Latest / Bloomberg Intelligence / Fox Has Best Exposure to Global Growth of Pay TV, Sweeney Says

Transcript

Fox Has Best Exposure to Global Growth of Pay TV, Sweeney Says · Bloomberg Intelligence

• 0:00
  Speaker 1: P and L is brought to you by proper Cloth,
• 0:02
  Speaker 1: a leader in men's custom shirts, with proprietary smart sized
• 0:05
  Speaker 1: technology and top rated customer service. Ordering a custom shirt
• 0:08
  Speaker 1: has never been easier. Visit proper cloth dot com to
• 0:11
  Speaker 1: order your first custom shirt today. Welcome to the Bloomberg
• 0:20
  Speaker 1: P and L Podcast. I'm Pim Fox. Along with my
• 0:22
  Speaker 1: co host Lisa Abramowitz. Each day we bring you the
• 0:25
  Speaker 1: most important, noteworthy, and useful interviews for you and your money,
• 0:29
  Speaker 1: whether at the grocery store or the trading floor. Find
• 0:32
  Speaker 1: the Bloomberg P and L Podcast on iTunes, SoundCloud and
• 0:36
  Speaker 1: at Bloomberg dot com. All right, let's get a king
• 0:44
  Speaker 1: of radio and all media, Paul Sweeney, into the conversation.
• 0:48
  Speaker 1: He is our director of North American Research and media
• 0:50
  Speaker 1: analyst four Bloomberg Intelligence. Paul, spread a little intelligence force.
• 0:56
  Speaker 1: We've got a big week. Let's start off with twenty
• 0:58
  Speaker 1: century Fox. They say, but you know, I was thinking right,
• 1:05
  Speaker 1: used to they but they also use twentieth century Fox
• 1:09
  Speaker 1: I believe still as part of one of their best
• 1:11
  Speaker 1: studio right exactly. So it was because I looked at
• 1:13
  Speaker 1: it over the weekend. Go ahead, Yeah, this confusing, But
• 1:15
  Speaker 1: they're convinced it was a great name change. Yeah, this
• 1:18
  Speaker 1: is a This is a great week for for big,
• 1:19
  Speaker 1: big media. All the big media companies are reporting, and
• 1:22
  Speaker 1: you know, the stocks have generally done pretty well over
• 1:25
  Speaker 1: you know, year to date, in over the last twelve months.
• 1:27
  Speaker 1: And I think but the big issue for media investors
• 1:31
  Speaker 1: this this whole concept of chord cutting and what it
• 1:33
  Speaker 1: means to the economics of you know, the cable network
• 1:37
  Speaker 1: business in particular, and broadcast networks as well. If people
• 1:41
  Speaker 1: are cutting the chord, does that mean less of viewers,
• 1:43
  Speaker 1: means less advertising, which means less affiliate fees. And if so,
• 1:48
  Speaker 1: what's the trajectory of that downward decline um in those
• 1:52
  Speaker 1: kinds of numbers? And that's what investors are trying to
• 1:54
  Speaker 1: get a handle on. Okay, well, so we're gonna get
• 1:55
  Speaker 1: earnings from twenty first century Fox, Disney, Time, Warner Viacom.
• 2:00
  Speaker 1: Which company is the most important to watch to get
• 2:02
  Speaker 1: a sense of just how much chord cutting is happening.
• 2:05
  Speaker 1: I think Disney is probably the big one simply because
• 2:08
  Speaker 1: they have the biggest cable network in ESPN, the most
• 2:11
  Speaker 1: valuable cable network in ESPN, And it was Disney a
• 2:14
  Speaker 1: little over two years ago. That really started the whole concern,
• 2:17
  Speaker 1: the whole issue of cord cutting and the fact that
• 2:19
  Speaker 1: it was in fact impacting, uh, the cable television business
• 2:23
  Speaker 1: when they said that even the mighty ESPN was losing subscribers,
• 2:26
  Speaker 1: uh and that it would cause Disney to reduce their
• 2:30
  Speaker 1: profit forecast for ESPN going forward. So that really brought
• 2:34
  Speaker 1: home to a media investors that this cord cutting thing
• 2:37
  Speaker 1: is real, it's right now, and it's impacting the businesses
• 2:40
  Speaker 1: for these companies. So UH, Now, what investors are trying
• 2:43
  Speaker 1: to do ever since that point in time a couple
• 2:45
  Speaker 1: of years ago, was trying to get a sense of
• 2:47
  Speaker 1: again the rate of decline of pay TV subscribers in
• 2:51
  Speaker 1: the US. UH. And if you're a bear, then you
• 2:53
  Speaker 1: think that rate of decline is steep, and you think
• 2:56
  Speaker 1: it's gonna be long term and you've you've gotten out
• 2:58
  Speaker 1: of these stocks. If you're more more bullish, I think
• 3:01
  Speaker 1: a lot of it, and I think that's what's happened
• 3:02
  Speaker 1: with the stocks. A lot of investors have said, Okay,
• 3:05
  Speaker 1: we know the chord cutting is happening, but it's going
• 3:07
  Speaker 1: to be a very gradual decline. It's nothing that's gonna
• 3:11
  Speaker 1: crush these businesses in the near term. Uh, so let's
• 3:13
  Speaker 1: try to pick some winners and losers. And then the
• 3:15
  Speaker 1: other thing that's happening is, um, we're starting to see
• 3:18
  Speaker 1: some of these media companies go direct to consumer over
• 3:22
  Speaker 1: the Internet, much like Netflix does with some of their
• 3:25
  Speaker 1: own offerings like HBO now from Time Warners a HBO,
• 3:29
  Speaker 1: UM and some of the other cable networks have done that.
