Latest / Bloomberg Intelligence / Banks At Cycle Top, Will Be Down 30-50% In 12-18 Months: Peabody

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Banks At Cycle Top, Will Be Down 30-50% In 12-18 Months: Peabody · Bloomberg Intelligence

• 0:05
  Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm pim Fox.
• 0:08
  Speaker 1: Along with my co host Lisa Abramowitz. Each day we
• 0:11
  Speaker 1: bring you the most important, noteworthy, and useful interviews for
• 0:15
  Speaker 1: you and your money, whether you're at the grocery store
• 0:17
  Speaker 1: or the trading floor. Find the Bloomberg p m L
• 0:20
  Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. The
• 0:33
  Speaker 1: shares a Bank of America are lower by three tenths
• 0:36
  Speaker 1: of a percent right now after reporting quarterly results. Here
• 0:40
  Speaker 1: to tell us more about those results and the banking
• 0:42
  Speaker 1: industry is Charles Peabody. He is the president of Portala's Partners.
• 0:46
  Speaker 1: Charles always a pleasure give us the details when it
• 0:49
  Speaker 1: comes to Bank of America and maybe just provide the
• 0:52
  Speaker 1: context for how the bank is performing. Sure, well it was.
• 0:58
  Speaker 1: It was a solid quarter um, but like other banks,
• 1:01
  Speaker 1: the reported earnings were probably higher than what we would
• 1:04
  Speaker 1: call core earnings as they included a number of unusual items.
• 1:08
  Speaker 1: Two that can be called out was about a two
• 1:10
  Speaker 1: cents share benefit from text benefits and a one cent
• 1:15
  Speaker 1: um you know, goose from reserve release. So that's what
• 1:19
  Speaker 1: you're generally seeing is that the core rains are coming
• 1:22
  Speaker 1: in below the report earnings, but I would say the
• 1:24
  Speaker 1: corens are in line with with expectations. This are these
• 1:28
  Speaker 1: the best core earnings were likely to see in the cycle.
• 1:32
  Speaker 1: They are, and I think that's why the stocks are
• 1:34
  Speaker 1: reacting UM in a negative fashion to these. What are
• 1:38
  Speaker 1: on the surface strong reported numbers is we're seeing what
• 1:43
  Speaker 1: I would call low quality of earnings UM. The earnings
• 1:46
  Speaker 1: strength is coming from large trading gains, which is a
• 1:50
  Speaker 1: low pe revenue source, and they're coming from reserve releases,
• 1:54
  Speaker 1: which you know investors aren't going to pay up for
• 1:56
  Speaker 1: at the end of an economic cycle, and some unusual
• 2:00
  Speaker 1: accounting gains. So in that context, if you have a
• 2:04
  Speaker 1: situation where interest rates are moving higher because of either
• 2:08
  Speaker 1: a strengthening US economy or increases from the Federal reserve,
• 2:14
  Speaker 1: that should help the net interest margin of the bank.
• 2:17
  Speaker 1: No matter how the bank is really run, it will
• 2:21
  Speaker 1: and it has um. But what what we're looking for
• 2:24
  Speaker 1: at this point of the economic cycle is what i'd
• 2:26
  Speaker 1: call the second derivative, the end of cycle dynamics. So
• 2:30
  Speaker 1: take your comment about higher rates, Yes, it is going
• 2:33
  Speaker 1: to help net interest margins in net interest income, but
• 2:36
  Speaker 1: we're past what I would call peak optionality in terms
• 2:40
  Speaker 1: of the benefits of higher rates. So, for example, um
• 2:44
  Speaker 1: back in two thousand and sixteen, Bank America would have
• 2:48
  Speaker 1: seen about a seven billion dollar boost to their net
• 2:51
  Speaker 1: interest income from a hundred basis point rise in interest rates. Today,
• 2:55
  Speaker 1: that's about three billion JP Morgan and they're called Marion
• 2:59
  Speaker 1: Lake the Sea Fox said that they're one point seven
• 3:02
  Speaker 1: billion last quarter, would be material lower from a right
• 3:06
  Speaker 1: rate hike, and that's down from three billion in two
• 3:09
  Speaker 1: thousand and sixteen, So that the optionality that the margin
• 3:13
  Speaker 1: is becoming less and less favorable. Add to that, issues
• 3:18
  Speaker 1: of credit card charge offs are they rising? They are,
• 3:22
  Speaker 1: and you know they're rising. You know what the analysts
• 3:26
  Speaker 1: are calling in a benign state, but they are rising.
• 3:29
  Speaker 1: And that's the other um end of cyclodynamic is usually
• 3:33
  Speaker 1: you see cards lead other categories in terms of deterioration,
• 3:38
  Speaker 1: and we are definitely seeing higher losses. Although it's been
• 3:42
  Speaker 1: coined in the in the phrase of you know normalization, Yes,
• 3:46
  Speaker 1: well that's that's it's a nice word. That's why that's
• 3:49
  Speaker 1: why they get to use it. Lending against inflated asset values.
