yahoo Finance Live’s Brian Sozzi at the Milken Institute’s 26th annual Global Conference in Beverly Hills, CA, to discuss TD Bank’s acquisition of Cowen Inc., banking turmoil, the expectations for a recession, and the outlook for TD Cowen.

Video transcript

[MUSIC PLAYING]

BRAD SMITH: In August last year, Toronto-based TD Bank snapped up boutique investment house Cowen for $1.3 billion. TD's ambitions to boost its operations in the US made Cowen's rapid growth and leading prime brokerage and research units an attractive proposition. The deal creating TD-Cowen received regulatory approval earlier this year and comes with obvious upside for both.

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TD gets a firm foothold in the US equities market, while Cowen's clients see the benefits of a big balance sheet and strong capital markets business. Long known as a top 10 research house, especially on US equities, the acquisition gives Cowen the scale to reach a bigger audience. No stranger to stock research himself, Yahoo Finance's Brian Sozzi spoke with TD-Cowen President Jeff Solomon at the Milken Conference. But he started with an issue still top of mind-- banking turmoil. Take a listen.

JEFF SOLOMON: I think this is pretty expected. You know, and the markets can adjust to things that they kind of expect to come. Like the first time when you saw SVB and Signature, there was a disruption. You know, First Republic has been talked about for the last month. And I think people were hopeful that they could figure out a way to stay independent. But obviously, they weren't. The market fully priced in this idea.

And I do think that what Jamie said this morning is true. I think this phase of any crisis is over. I don't think there's a whole bunch of others. We've been through a lot of bank earnings. So, you know, it's-- let's put this behind us and continue moving forward. And that's what the market is saying too.

BRIAN SOZZI: Do you see other phases of this? I've heard that from other folks that I've been talking to. Some have said, Brian, this is the first inning. Which makes me concerned, well, what does the-- what does the second inning going to look like?

JEFF SOLOMON: Well, I think any time you've seen a massive change in the way the rate structure works, right? So we've been-- since the global financial crisis, we've basically been in a zero interest rate environment, right? And so the entirety of the equity market underpinning is focused on this idea that money has essentially been free. And it's not going to be free for the next decade or so. It's just not going to happen.

And so if you look at what's happening in inflation, if we've had a parallel yield curve shift or we have right now an inverted yield curve, it's saying that we're looking at some sort of a recession. How hard, how long, to be determined. I think people are looking at commercial real estate as the next shoe to drop. I'm not sure I'm smart enough to know if that's the case, but it's on my radar screen. And so I think when people say this phase is over, I'd say this phase of adjustment to the new rate structure. And then we'll see if there's fallout from other areas.

BRIAN SOZZI: Are clients preparing for a recession? When you talk to them, the moves they're making in their portfolios, what does that look like?

JEFF SOLOMON: Yeah, I mean, I think you are. I mean, again, the inverted yield curve is pretty predictive. As I've been asking people, do you think that longer term we're going to be in a situation where short-term rates have to come down or long-term rates are going to shift higher? And everybody-- pretty much the consensus is that long-term rates are going to be moving-- or short-term rates will move down.

And so again, the Fed is going to keep its foot on the gas in terms of rate hikes until it's sure that inflation is gone. And then once they are convinced that that's-- you know, they've got that underhand, then they'll look at ways to be more accommodative.

BRIAN SOZZI: I know your firm has the pulse on all things deals amongst stock research. We'll get to in a second. Are you seeing any line of sight to improve deal flows this year?

JEFF SOLOMON: So we've been saying all year that the M&A market is really going to be a second half of the year market. And this is even before we understood what was happening in the banking sector. If anything, that kind of put a pause on things. And it's not uncommon here. You know, interest rates are higher. So the cost of doing acquisitions are higher. Multiples will come in on private companies. Sellers have to readjust to what the new reality looks like and what people are paying for cash flows. You know, if you-- I always go back to discounted cash flow analysis.

BRIAN SOZZI: Me too.

JEFF SOLOMON: Right?

BRIAN SOZZI: As a former stock analyst, yes.

JEFF SOLOMON: Yeah, and so--

BRIAN SOZZI: [INAUDIBLE].

JEFF SOLOMON: Right. So if your cost of borrowing is higher, your multiples are going to be lower. OK, that needs to be reset. And I think that just takes some time. But we've said for a while that it would be a second half year, and that's-- we're sticking by that.