• 3:31
  Speaker 1: Some of the other networks have been joining some of
• 3:33
  Speaker 1: these skinny bundles like Sling Television. So I think investors
• 3:36
  Speaker 1: are saying chord cutting is an issue. It's a problem.
• 3:40
  Speaker 1: The fretting of the big cable TV bundle is a
• 3:42
  Speaker 1: negative issue for this industry. But there are degrees of
• 3:47
  Speaker 1: how this is gonna play out, and there's gonna be
• 3:48
  Speaker 1: some winners and losers um, and I think investors are
• 3:51
  Speaker 1: just trying to figure out who those companies are. Is
• 3:54
  Speaker 1: twenty first Century Fox a winner? I'm looking at the
• 3:58
  Speaker 1: stock is this was a only four dollar stock in September.
• 4:02
  Speaker 1: We're now over thirty one. We're going to get the results.
• 4:05
  Speaker 1: Uh super Bowl coverage? Do they have all the pieces
• 4:10
  Speaker 1: to make this work? Yeah, it's funny. Century Fox owning
• 4:13
  Speaker 1: the Fox Network very happy this morning after the overtime
• 4:16
  Speaker 1: game last night, a lot more advertising inventory to sell
• 4:20
  Speaker 1: at very high prices. So they love the fact that
• 4:22
  Speaker 1: it was the first Super Bowl to go the overtime.
• 4:24
  Speaker 1: But generally speaking, I think most Fox investors feel pretty
• 4:28
  Speaker 1: good about the story because the company has a lot
• 4:30
  Speaker 1: of international exposure. They're one of the biggest companies in
• 4:33
  Speaker 1: terms of international exposure with their pay TV business globally
• 4:37
  Speaker 1: in India and Asia and all through Europe. And the
• 4:42
  Speaker 1: bullish case there is that the pay TV industry outside
• 4:45
  Speaker 1: of the U S is UH is more of a
• 4:47
  Speaker 1: growth story than it is in the U S. The
• 4:48
  Speaker 1: U S it's again it's a mature business, susceptible to
• 4:51
  Speaker 1: chord cutting. In other parts of the world, it's still
• 4:53
  Speaker 1: a growth business. And Fox, along with Discovery Communications, are
• 4:56
  Speaker 1: the two companies that are probably best exposed to the
• 4:59
  Speaker 1: globe growth of pay television. You know, last night, when
• 5:02
  Speaker 1: I was watching the Super Bowl with my seven year
• 5:04
  Speaker 1: old son, he said to me these advertisements they are
• 5:07
  Speaker 1: also dramatic, he said, do they actually work? And and
• 5:11
  Speaker 1: I'm wondering, you know, at a time when more eyeballs
• 5:14
  Speaker 1: are on the Internet than on a particular channel. Is
• 5:19
  Speaker 1: there some kind of evaluation of how much these ads
• 5:21
  Speaker 1: work and are they less willing to pay the advertisers
• 5:24
  Speaker 1: less willing to pay premium fees for for displaying their ads. Yeah.
• 5:28
  Speaker 1: The You know, the global advertising business is about a
• 5:30
  Speaker 1: six d fifty billion dollar a year business that grows
• 5:33
  Speaker 1: about three to four to five percent a year. Within that, Uh,
• 5:37
  Speaker 1: Internet advertising this clearly the big growth story. It's growing
• 5:40
  Speaker 1: about fifteen percent per year. So share of advertising globally
• 5:45
  Speaker 1: over the last ten years has dramatically shifted from traditional media,
• 5:48
  Speaker 1: uh to digital media. You think about search, you think
• 5:51
  Speaker 1: about Google, you think about uh social platforms like Facebook.
• 5:55
  Speaker 1: Those are the platforms that are really getting uh the
• 5:57
  Speaker 1: incremental ad dollars. That being said, though, uh, and part
• 6:00
  Speaker 1: of the reason they're getting the incremental ad dollars is
• 6:02
  Speaker 1: that it's easier for them to prove to advertisers that, uh,
• 6:07
  Speaker 1: your audience did click on this ad. Um, we can
• 6:10
  Speaker 1: prove to you who it was and that that he
• 6:11
  Speaker 1: actually saw the ad, and so on and so forth.
