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B. Riley Faces Wider Probe, Markets Rebound · Bloomberg Intelligence

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Speaker 3: All right, well, one stock this down about fifty percent
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Speaker 3: is b Riley. It's facing a wider probe on some
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Speaker 3: risk disclosure disclosure. So we want to get a little
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Speaker 3: bit more into this with David Viacos. He is Bloomberg
0:36
Speaker 3: Legal reporter. Can you just explain to me, David, what's
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Speaker 3: going on here? What this probe is.
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Speaker 4: The Security and Exchange Commission has been investigating for several
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Speaker 4: months the accuracy of the financial disclosures from b Riley,
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Speaker 4: which is a Los Angeles based investment firm, and we
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Speaker 4: reported this morning that they're also looking into whether they've
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Speaker 4: adequately disclosed the risk in some of the assets, and
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Speaker 4: they're looking at possible improper trading by insiders as well.
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Speaker 4: The company today announced that it's likely to miss its
1:15
Speaker 4: earnings by a good bit and so I think the
1:21
Speaker 4: poor earnings announcement, combined with the SEC news, is punishing
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Speaker 4: the shriffs.
1:28
Speaker 5: Down fifty four percent over the trailing twelve months. That
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Speaker 5: really does suggest that the stock market is really concerned
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Speaker 5: about this thing. Is there a solution here? Is there
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Speaker 5: a restructuring out there? Is there just is there something
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Speaker 5: out there that can save this company and shareholders and
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Speaker 5: bond holders?
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Speaker 4: I guess, well that's the question. I mean, Bryan Riley,
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Speaker 4: the founder and CEO, said today that they're refocusing their
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Speaker 4: business on their core operations, and I guess we'll see
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Speaker 4: how investors react. Their problem is they have a lot
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Speaker 4: of problematic debt that they're going to have to work
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Speaker 4: through now. And they also, uh, it's unknown just the
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Speaker 4: precise nature of their relationship with a guy named Brian Khan,
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Speaker 4: who be Riley helped take his company, Franchise Group public
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Speaker 4: and then help him take it private, and so there's
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Speaker 4: a lot of interlocking relationships between the two of them,
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Speaker 4: and there's a criminal investigation that's caught up Brian Khan.
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Speaker 3: So why would anyone own the stock right now? I mean,
2:39
Speaker 3: what's in it for investors to hold onto the stock?
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Speaker 3: Like how soon will this legal worries be resolved or not?
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Speaker 3: Like how drawn out? Could this be?
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Speaker 5: It?
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Speaker 4: The company is contracting pretty rapidly. If you look at
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Speaker 4: its market share, it's down considerably. So this could go quickly.
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Speaker 4: And I guess it's a matter of whether investors still
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Speaker 4: have faith in this company to right itself.
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Speaker 5: You know, I'm just looking at you know, when you
3:05
Speaker 5: think about these investors, banks, these brokers, firms, it's in
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Speaker 5: the marketplace, it's all about trust. We saw that with
3:11
Speaker 5: Lehman Brothers, bear Stearns, much bigger firms. But if you
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Speaker 5: lose that counterparty trust, you're done. Everybody just walks away
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Speaker 5: from you. Is that kind of It feels like we're
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Speaker 5: kind of at that point right now.
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Speaker 4: It does feel like we're at an inflection point, you know,
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Speaker 4: whether investors will continue to trust and so I guess
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Speaker 4: we'll have to see how the investigations play out as well.
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Speaker 5: All Right, David, thank you very much for that reporting.
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Speaker 5: It looks like a brutal day for b Riley and
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Speaker 5: A shareholders down fifty percent. Here David Orriaco's Bloomberg legal reporter,
3:45
Speaker 5: talking to us about b Riley. R I l Y
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Speaker 5: is the ticker.
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Speaker 3: top news in business and finance and economics. There are
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Speaker 3: lens of our Bloomberg Intelligence folks. They cover two thousand
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Speaker 3: companies and one hundred and thirty industries worldwide. We also
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Speaker 3: take you outside the Bloomberg Intelligence universe to get the
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Speaker 3: read on what people are doing with their money, and
4:28
Speaker 3: for that we go to Christina Hooper, a chief Global
4:30
Speaker 3: market strategist at Invesco. She joins us. Now, Christina, you're
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Speaker 3: one of the best about putting situations in the market
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Speaker 3: into context, into perspective. So just let's start broad. How
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Speaker 3: would you categorize the last couple weeks within the within
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Speaker 3: the market.