• 3:54
  Speaker 1: Do you consider that to be a risk? I do,
• 3:57
  Speaker 1: and that that's more on the on the wealth management
• 4:02
  Speaker 1: side and on the corporate side. So in wealth management,
• 4:05
  Speaker 1: one of the drivers of revenues is what we call
• 4:08
  Speaker 1: securities based loans and jumbo mortgages and um, you know,
• 4:13
  Speaker 1: I think we're going to see much more volatility in
• 4:16
  Speaker 1: asset prices, where certain assets values could deteriorate literally overnight.
• 4:21
  Speaker 1: And we saw that with the stein Hoffman in the
• 4:24
  Speaker 1: fourth quarter. We saw that more recently with rousel Um,
• 4:28
  Speaker 1: the aluminum company in Russia, and how either geopolitical events
• 4:31
  Speaker 1: or economic events can cause the value of those assets
• 4:34
  Speaker 1: to change very rapidly. And yet banks have made significant
• 4:39
  Speaker 1: loans against these inflated asset values. And as rates move higher,
• 4:42
  Speaker 1: I think it's gonna be tougher to sustain these asset values.
• 4:46
  Speaker 1: Is it tougher for even experts to understand what's going
• 4:49
  Speaker 1: on at large banks because there are so many unusual
• 4:52
  Speaker 1: items that are reported on a quarterly basis. Yeah, this
• 4:57
  Speaker 1: quarter was a very messy quarter because you new accounting
• 5:02
  Speaker 1: adoptions that change to the values of equities. For example,
• 5:06
  Speaker 1: you had tax benefits, you had lone loss reserve releases, um,
• 5:10
  Speaker 1: you had asset sale gains there there it was a
• 5:13
  Speaker 1: messy quarter, and that that has made it difficult, you know,
• 5:18
  Speaker 1: short term to to understand what is truly core and
• 5:21
  Speaker 1: underlying trends. Okay, so it seems to me that you're
• 5:24
  Speaker 1: not just talking about the business at Bank of America
• 5:28
  Speaker 1: but at all major banks. Is that correct? That's correct,
• 5:32
  Speaker 1: But but there are some themes. For example, Bank America's
• 5:35
  Speaker 1: revenues were up, you know, two and a half percent
• 5:37
  Speaker 1: year over a year, So we're seeing low single digit
• 5:41
  Speaker 1: revenue growth pretty much through all these big banks except
• 5:44
  Speaker 1: for JP Morgan, which had much much stronger revenue growth.
• 5:47
  Speaker 1: You're seeing reserve releases, you know, because of improvements in
• 5:51
  Speaker 1: the energy portfolio and improvements in residential real estate. So
• 5:54
  Speaker 1: there are some common themes. Expensive control remains very tight.
• 5:58
  Speaker 1: They're doing a great job on expenses. And then see
• 6:01
  Speaker 1: income remains weak outside of trading. And that's important because
• 6:05
  Speaker 1: at the end of the cycle, you see a couple
• 6:08
  Speaker 1: of things that that says we're at the end of
• 6:11
  Speaker 1: the cycle. On on the trading front, you see a
• 6:13
  Speaker 1: rotation from thick to equity as the driver of kapital
• 6:17
  Speaker 1: markets revenues, and you saw that in this quarter equity
• 6:19
  Speaker 1: was very strong. Thick was a little weaker, although solid,
• 6:23
  Speaker 1: and then on the on the underwriting side, um, you see,
• 6:27
  Speaker 1: you know, a shift as well. So we're seeing all
• 6:30
  Speaker 1: the typical signs of end of cycle dynamics. So just quickly, Charles,
• 6:37
  Speaker 1: all things being equal, if you aren't an investor in banks,
• 6:40
  Speaker 1: should you just wait for a better time? I think so.
• 6:43
  Speaker 1: I think we're in the topping process in the stocks
• 6:46
  Speaker 1: in the first half of this year, and we'll enter
• 6:47
  Speaker 1: a bearer market in these stocks. You know, a year
• 6:49
  Speaker 1: and a half from now, two years from now, we'll
• 6:51
  Speaker 1: be down from their peaks. Thanks very much, Charles Peabody,
• 6:55
  Speaker 1: always a pleasure, President of Portalis Partners, talking about the
• 6:59
  Speaker 1: US bank industry. I'm pim Fox. My co host Lisa
• 7:16
  Speaker 1: Abramowitz is off today. Joining me now is Brian Egger.
• 7:20
  Speaker 1: He is our senior Gaming and Lodging analyst for Bloomberg Intelligence.
• 7:25
  Speaker 1: You can follow him on Twitter at breaking Call. And
• 7:29
  Speaker 1: El Dorado Resorts and the real estate company Gaming and
• 7:33
  Speaker 1: Leisure Properties. They are teaming up to buy carl Icons
• 7:36
  Speaker 1: Tropicana entertainment price tag one point eight five billion dollars. Brian,
• 7:43
  Speaker 1: why is carl Icon selling Tropicana Entertainment if it's such
• 7:48
  Speaker 1: a good business, remember that Carlican has actually been selling
• 7:52
  Speaker 1: his gaming interests over time. Uh. He basically had owned
• 7:56
  Speaker 1: Trump Entertainment Resorts and ceased the operations of the Trump
• 7:59
  Speaker 1: Tasha Hall back in sixteen, sold that property in seventeen.