• 6:13
  Speaker 1: So some of the metrics around um proving the effect
• 6:17
  Speaker 1: effectiveness of advertising a little bit better for digital advertising. However,
• 6:22
  Speaker 1: as we saw with the Super Bowl last night. You
• 6:24
  Speaker 1: put a big audience together on television and advertisers will
• 6:27
  Speaker 1: line up to pay five million dollars for a thirty
• 6:29
  Speaker 1: second spot. So the real challenge for the traditional media
• 6:32
  Speaker 1: is to be able to again continue to aggregate big
• 6:35
  Speaker 1: audiences and biggest different today than it was thirty years ago,
• 6:39
  Speaker 1: but you know, aggregate big audiences and advertisers will show
• 6:42
  Speaker 1: up with ad dollars. So the television business is still
• 6:46
  Speaker 1: performing very well relative to the Internet two reasons. One
• 6:51
  Speaker 1: it's video and number two, it's still big audiences aggregated.
• 6:55
  Speaker 1: I just keep thinking of the sunk costs that exist
• 6:58
  Speaker 1: in let's say, the television and broadcast distribution markets and
• 7:02
  Speaker 1: the cable markets as opposed to the Internet based systems
• 7:06
  Speaker 1: that Facebook is able to take advantage of. Right, yeah, exactly.
• 7:10
  Speaker 1: I mean they're piggybacking. I kind of wonder at what
• 7:13
  Speaker 1: point does someone play hardball with Facebook and said, you know,
• 7:16
  Speaker 1: you're not gonna have anything to write about unless you
• 7:20
  Speaker 1: recognize that we're providing that content. Well, yeah, Facebook. You know,
• 7:23
  Speaker 1: Mark Zuckerberg just recently in the last one or two quarters,
• 7:26
  Speaker 1: has really changed how he's positioning the company both too,
• 7:30
  Speaker 1: just just to the world in general. He's calling it
• 7:32
  Speaker 1: a video first company, a video centric company. He recognizes
• 7:36
  Speaker 1: that the fastest growing advertising stream on the Internet is
• 7:39
  Speaker 1: online video, and so he is positioning his company pivot
• 7:43
  Speaker 1: pivoting his company there, So a Snapchat, a company that's
• 7:45
  Speaker 1: about the go public, really focusing on video. Yeah, well,
• 7:48
  Speaker 1: I mean, who wants to read anymore anyway? Paul Sweeney,
• 7:51
  Speaker 1: thank you so much for joining us. Paul Sweeney, US
• 7:53
  Speaker 1: director of Research and senior Senior Media and Internet analyst
• 7:58
  Speaker 1: uh Fort Bloomberg Intelligence. I'm just still stuck on that
• 8:02
  Speaker 1: growth in internet ad spending. It just fifty billion dollars
• 8:06
  Speaker 1: a year. Now, I'd like to learn a little bit
• 8:21
  Speaker 1: more about Chipotle Mexican grill because the shares, Lisa Abramowitz
• 8:25
  Speaker 1: are down a little bit more than let's say, five
• 8:28
  Speaker 1: five and a half percent, depending upon whether you're looking
• 8:31
  Speaker 1: at the open today or the clothes on Friday. Why, Well,
• 8:35
  Speaker 1: it was a cover story in Barrens and I just
• 8:36
  Speaker 1: got to ask our next guest, Scott rothboard president, founder
• 8:40
  Speaker 1: lake US at Management, also Professor of Finance at Seton
• 8:45
  Speaker 1: Hall University's uh Stillman's School of Business, Scott rothboard, uh
• 8:50
  Speaker 1: C c MG. What what's the future for Chipotle? The
• 8:55
  Speaker 1: future for Chipolt is that it needs to seriously take
• 8:59
  Speaker 1: a step back and re evaluate its business model. And
• 9:03
  Speaker 1: this is the company that was far ahead of the
• 9:05
  Speaker 1: rest of the pack for many years. It was trading
• 9:09
  Speaker 1: at a multiple which was almost twice, if not more
• 9:14
  Speaker 1: than its growth rate. They had some problems two years ago. Um,
• 9:21
  Speaker 1: but management pretty mild, I must say. They had problems. Yeah,
• 9:24
  Speaker 1: they had they had Okay, um people were sickened by
• 9:28
  Speaker 1: eating some of their food. Well, there was two problems.
• 9:32
  Speaker 1: One was that some people who ate their food UM
• 9:35
  Speaker 1: did catch some sort of disease. And also there was
• 9:38
  Speaker 1: a problem with sourcing UM their pork products. Right now,
• 9:41
  Speaker 1: there's a company whose mantra is food with integrity. Well,
• 9:46
  Speaker 1: people are saying, well, where's the integrity here? Um, And
• 9:50
  Speaker 1: and so it's been it's been on a decline. Uh.