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Speaker 6: So Alex, I would characterize it this way. We have
4:49
Speaker 6: seen valuations get stretched. Let's face it, We've seen a
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Speaker 6: very very strong rally over multiple multiple months without much
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Speaker 6: of a pullback, So it makes sense that when stocks
5:00
Speaker 6: are closer to being priced for perfection, jitters enter the
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Speaker 6: market environment, especially when we see some cracks appearing in
5:13
Speaker 6: the economy at the same time that the FED is
5:16
Speaker 6: holding rates at very high levels. What I would argue
5:20
Speaker 6: is very restrictive given the level of disinflationary progress we've
5:26
Speaker 6: seen thus far. So I think of it as something
5:28
Speaker 6: of a small but almost perfect storm that caused a
5:33
Speaker 6: sell off. Certainly that was the case in the United States,
5:37
Speaker 6: of course, greatly exacerbated and initially triggered by what happened
5:41
Speaker 6: in Japan with the carry trade. The banker Japan gave
5:45
Speaker 6: a somewhat surprising rate hike, and that triggered an unwind.
5:51
Speaker 6: And so we had several different events that came together
5:56
Speaker 6: to cause the sell off. But just as quickly as
5:59
Speaker 6: at occurred, we saw a retracing of much of it
6:04
Speaker 6: because those proximate causes dissipated. And by that I mean
6:09
Speaker 6: we heard from the Bank of Japan that in fact,
6:11
Speaker 6: they're going to be a lot more cautious with any
6:13
Speaker 6: more rate hikes if there is market turmoil or instability.
6:18
Speaker 6: And number two, we got a data point in labor.
6:22
Speaker 6: The initial jobless claims that was better than expected because
6:25
Speaker 6: in the US, the trigger, of course for concerns about
6:27
Speaker 6: a heightened probability of recession came from the July jobs report,
6:33
Speaker 6: and that increased in unemployment. So we've seen something of
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Speaker 6: a recovery. I think we're going to continue to see
6:41
Speaker 6: investors walking on eggshells in the near term because there's
6:45
Speaker 6: still a lot of uncertainty out there. But I think
6:47
Speaker 6: it definitely was an over sold situation.
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Speaker 3: So then how does that set us up into CPI
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Speaker 3: this week? Although I might say initial jobless claims before CPI,
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Speaker 3: for example, more important, and then Jackson Hole, if position
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Speaker 3: is kind of cleaned out a little bit, if we've
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Speaker 3: kind of delevered enough, if technically we've already sort of stabilized,
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Speaker 3: how does that set us up?
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Speaker 6: So I think we certainly will have jitters around, not
7:14
Speaker 6: just initial jobless claims, but clearly CPI, But we have
7:17
Speaker 6: to take it with a grain of salt, right because
7:19
Speaker 6: we are seeing other signs of disinflation. In fact, I
7:23
Speaker 6: thought the most important data point from the July jobs
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Speaker 6: report was wage growth, which has fallen to three point
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Speaker 6: six percent year over year. But certainly we'll have markets
7:33
Speaker 6: hypersensitive to the data this week, especially CPI, and then
7:38
Speaker 6: of course we'll have a lot of sensitivity around Jackson Hole.
7:42
Speaker 6: Now I look to history and say that typically that
7:45
Speaker 6: is used as an opportunity for central bankers to signal
7:52
Speaker 6: shifts in monetary policy, and I would expect that to
7:55
Speaker 6: happen at Jackson Hole, not in every speech, but I
7:58
Speaker 6: think we should get some sense that the Fed will
8:02
Speaker 6: cut in September. Now, I don't think we're going to
8:04
Speaker 6: get an emergency cut before then. I don't think we're
8:06
Speaker 6: going to get bigger than fifty basis points because the
8:09
Speaker 6: Fed seems to be very confident in their approach. And
8:12
Speaker 6: keep in mind, they did a similar thing back in
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Speaker 6: twenty twenty two. Many thought they were behind I think
8:19
Speaker 6: they thought they might be behind it, but they still
8:21
Speaker 6: only started with twenty five basis points, and I think
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Speaker 6: we'll see the same in September.
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Speaker 3: So to that point, how does the FED signal cuts
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Speaker 3: when the market's already pricing in one hundred basis points
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Speaker 3: of cuts? So it's like if they go too far
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Speaker 3: and then all of a sudden, we're going to be
8:35
Speaker 3: looking at what fifty again are being priced in.
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Speaker 6: Well, I think it's a reiteration that we're going to
8:42
Speaker 6: be gradual, that we are going to start cutting, but
8:47
Speaker 6: don't expect it to be at the level you think
8:50
Speaker 6: it is, because we're very comfortable with where the economy
8:54
Speaker 6: is right now, although monetary policy is too restrictive, so
8:57
Speaker 6: I think that's going to be the approach. So certainly
9:01
Speaker 6: not not hawkish, but not the dubvishness that markets are
9:07
Speaker 6: pricing in at this point.