• 8:04
  Speaker 1: It's not reopening. So basically what this does is carl
• 8:08
  Speaker 1: Aicon gets a billion eight five in proceeds and ends
• 8:12
  Speaker 1: up effectively divesting his casino interests, which turns them over
• 8:16
  Speaker 1: at Eldorado Resorts, which has the advantage of be able
• 8:18
  Speaker 1: to get all these cost savings and synergies from doing
• 8:21
  Speaker 1: this deal. Why are they able to cut costs when
• 8:24
  Speaker 1: carl Icon is not, Well, it's basically because El Dorado
• 8:28
  Speaker 1: has an existing base of operations, partly through the acquisition
• 8:32
  Speaker 1: of Alfpre Casinos last year. So with a larger base
• 8:36
  Speaker 1: of operations, you can basically reduce combined corporate overhead, get
• 8:40
  Speaker 1: eventual marketing synergies. And what they hope to do with
• 8:43
  Speaker 1: this deal is reduced the costs at the Tropicana Entertainment
• 8:47
  Speaker 1: entity by about forty million dollars and basically take their
• 8:50
  Speaker 1: purchase multiple down to like the five to five and
• 8:52
  Speaker 1: a half times Ebadar range, which is quite attractive. So
• 8:56
  Speaker 1: it does make sense for El Dorado and gives them
• 8:59
  Speaker 1: some cost savings opportunities Gaming and Leisure properties. This is
• 9:04
  Speaker 1: the partner with El Dorado Resorts that is making this
• 9:08
  Speaker 1: deal there, that's just a real estate investment trust. They
• 9:13
  Speaker 1: have been on the acquisition trail as well. They bought
• 9:16
  Speaker 1: Pinnacle Entertainment back in sixteen, right, that was nearly a
• 9:19
  Speaker 1: two billion dollar deal, right, So basically they own the
• 9:22
  Speaker 1: real state of both Pen National Gaming and most of
• 9:24
  Speaker 1: Pinnical Entertainment properties. Pinnacle itself as being acquired by Pen
• 9:28
  Speaker 1: National Gaming in terms of the operations in the second
• 9:31
  Speaker 1: half of this year. But as you mentioned Gaming Leisure
• 9:34
  Speaker 1: properties as a reets, uh, they have the real estate
• 9:37
  Speaker 1: assets here. So basically the way this deal works is
• 9:40
  Speaker 1: that Eldorado is paying about sixty million dollars for the
• 9:44
  Speaker 1: operations and that Gaming and Leisure is paying about a
• 9:48
  Speaker 1: billion two for the underlying real estate. So you're really
• 9:51
  Speaker 1: having kind of a separating the real state from the
• 9:54
  Speaker 1: operations in this combined transaction. All right, So where does
• 9:57
  Speaker 1: all this money come from? And is it money? In
• 10:00
  Speaker 1: other words, why would you want to be buying if
• 10:02
  Speaker 1: someone is supposedly as smart as carl Icon is selling right.
• 10:06
  Speaker 1: So there's no doubt that Atlantic City has been a
• 10:08
  Speaker 1: challenging market. UH. The two casinos opening up the summer,
• 10:11
  Speaker 1: the Ocean resort UH and the hard rock properties I
• 10:14
  Speaker 1: think could galvanized tourism. But they also come at a
• 10:17
  Speaker 1: time I adding capacity to an already crowded Northeast gaming market.
• 10:21
  Speaker 1: So I think the way El Dorado thinks about this
• 10:23
  Speaker 1: in Atlantic City, which again is only of the cash
• 10:27
  Speaker 1: flow of Tropicana Entertainment, is they probably increased the but
• 10:30
  Speaker 1: dire fermenting some cost savings. They don't deny the fact
• 10:33
  Speaker 1: that that particular market is challenging. Now this could change
• 10:36
  Speaker 1: if UH the Supreme Court authorizes understructured sports betting across
• 10:41
  Speaker 1: the country, in New Jersey and elsewhere, that could create
• 10:43
  Speaker 1: a traffic driver that heretofore has not existed in Atlantic City.
• 10:47
  Speaker 1: Based on your knowledge of the industry, do you believe
• 10:50
  Speaker 1: that that is what many investors are betting on, this
• 10:54
  Speaker 1: unrestricted sports betting. That's certainly a part of what the
• 10:58
  Speaker 1: m and a interest in both Pennsylvania UH and New
• 11:01
  Speaker 1: Jersey has been about been about. Now if you look
• 11:03
  Speaker 1: Atlantic City, they had about twelve casinos a peak there,
• 11:05
  Speaker 1: down to seven this summer will be up to nine
• 11:08
  Speaker 1: again with two new openings. So we've shaken that market
• 11:11
  Speaker 1: out already. We've cut it almost in half, and it's
• 11:14
  Speaker 1: much healthier today, albeit on a much smaller scale. Two
• 11:17
  Speaker 1: new properties opening the summer depends on whether or not
• 11:19
  Speaker 1: they'll drive enough traffic to the city through entertainment to
• 11:23
  Speaker 1: galvanized tourism and increase overall results. But there's no question
• 11:27
  Speaker 1: the Northeast mid Atlantic gave market has become quite crowded
• 11:30
  Speaker 1: with all the expansion throughout the mid Atlantic and Northeast.