• 9:54
  Speaker 1: They try to support the business and the stock through
• 9:58
  Speaker 1: couponing and and and through other methods. Where you have
• 10:02
  Speaker 1: along the stock. I was long the stock years ago, okay,
• 10:05
  Speaker 1: And it was in your road, the wave road, the
• 10:07
  Speaker 1: wave Okay, Now I went short a few weeks ago.
• 10:11
  Speaker 1: You went short to staff. Um, you don't think they
• 10:14
  Speaker 1: can really pull out of this. I think this stock
• 10:17
  Speaker 1: is going to have to basically gravitate down towards an
• 10:21
  Speaker 1: industry multiple of eighteen to two times earning. It's about
• 10:25
  Speaker 1: four bucks to share right now. If you look at
• 10:28
  Speaker 1: the broader backdrop, Scott, you're not particularly positive generally on
• 10:32
  Speaker 1: the whole restaurant sector. No, no, we're not. We We
• 10:36
  Speaker 1: we run a special restaurant and food portfolio. I also
• 10:40
  Speaker 1: have a newsletter on the restaurant and food industry, and
• 10:43
  Speaker 1: we are now in terms of restaurants themselves, we're at
• 10:47
  Speaker 1: the lowest exposure to restaurants in many years. Uh. We
• 10:50
  Speaker 1: just don't think there's value. They had a tremendous run
• 10:53
  Speaker 1: at a part of last year, probably got overvalued. Uh
• 10:56
  Speaker 1: and we just don't see that the appetites, so to speak,
• 11:00
  Speaker 1: for the consumer, is there in the restaurant space. Um
• 11:05
  Speaker 1: and so um Uh So we're we're it has begun
• 11:09
  Speaker 1: to pull back this year. We think it will pull
• 11:11
  Speaker 1: back a little bit more. And I'm expecting, just like
• 11:13
  Speaker 1: last year, back ended year for the restaurant stocks. But
• 11:17
  Speaker 1: when I look at something like Chapult, that stock has
• 11:19
  Speaker 1: has has bigger problems, and I see this really coming
• 11:23
  Speaker 1: down even further. Um. And I think the management needs
• 11:26
  Speaker 1: to do a few things. First of all, re evaluate
• 11:29
  Speaker 1: its menu, which is stale. UM. It needs to also
• 11:34
  Speaker 1: um stop moving into other concepts like chophouse, Asian fusion
• 11:40
  Speaker 1: uh and a pizza concept. I mean, there's enough pizza
• 11:43
  Speaker 1: concepts out there. UM. And I just think I just
• 11:46
  Speaker 1: think that that that they've lost their way, and that
• 11:48
  Speaker 1: that happens to a lot of companies. All Right, tell
• 11:51
  Speaker 1: me company that's found their way that most investors have overlooked.
• 11:56
  Speaker 1: Company is foundl whether that most investors have overlooked in
• 11:59
  Speaker 1: the restaurant space or any space. I was looking at
• 12:02
  Speaker 1: at Craft Higns, but you you tell us, well, I
• 12:07
  Speaker 1: I really think that companies you should be focusing in
• 12:11
  Speaker 1: on are lowered down in the food chain. Go for
• 12:14
  Speaker 1: I think we've got to look at the agricultural companies,
• 12:17
  Speaker 1: and we own some of them, Archid Daniels, Midland, Bungee, UM,
• 12:22
  Speaker 1: the Anderson's companies that are are are processing manufacturing the food.
• 12:26
  Speaker 1: Because we still need food, whether we're gonna eat it
• 12:29
  Speaker 1: at a restaurant or get it at home. Okay, we
• 12:32
  Speaker 1: still need the food, and we still need the process
• 12:34
  Speaker 1: and produced the basic food stuffs. Although how vulnerable are
• 12:38
  Speaker 1: these companies two changes in policy, particularly trade, I think
• 12:44
  Speaker 1: that they are more vulnerable to commodity prices, and commodity
• 12:50
  Speaker 1: prices are very much um in tune with currency prices. Um.
• 12:55
  Speaker 1: But again there's more to it than that, because when
• 12:58
  Speaker 1: you look at these companies that the commodity prices have
• 13:01
  Speaker 1: a great deal of exposure to things such as weather patterns. Um.
• 13:06
  Speaker 1: So So there's do you buy these home delivery businesses?
• 13:11
  Speaker 1: You know where they do make the food and it's
• 13:12
  Speaker 1: delivered to your home that you cook it at home, right, Yes,
• 13:17
  Speaker 1: I think that's that's a very urban concept. I think
• 13:20
  Speaker 1: there's more to the world than just New York in
• 13:23
  Speaker 1: l A and Chicago and um. You know I I
• 13:27
  Speaker 1: live now full time out in Las Vegas. Um. We
• 13:31
  Speaker 1: do still have a home here in New Jersey and
• 13:33
  Speaker 1: upstate New York. UM. I think when you look in
• 13:36
  Speaker 1: between the coasts, there's just no appetite, so to speak. Again,
• 13:40
  Speaker 1: I have to use that term for for for those
• 13:42
  Speaker 1: types of concepts. Um. Look, I think open table was
• 13:46
  Speaker 1: a great idea, UM and that was taken over by Priceline,
• 13:48
  Speaker 1: which we own. Thank you so much. Scott Rothbert, president
• 13:52
  Speaker 1: and founder of Lakeview Asset Management UH in New Jersey
• 13:56
  Speaker 1: and also Las Vegas, also a professor Aton Hall University.