BRIAN SOZZI: What sectors do you see consolidation happening in?

JEFF SOLOMON: Well, I certainly think we've seen the tech sector, right? The tech sector is-- a lot of people who thought they were going to have endless amounts of financing are now looking at, OK, what can I do strategically? And so we expect to see some consolidation there. I still think there's consolidation to go in the biotech sector. Those are two big areas for us at Cowen Legacy, TD-Cowen. And so I think that's-- you can pretty much rest assured those things will happen.

BRIAN SOZZI: And amidst everything we're seeing in the banking sector, you are now part of TD.

JEFF SOLOMON: Yes.

BRIAN SOZZI: Where are you at in this integration? When did the deal close? And what are you looking to achieve?

JEFF SOLOMON: Yeah, so we're still relatively new. It's-- I think today is our second month. And it's been great, I will just say. You know, when you do these kinds of acquisitions, you think you know. And then once the transaction closes, you see if it's actually what you thought is the case. And it is. Culturally, a great alignment. A lot of work to be done understanding how to operate our business model inside a globally systemic important bank, but relatively straightforward stuff for us to be doing.

And then when you talk about the opportunity set, really I think where I'm spending a lot of my time is really looking at-- on the combined platform. Where can we go? What are the things we can do? We have a full suite of products and opportunities in front of us. Let's pick and choose the ones where there's low-hanging fruit where we can go out and take meaningful share. That's fun stuff for me and for a lot of us. And so that's kind of where we are. And I think you'll hear more from us as we head into what our fiscal '24 is, which is, end of October, beginning of November.

BRIAN SOZZI: Where do you think you could take market share?

JEFF SOLOMON: I mean, it's so early for me to be making those predictions. It's good of you to ask. And I'm probably not going to disclose my strategy or our strategy here.

BRIAN SOZZI: I have to ask it.

JEFF SOLOMON: But I think when you see us over the next six months to 12 months leaning into certain markets, you're going to be like, oh, that's a really logical place. So I'll leave that TBD, and I'll let you know after we've made some inroads.

BRIAN SOZZI: All right, so I can't punch anything into my old free cash flow model. OK. Stock research, I have-- I have long known Cowen for stock research. What is-- this consolidation we're seeing on Wall Street, what does that mean to the business of doing stock research?

JEFF SOLOMON: Well, so for us, this is part of the primary reasons why TD bought Cowen is our amazing research. And TD did not have a US research-- equity research presence. So we're able to integrate their Canadian presence with our US presence and really, I would say, do the things that we do to be-- to drive alpha in the equity portfolios. Certainly, you can see us in the macro research piece, the policy piece.

When you look at what TD Securities historically has been in the dealer market, it's been fixed income commodities and currencies. And so we've never really been able to have a view on those that are what I would call the house view. And so being able to integrate those into our research. I think ESG, big, big strategy at TD.

Also a big strategy for Cowen, all things ESG as we figure out what's real, what's not real, who's actually doing things that will move the needle in terms of decarbonization, who's not, who are the winners and losers. So much for us to cover in that space. And I just think when you look at the combined platform, the ability to broadcast what we do over a much broader client base, that's going to be the great story there.

BRIAN SOZZI: Are you still seeing the appetite for ESG research, ESG knowledge, let's say, three years into all this interest really exploding into the scene?

JEFF SOLOMON: I do. Like, it's not going away. You know, like most markets, right, people can get ahead of themselves and overpromise and underdeliver. People will make bold statements, just like we saw with the internet, right? And all that ended up coming true when it happened, but it's probably longer dated than what people thought about. I think ESG is true also.

Like, we're going to be-- there's going to be a big global push to be carbon neutral by 2050. The day in and day out reporting on that, the role of regulators in that, and how it all gets reported, TBD. But it's hard to argue that the world isn't heading towards a more carbon neutral state of being. And so we want to be there at the forefront of that to help clients figure out what's real, what's not real, who's actually doing things versus who's just saying they're doing things. That's a vital part of our research footprint. And we also think that how people engage around ESG is predictive in terms of ultimately how their business models play out.

BRAD SMITH: And that was TD-Cowen President Jeff Solomon, alongside our executive editor, Brian Sozzi.