• 11:34
  Speaker 1: On a scale of I'll do this on a scale
• 11:35
  Speaker 1: of one to ten. If the if the court does
• 11:39
  Speaker 1: not allow sports betting, how challenged is this market in
• 11:44
  Speaker 1: the Northeast on a scale of one to tend and
• 11:47
  Speaker 1: being it's really challenge. It's a challenging market compared to
• 11:51
  Speaker 1: any prior time period. You've now got twelve casinos with
• 11:54
  Speaker 1: ten more to come in Pennsylvania. Uh, You've got six
• 11:57
  Speaker 1: casinos in Maryland. You've got more casinos in the New
• 12:00
  Speaker 1: York States. So it's a crowded market. I think sports
• 12:03
  Speaker 1: betting would certainly give some incremental tourism to places like
• 12:07
  Speaker 1: Pennsylvania Atlantic City. But Atlantic City is now just one
• 12:10
  Speaker 1: of several destinations in the Mid Atlantic, which is why
• 12:14
  Speaker 1: about half the casinos they have already shut down. Now
• 12:16
  Speaker 1: we we we'll see what happens next. But I do
• 12:19
  Speaker 1: think the Supreme Court is likely to allow for sports betting.
• 12:22
  Speaker 1: I do think that's beneficial to Atlantic City. But I
• 12:24
  Speaker 1: certainly think Eldorado Resorts has its eyes open in terms
• 12:28
  Speaker 1: of the historical challenges there. All right, I can't let
• 12:31
  Speaker 1: you go with that giving giving us the lowdown on
• 12:33
  Speaker 1: Wind Resorts and what's happening with the Steve Win Empire.
• 12:37
  Speaker 1: So Win Resorts, which by the way, did pre announce
• 12:39
  Speaker 1: at least January febru results they're having a good quarter,
• 12:42
  Speaker 1: doesn't detract from the fact that company has a number
• 12:45
  Speaker 1: of challenges. A lot of the recent drama has centered
• 12:48
  Speaker 1: around the fate of their property in Boston Win Boston Harbor,
• 12:51
  Speaker 1: which could be renamed it could be sold to another operator.
• 12:55
  Speaker 1: There were speculation last week that either MGM Resorts or
• 12:58
  Speaker 1: another company might try to take over that license. Uh
• 13:01
  Speaker 1: and so, because of the ongoing questions. Even with Steve
• 13:03
  Speaker 1: when having sold his stock, resigned the CEO UH and
• 13:07
  Speaker 1: Nonger being either an officer or board member, they're still
• 13:10
  Speaker 1: ongoing scrutiny of the suitability of the other officers and
• 13:14
  Speaker 1: directors as it relates to that Massachusetts gaming license. I
• 13:17
  Speaker 1: have a feeling you're gonna be very busy and you're
• 13:19
  Speaker 1: gonna keep us at the date on all of this.
• 13:21
  Speaker 1: Thank you very much. Brian Edgar are expert, really whenever
• 13:25
  Speaker 1: it comes to gaming and lodging. Senior Gaming and Lodging
• 13:28
  Speaker 1: analyst for Bloomberg Intelligence. Remember to follow him on Twitter
• 13:32
  Speaker 1: at breaking Call at Agronomics. Now believe it or not,
• 13:37
  Speaker 1: that's breaking news. Yes, anomics. We thought that sounded better,
• 13:42
  Speaker 1: so and it does. And I'm going to follow you
• 13:44
  Speaker 1: right now as a result of that. And is the
• 14:01
  Speaker 1: stock market overvalued or undervalued? Let's find out. Let's ask
• 14:05
  Speaker 1: Jack Ablin. He is the founding partner in chief investment
• 14:08
  Speaker 1: officer for Crescent Wealth Advisers based in Chicago, and you
• 14:12
  Speaker 1: can follow Jack on Twitter at Jack Ablin. That's a
• 14:16
  Speaker 1: B L I n R I Jack Ablin. Overvalued or undervalued?
• 14:21
  Speaker 1: Make the case actually near term it's it's undervalued. If
• 14:26
  Speaker 1: you look at one of the route force measures that
• 14:30
  Speaker 1: I like to use, it's just a total return of
• 14:33
  Speaker 1: the stock market against the cumulative growth of dividends and
• 14:38
  Speaker 1: earnings UM. It shows that the market is probably about
• 14:43
  Speaker 1: five to seven percent undervalued. If you assume that the
• 14:48
  Speaker 1: earnings were expecting for the next four quarters and the
• 14:51
  Speaker 1: dividends were expecting for the next four quarters will will
• 14:54
  Speaker 1: play out UM. So near term, I think that's a
• 14:57
  Speaker 1: that's a good thing because we did start the year
• 15:00
  Speaker 1: about eighteen percent overvalued, and I think between the market
• 15:03
  Speaker 1: coming down and earnings expectations coming up UM, things have
• 15:08
  Speaker 1: kind of settled out in your term. Long term that's
• 15:10
  Speaker 1: a different matter. You know, if you look at the
• 15:13
  Speaker 1: Shiller's Index relative earnings over the last ten years, or
• 15:18
  Speaker 1: if you look at a price to sales ratio UM,
• 15:21
  Speaker 1: that would suggest negative returns for the next annually for
• 15:26
  Speaker 1: the next three years. What is competing for investors money?