• 14:11
  Speaker 1: P and L is brought to you by proper Cloth,
• 14:13
  Speaker 1: the leader in men's custom shirts. At proper cloth dot com,
• 14:16
  Speaker 1: ordering custom shirts has never been easier. Create your custom
• 14:20
  Speaker 1: shirt size by answering ten easy questions, select from over
• 14:23
  Speaker 1: five fabrics to suit your personal taste. Shirts start from
• 14:27
  Speaker 1: eight dollars and are delivered in just two weeks with
• 14:30
  Speaker 1: proper Cloths perfect fit guarantee. Remakes are completely free and
• 14:34
  Speaker 1: expert staff are standing by to help. For premium quality,
• 14:38
  Speaker 1: perfect fitting shirts, visit proper cloth dot com Custom Shirts
• 14:42
  Speaker 1: made Smarter. I want to imagine what is going to
• 14:52
  Speaker 1: happen with the shipping industry this year and what that
• 14:55
  Speaker 1: might tell us about global trade and the economy. I
• 14:59
  Speaker 1: want to bring in h John woven Smith, president of
• 15:02
  Speaker 1: Genko Shipping in New York City. UH and John, this
• 15:05
  Speaker 1: has been sort of one of the big mysteries the
• 15:07
  Speaker 1: dry ball market for UH. Several years after the crisis
• 15:10
  Speaker 1: was really kind of sounding alarms about the state of
• 15:13
  Speaker 1: the global economy, we've seen a little bit of a recovery.
• 15:16
  Speaker 1: What is it telling us right now, Well, what it's
• 15:18
  Speaker 1: telling is is that we are continuing to see growth
• 15:21
  Speaker 1: on the Chinese side, iron ore and coal going into China.
• 15:24
  Speaker 1: You know, one of the one of the big misnomers
• 15:26
  Speaker 1: I think is that as freight rates um collapsed in
• 15:30
  Speaker 1: dry ball shipping and probably bottomed in the first quarter
• 15:32
  Speaker 1: of two thousand sixteen. It was not necessarily a global
• 15:36
  Speaker 1: demand issue. It was more of the supply of ships
• 15:39
  Speaker 1: that are on the water. The sector was overbuilt, and
• 15:41
  Speaker 1: so now what we're seeing is those ships are being
• 15:44
  Speaker 1: absorbed into the market from growth in demand. We're seeing
• 15:47
  Speaker 1: a real slow down on the number of ships that
• 15:50
  Speaker 1: are that are delivering. So the supply and demandant balance
• 15:54
  Speaker 1: is finally starting to come back into play. So look
• 15:57
  Speaker 1: forward about four orders and tell me where you think
• 16:02
  Speaker 1: you're going to be, because I mean, I'm going back,
• 16:04
  Speaker 1: and we go back a long time. So two thousand fourteen, Uh,
• 16:08
  Speaker 1: Jenco stock was a lot different than it is today.
• 16:11
  Speaker 1: It's not, you know, nine dollars a share, but this
• 16:15
  Speaker 1: was you know, two stock at one time. Yeah, a lot,
• 16:19
  Speaker 1: a lot has happened a lot of a lot of
• 16:21
  Speaker 1: ships have passed under that bridge. A lot has happening. Again,
• 16:24
  Speaker 1: as I said, it really has been a supply issue.
• 16:26
  Speaker 1: There were so many ships that were delivered two thousand fourteen,
• 16:30
  Speaker 1: two thousand fifteen, and even last year, and now that
• 16:34
  Speaker 1: that delivery schedule is really starting to come off. Just
• 16:37
  Speaker 1: to give me example, you know, this is the lowest
• 16:40
  Speaker 1: order book that we have seen since two thousand three,
• 16:43
  Speaker 1: with only nine percent of the fleet on order, and
• 16:45
  Speaker 1: we only expect one to two percent of the fleet
• 16:48
  Speaker 1: delivering this year. And you back that up on the
• 16:51
  Speaker 1: demand side, where you're talking two to three percent growth.
• 16:54
  Speaker 1: So again you're finally starting to see the beginnings of
• 16:57
  Speaker 1: a of a cyclical recovery. Do you think that some
• 17:00
  Speaker 1: of this protectionist UH sort of wave that's sweeping a
• 17:04
  Speaker 1: lot of different countries and this feeling of anti global
• 17:08
  Speaker 1: trade could potentially derail this recovery that we're seeing. I
• 17:13
  Speaker 1: think what you have to what you have to focus
• 17:15
  Speaker 1: on is is think about what China is actually importing UM.
• 17:19
  Speaker 1: And by the way, with the exception of of soybeans, UM,
• 17:23
  Speaker 1: really nothing is being exported from the US into China.
• 17:26
  Speaker 1: It's mostly coming out of Brazil into China on the
• 17:28
  Speaker 1: iron or Front, Australia into China on the iron or Front,
• 17:32
  Speaker 1: Australia into China on the coal front, and those are
• 17:35
  Speaker 1: the growth areas that that we're seeing. So I don't
• 17:37
  Speaker 1: I don't feel that protectionism, whatever may come down the road,
• 17:42
  Speaker 1: would affect those trades. And the interesting thing is what
• 17:45
  Speaker 1: we're seeing is volume increases, particularly now out of Brazil.
• 17:49
  Speaker 1: Most of the volume increases over the last few years
• 17:52
  Speaker 1: has come out of Australia, which is a shorter trade
• 17:55
  Speaker 1: route into China, and they've been taking market share away
• 17:58
  Speaker 1: from the Brazilian producers. Now the Brazilian producers look like
• 18:01
  Speaker 1: they're going to be able to claw back some of
• 18:03
  Speaker 1: that market share. And Brazil to China takes twice as long,
• 18:07
  Speaker 1: so these ships are out of action for for longer
• 18:09
  Speaker 1: and that should lift freight rates. The specific routs that
• 18:15
  Speaker 1: that you're taking just give people a little idea of
• 18:17
  Speaker 1: you know, what you're actually moving, how long some you
• 18:20
  Speaker 1: know the ships, just how big is the fleet and
• 18:22
  Speaker 1: so on. Well, so jenko Um just taking a step
• 18:25
  Speaker 1: back for a second. We actually did raise equity and
• 18:28
  Speaker 1: refinance our bank debt in November of last year, and
• 18:31
  Speaker 1: the whole idea was to position the company in a
• 18:35
  Speaker 1: position of strength for recovering markets. So you look at
• 18:38
  Speaker 1: what Jenko is doing. We have sixty ships today on
• 18:40
  Speaker 1: the water. We have our very large ships which are
• 18:43
  Speaker 1: cape size ships that are predominantly shipping iron ore and
• 18:46
  Speaker 1: coal again from Brazilian too China, Australian to China. And
• 18:50
  Speaker 1: then we also have exposure to what we call the
• 18:52
  Speaker 1: minor bulks, which is your grains, your your GYP sum,
• 18:56
  Speaker 1: your sugar, your salt, cement, those type of products that
• 18:59
  Speaker 1: were also of seeing growth on in terms of just
• 19:01
  Speaker 1: normal GDP growth around the world. So you have amazing
• 19:05
  Speaker 1: insight into what the true growth is in China. I
• 19:08
  Speaker 1: would imagine you're singularly positioned to do that. UM, do
• 19:12
  Speaker 1: you think that a lot of the discussion that has
• 19:15
  Speaker 1: been happening about uh China's economy slowing down materially and
• 19:20
  Speaker 1: that any growth that we're seeing is really coming from
• 19:22
  Speaker 1: government stimulus and their money propping up in markets. Do
• 19:25
  Speaker 1: you think that that's accurate or are we actually seeing,
• 19:28
  Speaker 1: um some studying of of of growth in China. I
• 19:31
  Speaker 1: think you're seeing study of growth in China, but make
• 19:34
  Speaker 1: no mistake. A lot of this is infrastructure spending, right,
• 19:37
  Speaker 1: that is what drives the steel industry, that is what
• 19:40
  Speaker 1: drives iron ore imports with public money, with with public money.
• 19:44
  Speaker 1: That's absolutely correct. Um And uh, you know what what
• 19:48
  Speaker 1: has also been happening though, is you've you've seen some
• 19:50
  Speaker 1: consolidation on the steel industry, it moving more into private hands,
• 19:55
  Speaker 1: which is obviously good for the economy as a whole. Um.
• 19:58
  Speaker 1: And then just switching gears on the coal side again,
• 20:01
  Speaker 1: cole volumes into China. Imports dropped thirty in two thousand fifteen.
• 20:07
  Speaker 1: There for two thousand sixteen they've actually been up, so
• 20:11
  Speaker 1: that has actually been helpful as well. And that is
• 20:13
  Speaker 1: a cleaner product the coal coming out of Australia going
• 20:17
  Speaker 1: into China than actual domestic Chinese coal, so that's been
• 20:20
  Speaker 1: helpful also. Any uh, any pushback, any thoughts about the
• 20:26
  Speaker 1: new trade policies as expressed by President Trump. I mean,
• 20:31
  Speaker 1: you're traveling around the world, you know a lot of
• 20:33
  Speaker 1: people in the high levels of business. What's been the reaction. Look,
• 20:37
  Speaker 1: I think I think it's a cautionary reaction. I mean,
• 20:39
  Speaker 1: as I said, in terms of dry bulk shipping. Um,
• 20:43
  Speaker 1: we don't see too much of an effect that will
• 20:46
  Speaker 1: take place because the Chinese will be importing ourn or
• 20:48
  Speaker 1: from Brazil and Australia. The coal will be coming in. UM.