• 15:31
  Speaker 1: Is it bonds? Because I'm looking at the twelvemonth dividend
• 15:35
  Speaker 1: yield on the SMP five, we're just under two percent.
• 15:39
  Speaker 1: Let's one point nine four percent, but let's call it
• 15:41
  Speaker 1: just under two percent. Heck, you can do that in
• 15:44
  Speaker 1: a one year treasury, Yeah, that's it. UM. You can
• 15:49
  Speaker 1: in fact that you know, two years starting to get
• 15:51
  Speaker 1: pretty compelling as a quote unquote money market alternative UM.
• 15:57
  Speaker 1: But UM interest rates longer terms still seem to be
• 16:01
  Speaker 1: below where they ought to be long term. So if
• 16:04
  Speaker 1: you look at the tenure treasury at two point eight
• 16:06
  Speaker 1: and change, historically, that ten year tends to track nominal
• 16:10
  Speaker 1: GDP UH. And last time we calculated nominal GDP at
• 16:14
  Speaker 1: the end of the last year, UH, that number was
• 16:17
  Speaker 1: about four point one. So clearly we have another hundred
• 16:21
  Speaker 1: basis points or so to move to the upside um
• 16:23
  Speaker 1: to get to what it will call kind of long
• 16:26
  Speaker 1: term fair value UM. And I think that can unfortunately
• 16:29
  Speaker 1: constrains the Fed UH quite honestly, because what we find
• 16:33
  Speaker 1: is that that tenure treasury isn't really tethered to FED policy.
• 16:37
  Speaker 1: It's probably more closely linked to what's going on in
• 16:39
  Speaker 1: Europe and Japan, and they're still pedal to the metal.
• 16:43
  Speaker 1: Well but chack, let's let me, let's just make the case. Right.
• 16:45
  Speaker 1: Someone comes along and says, you know, I understand what
• 16:47
  Speaker 1: you're saying. This all makes perfect sense. But you know,
• 16:50
  Speaker 1: if I can get more than two in a treasury
• 16:53
  Speaker 1: and not pay state and local taxes on it. Uh.
• 16:57
  Speaker 1: Then and that's money good. Then you tell of me, well,
• 17:00
  Speaker 1: you know, maybe I'm going to get a pop when
• 17:02
  Speaker 1: it comes to the stock market. What kind of returns
• 17:05
  Speaker 1: are you looking for in stocks in order to make
• 17:08
  Speaker 1: that more appealing? Yeah? I think that it's a good
• 17:12
  Speaker 1: question because near term, you know, we can maybe get
• 17:15
  Speaker 1: single digit uh gains um if you and and that's
• 17:21
  Speaker 1: cumulative um for the next twelve months. So nothing really
• 17:25
  Speaker 1: exciting here at home. Um. I don't think necessarily the
• 17:29
  Speaker 1: bottom is going to fall out unless, of course, all
• 17:31
  Speaker 1: of the data supporting the stock market falls by the wayside.
• 17:35
  Speaker 1: But the economy appears to be pretty strong, So yeah,
• 17:38
  Speaker 1: I don't think that the stock market is certainly a
• 17:41
  Speaker 1: table pounding near term by um. But um, you know,
• 17:46
  Speaker 1: I think bonds still have to get a little more interesting,
• 17:49
  Speaker 1: uh yield wise relative to longer term benchmarks to to
• 17:55
  Speaker 1: you know, uh, really prompt us to shift out of
• 17:58
  Speaker 1: equities and into more of a bond focus. All right,
• 18:00
  Speaker 1: So there specific industry groups that you would be looking
• 18:03
  Speaker 1: to for greater capital appreciation. Yeah, I think that in
• 18:10
  Speaker 1: this environment where we're taking what is a you know,
• 18:13
  Speaker 1: call it a two percent donkey and beating it into
• 18:16
  Speaker 1: a three percent or four percent racehorse, depending on how
• 18:20
  Speaker 1: much we can accomplish with tax the tax reform, plus
• 18:25
  Speaker 1: some infrastructure, maybe something else. Then I think that the
• 18:30
  Speaker 1: they value oriented sectors, the industrial, financials, basic materials, Darius,
• 18:37
  Speaker 1: even energy UM could take more of a leadership role
• 18:41
  Speaker 1: versus tech UM. I think the first quarter, what we're
• 18:45
  Speaker 1: trying to do is adjust to the new tax regime
• 18:48
  Speaker 1: UM and UM. You know, there are some bigger beneficiaries.
• 18:52
  Speaker 1: Their financials certainly a huge beneficiary UM, but also technology
• 18:58
  Speaker 1: probably benefiting from both says and maybe the increased investment.
• 19:02
  Speaker 1: But I think once we kind of play out the
• 19:05
  Speaker 1: first quarter results and look beyond here to the rest
• 19:09
  Speaker 1: of the year, then I think UM investors are gonna
• 19:12
  Speaker 1: want to look at the the economic environment, and I
• 19:17
  Speaker 1: think the value oriented sectors will tend to lead the mark. Okay,
• 19:20
  Speaker 1: but all right, so and and Jack, you know I
• 19:22
  Speaker 1: always challenge you on this. Let's say someone comes to
• 19:24
  Speaker 1: you and says, boy, you know I have Netflix bought
• 19:27
  Speaker 1: Netflix because my family spends all their time glued to Netflix.
• 19:31
  Speaker 1: I'm paying the monthly subscription, the stock is up sixty
• 19:36
  Speaker 1: year to date. Does Jack Ablin say take a little
• 19:39
  Speaker 1: off the table and put some into energy industrials and financials?
• 19:44
  Speaker 1: What do you say, stay with what's working. If this
• 19:47
  Speaker 1: is the kind of market that we're in and we're
• 19:49
  Speaker 1: getting sixty year to date returns on a stock that
• 19:53
  Speaker 1: is burning through cash, it's that kind of market. Yeah.
• 19:58
  Speaker 1: And the funny thing about net Flex and I will say,
• 20:00
  Speaker 1: you know, let's let's just you know, if we didn't
• 20:03
  Speaker 1: have to take taxes in the consideration, which is I
• 20:06
  Speaker 1: think keeping a lot of investors probably glued into some
• 20:09
  Speaker 1: of the names that have been working over the last
• 20:12
  Speaker 1: couple of years. But if taxes weren't a consideration, I
• 20:15
  Speaker 1: would say, yeah, let's take some of that off the
• 20:17
  Speaker 1: table and let's diversified into into areas of the market
• 20:21
  Speaker 1: that would benefit if we do get increased economic growth
• 20:25
  Speaker 1: here at home. Remember the reason why, in many respects,
• 20:28
  Speaker 1: the reason why investors love Netflix and they probably like
• 20:33
  Speaker 1: Amazon for the same reason is that those are all
• 20:36
  Speaker 1: weather stocks. You know, Netflix is going to add subscribers
• 20:39
  Speaker 1: and they're going to continue to push the bottom line
• 20:41
  Speaker 1: no matter what goes on. Uh in the economic environment,
• 20:45
  Speaker 1: no matter what kind of tweets that we hear or headlines.
• 20:48
  Speaker 1: Whereas you know, it takes a lot of courage to
• 20:51
  Speaker 1: buy say, uh, you know a Kroger or uh, you
• 20:54
  Speaker 1: know something you know another the banks nowadays or some
• 20:58
  Speaker 1: of the other industrial um that really do rely on
• 21:02
  Speaker 1: improving economic conditions right. Uh. What what is the one
• 21:07
  Speaker 1: investment you would not touch right now, jack boy? And
• 21:12
  Speaker 1: not touch? Probably I would say gold. Um. Gold is
• 21:16
  Speaker 1: just not behaving the way uh the that um it
• 21:21
  Speaker 1: has in the past. Historically it's been a great diversifier
• 21:26
  Speaker 1: that zigged when everything else has zagged, and it just
• 21:28
  Speaker 1: hasn't worked out this year. Um. And I think they're
• 21:33
  Speaker 1: probably other alternatives perhaps um maybe even energy or maybe
• 21:39
  Speaker 1: even master limited partnerships could serve that that purpose, uh
• 21:44
  Speaker 1: and do it in a way that gold can't. Remember,
• 21:47
  Speaker 1: gold gets undermined, if you will, when rates go up
• 21:52
  Speaker 1: because financial assets and real assets are are kind of competitive.
• 21:56
  Speaker 1: We got to leave it there, Jack Avelin. He is
• 21:58
  Speaker 1: founding partner chief investment officer Crescent Wealth Advisors. Follow him
• 22:04
  Speaker 1: on Twitter. In a note to clients, Scott Minor, the
• 22:22
  Speaker 1: head of investing for Googgenheim has said that there's a
• 22:26
  Speaker 1: chance of a sharp procession and decline in stocks that
• 22:30
  Speaker 1: is looming. He says the worst of the damage would
• 22:33
  Speaker 1: start in late into and he specifically called out corporate
• 22:39
  Speaker 1: bond defaults. He said that increases are likely as the
• 22:43
  Speaker 1: Federal Reserve raises interest rates and companies struggle to pay
• 22:46
  Speaker 1: off record debt levels. Here to help us understand the
• 22:49
  Speaker 1: role of corporate debt in this market is David Chain.
• 22:52
  Speaker 1: He is the managing partner for Kennedy Lewis Investment Management
• 22:57
  Speaker 1: and also joining me here in our eleven three oh
• 23:00
  Speaker 1: studio is a shri not Ragin. He is our Bloomberg
• 23:04
  Speaker 1: debt reporter. Gentlemen, thanks very much for being with us. David,
• 23:08
  Speaker 1: why don't you begin and give us your thoughts on
• 23:11
  Speaker 1: the role that corporate debt is currently playing and it's
• 23:15
  Speaker 1: size in the marketplace so that we can understand how
• 23:18
  Speaker 1: important it really is. Absolutely, thank you very much. UM.
• 23:22
  Speaker 1: Corporate debt markets today are larger than they've ever been historically.