• 20:51
  Speaker 1: On the grain side, China still needs, we still need soybeans.
• 20:56
  Speaker 1: Those will come in. UM. I think the real question
• 20:59
  Speaker 1: is what happens on on the finish good side, right,
• 21:01
  Speaker 1: come from China into into the US. But that's a
• 21:04
  Speaker 1: different industry from what we're involved in. What's the biggest
• 21:07
  Speaker 1: risk for you this year? Look? I think UM, I
• 21:11
  Speaker 1: think the biggest risk and it's always been this and
• 21:14
  Speaker 1: that is China, right and and the steel industry. Um. Again,
• 21:17
  Speaker 1: we're seeing firm steel prices, we're seeing growth on the
• 21:20
  Speaker 1: steel side, and all of that. You know, you you
• 21:24
  Speaker 1: then get into the iron ore imports coming into China.
• 21:27
  Speaker 1: And I can't stress this enough because you know, you
• 21:30
  Speaker 1: see a lot of news articles out there that talk about,
• 21:33
  Speaker 1: you know, China slowing down. But we've saw iron and
• 21:36
  Speaker 1: imports up six and a half percent last year. We
• 21:38
  Speaker 1: expect growth rates of four to five percent this year.
• 21:42
  Speaker 1: And as I said, a lot of that's going to
• 21:43
  Speaker 1: be coming out of Brazil. On the growth side, which
• 21:45
  Speaker 1: is a longer whole trade. You have to wonder how
• 21:47
  Speaker 1: much of that is coming from a sustainable growth and
• 21:50
  Speaker 1: government spending or not. We shall see US banks, particularly
• 22:05
  Speaker 1: the sixth biggest, could return more than one hundred billion
• 22:09
  Speaker 1: dollars in capital to investors through share buy backs and
• 22:14
  Speaker 1: other measures as a result of the removal of some
• 22:18
  Speaker 1: of the Dodd Frank provisions. I want to bring in
• 22:20
  Speaker 1: Charles Peabody, managing director and research analyst at Compass Point
• 22:24
  Speaker 1: Research and Trading in New York City, to get a
• 22:26
  Speaker 1: sense of how realistic it is that shareholders will see
• 22:30
  Speaker 1: this kind of incredible, uh capital redistribution back to them. Charles,
• 22:36
  Speaker 1: do you think that this sort of seems like a
• 22:38
  Speaker 1: likely possibility for shareholders in the short term? In the
• 22:43
  Speaker 1: short term, no, um, you know, over an extended period
• 22:47
  Speaker 1: of time, it's it's likely, very possible. But if you
• 22:51
  Speaker 1: take City Group, which I think in that article said
• 22:54
  Speaker 1: they had access of twenty seven point five billion dollars
• 22:57
  Speaker 1: of capital, that would require them reducing their common equity
• 23:02
  Speaker 1: Tier one ratio by two basis points. And I don't
• 23:06
  Speaker 1: think the regulators view the company is that less complex
• 23:11
  Speaker 1: today to to allow that. Even if there is some
• 23:15
  Speaker 1: kind of overhaulved at Frank. Yeah, even if there is
• 23:19
  Speaker 1: some over I mean, a two hundred based point reduction
• 23:21
  Speaker 1: in their common equity Tier one capital ratio would get
• 23:24
  Speaker 1: you that twenty seven billion. That's a lot of capital
• 23:28
  Speaker 1: um decline. And again, I don't know what the assumptions
• 23:32
  Speaker 1: are behind this, but you know there is a there
• 23:36
  Speaker 1: seems to be an assumption that the world is a
• 23:39
  Speaker 1: steady state, positive place, and therefore earnings growing, capital grows. Well,
• 23:44
  Speaker 1: we saw in the fourth quarter that capital was actually
• 23:47
  Speaker 1: destroyed at both City Group and Bank America because of
• 23:50
  Speaker 1: higher rates. I want you to go a little bit
• 23:53
  Speaker 1: more deeply into that the connection between those higher rates
• 23:57
  Speaker 1: and the capital requirements. But also just maybe you can
• 24:03
  Speaker 1: help us understand the value that we're talking about. Is
• 24:08
  Speaker 1: it based on analysis or is it based on last trade?