• 23:26
  Speaker 1: Total corporate debt today is of GDP. It's an all
• 23:29
  Speaker 1: time high. Uh so something that we obviously need to
• 23:31
  Speaker 1: pay attention to. UM. Fiscal policy recent fiscal policy in
• 23:36
  Speaker 1: terms of tax changes will continue to pressure the FED
• 23:39
  Speaker 1: to raise rates. So we do see pressure as it
• 23:42
  Speaker 1: relates to rising rates that will ultimately affect UM much
• 23:48
  Speaker 1: of the corporate debt market today. When you look at
• 23:50
  Speaker 1: the overall yields today, they're they're they're quite compressed relative
• 23:54
  Speaker 1: to historical standards. So we do see that as we
• 23:58
  Speaker 1: look out in this specifically in the HYO market, we
• 24:01
  Speaker 1: do see UM some of the maturity wall issues and
• 24:04
  Speaker 1: you know early two thousand twenties, combined with tax changes
• 24:09
  Speaker 1: that are are being implemented in terms of the interest
• 24:11
  Speaker 1: deductibility for some of the more levered UH corporates out there,
• 24:15
  Speaker 1: we do see some real disruption coming. I think UM
• 24:20
  Speaker 1: been from my perspective, when you see the likes of
• 24:24
  Speaker 1: Guggenheim and Pimco and tc W send out warning flares,
• 24:27
  Speaker 1: it's kind of important for us to sit up and
• 24:29
  Speaker 1: take notice. These are big players in the corporate debt market,
• 24:33
  Speaker 1: and effectively the tries are coming from inside the house,
• 24:35
  Speaker 1: and that is why I think everyone's trying to figure
• 24:38
  Speaker 1: out that. When Scott says maybe the next recession, which
• 24:41
  Speaker 1: could be well months down the line eighteen months down
• 24:43
  Speaker 1: the line could be driven by corporate debt. That's reason
• 24:46
  Speaker 1: to be wired about it. Because also remember that since
• 24:48
  Speaker 1: the last recession, in the ten years that have elapsed,
• 24:51
  Speaker 1: we have seen an explosion in the corporate credit market.
• 24:55
  Speaker 1: And I think this is probably the time in the cycle.
• 24:57
  Speaker 1: And maybe David could address this. Is you know where
• 25:00
  Speaker 1: we see maybe with the smaller companies already issues are
• 25:03
  Speaker 1: starting to pick up. Are we seeing a uptick in
• 25:06
  Speaker 1: Chapter eleven filings? And is that what sort of gives
• 25:09
  Speaker 1: us a broader signal to what might come down the
• 25:11
  Speaker 1: pike in a year or two from now. Yeah? Absolutely, Uh,
• 25:15
  Speaker 1: we definitely see that. We're starting to see if you
• 25:17
  Speaker 1: look at the rolling three months Chapter eleven filings over
• 25:19
  Speaker 1: the last several months, you're starting to see an uptick,
• 25:22
  Speaker 1: especially as it relates to smaller companies. Um. I just
• 25:25
  Speaker 1: note that when you look at the new issue market
• 25:27
  Speaker 1: for high old in the last month or so, you've
• 25:30
  Speaker 1: seen at least twelve to fifteen corporates where they've issued
• 25:35
  Speaker 1: paper where paper is trading below a hundred cents on
• 25:37
  Speaker 1: the dollar. Uh So the new issue market is starting
• 25:40
  Speaker 1: to get a little shaky. Um. And then I think
• 25:42
  Speaker 1: as it relates to UM sectors that are in secular
• 25:45
  Speaker 1: decline UM, whether that be wireless UM, auto rental companies
• 25:50
  Speaker 1: and autos in general, you know, retail, hospitals, etcetera. Uh.
• 25:54
  Speaker 1: There's a huge amount of debt in each of those sectors.
• 25:56
  Speaker 1: So you've got a secular decline happening. At the same time,
• 25:59
  Speaker 1: they're going to be trying to figure out how to
• 26:02
  Speaker 1: refinance their structure and uh and and then again deal
• 26:05
  Speaker 1: with some of these interest deductibility issues that I mentioned
• 26:08
  Speaker 1: coming in their early two thousand twenties. Well, David, you
• 26:11
  Speaker 1: you at Kennedy Lewis, you raised two hundred and fifty
• 26:15
  Speaker 1: million dollars in November. Right, that's for fund. That fund
• 26:19
  Speaker 1: is destined for distressed debt. Right. Yes, we define ourselves
• 26:24
  Speaker 1: as opportunistic credit managers, which includes a component includes distressed debt.
• 26:29
  Speaker 1: That's right, Okay, And you've got five years to invest
• 26:32
  Speaker 1: this money. So are you waiting? We are. We are
• 26:36
  Speaker 1: waiting to a large degree. But two Uh, we we
• 26:40
  Speaker 1: do have some sectors that we identified that we think
• 26:42
  Speaker 1: are very attractive. Now. UM. We are focused on the
• 26:45
  Speaker 1: middle market space where there's less UM we think competition
• 26:49
  Speaker 1: UH for players like ourselves that can deliver capital structure solutions. UM.
• 26:55
  Speaker 1: So some of the sectors that we like and that
• 26:56
  Speaker 1: we're focused on are the animal care sector as well. Uh.