• 24:11
  Speaker 1: For example, Tim, I'm not sure what you mean by
• 24:16
  Speaker 1: that last question. Well, just that just the fact that
• 24:18
  Speaker 1: you know, when you don't have a marketplace for many
• 24:22
  Speaker 1: of the securities or many of the assets, uh, that
• 24:25
  Speaker 1: can affect their value. Oh. Absolutely, I mean, you know
• 24:30
  Speaker 1: the two questions you asked. One in terms of the
• 24:33
  Speaker 1: white capital is destroyed as rate rise as you create
• 24:37
  Speaker 1: these unrealized losses in your debt security portfolio. Um and
• 24:42
  Speaker 1: there are there are other minor adjustments as well, um
• 24:46
  Speaker 1: and and so when you assume, you know higher earnings power,
• 24:50
  Speaker 1: you're probably assuming a higher rate environment and better margins,
• 24:53
  Speaker 1: but that has unintended consequences to what happens to your
• 24:57
  Speaker 1: shareholder's equity. So we saw a book value at both
• 25:00
  Speaker 1: of a in a city group decline in the fourth quarter,
• 25:02
  Speaker 1: and regulatory capital actually decline in absolute dollar terms. UM. So,
• 25:08
  Speaker 1: in terms of what you are alluding to, in a
• 25:12
  Speaker 1: environment where debt spreads wide now, which you I think
• 25:15
  Speaker 1: you'll see as the economic activity matures, um, you're going
• 25:20
  Speaker 1: to see a migration from what we call level one
• 25:22
  Speaker 1: assets to level two assets, to level three assets and
• 25:25
  Speaker 1: level three assets as they grow required that you hold
• 25:27
  Speaker 1: more capital that you can't return as much. Right, Charles,
• 25:31
  Speaker 1: We've heard some discussion that one provision of the Dodd
• 25:34
  Speaker 1: Frank Act that Congress is going to target will be
• 25:36
  Speaker 1: the vocal rule, which prohibits banks from treating with their
• 25:41
  Speaker 1: own money. I'm wondering, from your perspective, do you think
• 25:45
  Speaker 1: that if the vocal rule is overturned, that the biggest
• 25:49
  Speaker 1: US banks would restart their prop trading desks and have
• 25:53
  Speaker 1: the desire to go back to using their own money
• 25:56
  Speaker 1: to make markets. You know, I think the banks want
• 26:01
  Speaker 1: reduced reporting requirements as it relates to their trading operations. UM.
• 26:06
  Speaker 1: But yeah, I think there are pockets where they will.
• 26:09
  Speaker 1: For example, I've heard the banks UM say they would
• 26:12
  Speaker 1: like to be UM more free in how they trade
• 26:17
  Speaker 1: and hedge their treasury portfolios. As you know, under the
• 26:20
  Speaker 1: vocal rule, they still can do take proprietary positions in
• 26:24
  Speaker 1: cash trading, but they can in derivatives trading, and so
• 26:28
  Speaker 1: they would like, I think, to be able to use
• 26:29
  Speaker 1: the derivatives trading of treasuries to hedge and their positioning.
• 26:35
  Speaker 1: And that would be good for a volume in those contracts,
• 26:38
  Speaker 1: I would imagine. Right, so we're talking, they probably would
• 26:41
  Speaker 1: them Yes, I think you're right, and and add some
• 26:44
  Speaker 1: liquidity to the marketplace. What about other markets? Do you
• 26:46
  Speaker 1: think that they're going to start of rev up their
• 26:48
  Speaker 1: prop prop desks. I'd be surprised if they did it
• 26:52
  Speaker 1: in the commodity space, UM. As you know, most of
• 26:55
  Speaker 1: them did divest themselves of their physical commodity UM business.
• 27:00
  Speaker 1: You know, energy is probably one area where they might
• 27:02
  Speaker 1: come back. Um, but I think the CEOs are actually
• 27:09
  Speaker 1: thankful that they don't have to compete on a prop basis. Well,
• 27:14
  Speaker 1: it certainly levels the playing field if you can't play,
• 27:17
  Speaker 1: well done. Thanks very much, Charles Peabody, Managing Director, Research Annalysts,
• 27:21
  Speaker 1: Compass Point Research and Trading. I just got to say
• 27:24
  Speaker 1: that I've never met anyone who knows as much about
• 27:27
  Speaker 1: the banking industry as Charles Peabody. He's great. Thanks for
• 27:37
  Speaker 1: listening to the Bloomberg P and L podcast. You can
• 27:40
  Speaker 1: subscribe and listen to interviews at iTunes, SoundCloud, or whatever
• 27:44
  Speaker 1: podcast platform you prefer. I'm pim Fox. I'm out there
• 27:48
  Speaker 1: on Twitter at pim Fox. I'm out there on Twitter
• 27:51
  Speaker 1: at Lisa Abramo. It's one before the podcast. You can
• 27:54
  Speaker 1: always catch us worldwide on Bloomberg Radio. P and L
• 28:05
  Speaker 1: is brought to you by proper Cloth, a leader in
• 28:07
  Speaker 1: men's custom shirts, with proprietary smart sized technology and top
• 28:11
  Speaker 1: rated customer service. Ordering a custom shirt has never been easier.
• 28:15
  Speaker 1: Visit proper cloth dot com to order your first custom
• 28:18
  Speaker 1: shirt today.