• 27:00
  Speaker 1: You know, the power markets in Texas. There's been a
• 27:03
  Speaker 1: real disruption in the power markets in Texas. We we
• 27:05
  Speaker 1: think this supply demand and balance in Texas is coming
• 27:08
  Speaker 1: into play and UM and so a lot of the
• 27:11
  Speaker 1: high cost coal companies that are coming out of the
• 27:14
  Speaker 1: market there, they just can't compete with natural gas where
• 27:16
  Speaker 1: it is. So we do like UM some sectors there,
• 27:18
  Speaker 1: and we are putting dollars to work in. What kind
• 27:20
  Speaker 1: of yield does it have to offer you in order
• 27:22
  Speaker 1: to be attractive for for our fund in particular, we
• 27:26
  Speaker 1: are targeting at one point five times money multiple over
• 27:29
  Speaker 1: a five year period of time, which equates to roughly
• 27:32
  Speaker 1: a mid teens yield. Uh. And we are finding those
• 27:35
  Speaker 1: opportunities in those sectors. But help us understand one thing
• 27:39
  Speaker 1: David wouldn't uh, and maybe this is the reason for it.
• 27:42
  Speaker 1: When we talk to the bigger distress films right now,
• 27:44
  Speaker 1: all of them are complaining about how there's so little
• 27:47
  Speaker 1: to do. Is that a reason why we're seeing sort
• 27:50
  Speaker 1: of an uptick in almost manufactured events. You know, the
• 27:54
  Speaker 1: CDs clash which involves Blackstone, a bunch of hatge funds,
• 27:57
  Speaker 1: even Goldman that has gripped everyone in them Okay, Windstream
• 28:01
  Speaker 1: and all the scenarios like that where people are making
• 28:04
  Speaker 1: arcin legal arguments to win returns. Is that just a
• 28:07
  Speaker 1: result of there's very little else to do, so you
• 28:10
  Speaker 1: have to make stuff for yourself right now? Yeah, I
• 28:13
  Speaker 1: believe that's that's that's partially the case. Absolutely. I think
• 28:17
  Speaker 1: you know a lot of the large uh cap credit
• 28:21
  Speaker 1: players UM have found that, you know, they need to
• 28:25
  Speaker 1: be focused on um what we call, you know, sort
• 28:28
  Speaker 1: of binary outcomes on technicalities right with you know, focused
• 28:31
  Speaker 1: on loopholes within legal documents. UM. You know, they're forced
• 28:35
  Speaker 1: to put a lot more dollars to work in any
• 28:37
  Speaker 1: one particular situation. And there's not large scale distress okay,
• 28:43
  Speaker 1: that's happening in the market today, so those opportunities are
• 28:45
  Speaker 1: fewer and far between, and then therefore they're they're forced
• 28:48
  Speaker 1: to focus on these the CDs issues that we've we've
• 28:51
  Speaker 1: seen in names like Habnanian. Just to go back to
• 28:54
  Speaker 1: your point earlier that the total amount of corporate debt
• 28:57
  Speaker 1: outstanding is greater than us g EP. That's that's correct,
• 29:02
  Speaker 1: including investment grade and high Okay, if you get a
• 29:05
  Speaker 1: big move in interest rates, that's gonna make a lot
• 29:08
  Speaker 1: of that paper much less attractive, even if those debts
• 29:12
  Speaker 1: are wonderful and the companies continue to pay. That's that's
• 29:17
  Speaker 1: absolutely right. And we've seen that already this year with
• 29:20
  Speaker 1: respect to investment grade returns as well as high yield returns,
• 29:23
  Speaker 1: they're both negative on the year. Okay. The reason I
• 29:26
  Speaker 1: go there is because a lot of times you have
• 29:28
  Speaker 1: to separate whether someone wants to be an investor and
• 29:31
  Speaker 1: hold the paper versus whether there is an intrinsic problem
• 29:36
  Speaker 1: with the company that has borrowed the money. In today's marketplace,
• 29:42
  Speaker 1: you can have a bunch of people Russian for the
• 29:44
  Speaker 1: exits and the company is still fine. That's right. That
• 29:48
  Speaker 1: makes it must make it difficult for you. Well, I
• 29:51
  Speaker 1: think I think in some ways we see that as
• 29:53
  Speaker 1: an opportunity. I mean, we have outflows in high yield
• 29:56
  Speaker 1: UH year to date this this year that we haven't
• 29:58
  Speaker 1: seen in man years. So you know, we do get
• 30:01
  Speaker 1: a baby with the bathwater scenario and some and that's
• 30:03
  Speaker 1: when you come in and We try and be an
• 30:05
  Speaker 1: open tunistic We focus on the areas that we think
• 30:07
  Speaker 1: we have core expertise, on the sectors that we think
• 30:09
  Speaker 1: we're good at, and that's when we come in. Thanks
• 30:12
  Speaker 1: very much, David Shane, Managing Partner, Kennedy Lewis Investment Management.
• 30:16
  Speaker 1: By thanks also to shreet not Rain. He is our
• 30:19
  Speaker 1: Bloomberg debt reporter. Thanks for listening to the Bloomberg P
• 30:28
  Speaker 1: and L podcast. You can subscribe and listen to interviews
• 30:31
  Speaker 1: at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer.
• 30:35
  Speaker 1: I'm pim Fox. I'm on Twitter at pim Fox. I'm
• 30:39
  Speaker 1: on Twitter at Lisa Abramo. It's one before the podcast.
• 30:42
  Speaker 1: You can always catch us worldwide on Bloomberg Radio