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Speaker 3: Do you feel, then, from that perspective that the carry
9:11
Speaker 3: trade unwine blow up thing that we saw is that over?
9:14
Speaker 3: Because the funny thing is if the FED cuts more
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Speaker 3: than we think, that's actually worse for the carry trade
9:19
Speaker 3: blow up. Do we think that that part of the
9:22
Speaker 3: market turmoil is done?
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Speaker 6: I think it's largely done. I would say it's entirely
9:29
Speaker 6: but I do take comfort in the reassurances from the
9:33
Speaker 6: Bank of Japan and frankly, I don't think they need
9:36
Speaker 6: to hike again for some time. But yeah, certainly there
9:40
Speaker 6: could be wrenches thrown into it if the FED, for example,
9:43
Speaker 6: is more dubbish. I just don't see that on the
9:45
Speaker 6: very near term horizon.
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Speaker 3: All right, fair enough, what do you think we are
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Speaker 3: going to see for CPI? On Wednesday.
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Speaker 6: I think we'll probably see it somewhat in line with expectations.
9:55
Speaker 6: But I always take a step back and say, Okay,
9:58
Speaker 6: let's say that the month over month number is higher
10:02
Speaker 6: than we'd want to see. At the end of the day,
10:04
Speaker 6: the FED is looking at a mosaic of data, and
10:07
Speaker 6: more important to the FED, of course, is forre PCEE.
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Speaker 6: And also I think we often overlook that an important
10:14
Speaker 6: part of the Fed's calculus is consumer inflation expectations. We'll
10:17
Speaker 6: get the Michigan numbers on Friday, and I think that
10:21
Speaker 6: plays a role. Keep in mind that back in June
10:23
Speaker 6: of twenty twenty two, when the FED decided to hike
10:25
Speaker 6: rate seventy five basis points rather than fifty, they gave
10:29
Speaker 6: as their argument in the press conference a couple of
10:32
Speaker 6: different data points that they had received, not just CPI
10:35
Speaker 6: but inflation expectations. So I think that's an important part of.
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Speaker 3: The Calculus's such a good point. And it's also like
10:41
Speaker 3: the trend, you know, the directionality to be important there too.
10:44
Speaker 3: So when my husband texts me and says, oh my gosh,
10:46
Speaker 3: look at this market, what are we doing here? We
10:48
Speaker 3: have to do something. What do I tell him like,
10:50
Speaker 3: calm down, stay in your positions, or are we going
10:52
Speaker 3: to buy the dip? Here?
10:53
Speaker 7: Like?
10:53
Speaker 3: How do you deal with it as a market participant?
10:56
Speaker 6: Well, I look at it this way. If we had
10:59
Speaker 6: been sparn enough to turn off our.
11:01
Speaker 8: Bloomberg terminals, this is so true, and turned on the
11:07
Speaker 8: TV and just watched the Olympics since the start, and
11:10
Speaker 8: then turned back everything on today, it wouldn't seem like
11:14
Speaker 8: anything dramatic, very dramatic had happened while we were enjoying
11:17
Speaker 8: the Olympics, including the break dancing section.
11:20
Speaker 6: And yet that is not what we as humans tend
11:26
Speaker 6: to do. We fixate on every move and every data point.
11:29
Speaker 6: So I think to a certain extent, putting blinders on
11:32
Speaker 6: and thinking about the long term trajectory of where inflation
11:37
Speaker 6: is going, where the FED is going, can be helpful.
11:39
Speaker 6: I think we get so caught up in the short
11:42
Speaker 6: term data and market moves when we often as investors,
11:46
Speaker 6: we typically have much longer time horizons.
11:49
Speaker 3: It's true, it's such a good point. I knew that
11:51
Speaker 3: double tasking here well on my terminal with my little
11:54
Speaker 3: TV up on the screen was the right call. Thank
11:56
Speaker 3: you for validating me, Christina. So does that mean that
11:59
Speaker 3: it's it's still going to be sort of growth or quality.
12:02
Speaker 3: Maybe you go out with quality quality over cyclicals or something.
12:07
Speaker 3: Is that a good way to also think about it.
12:10
Speaker 6: Well, probably in the near term it's going to be
12:11
Speaker 6: quality because there is a nervousness. There still is some
12:14
Speaker 6: risk off sentiment, even though I think certainly conditions became
12:18
Speaker 6: over sold. Having said all that, if the FED begins
12:22
Speaker 6: to cut and we start to see an improvement in
12:26
Speaker 6: economic data, then I think there's this assumption on the
12:30
Speaker 6: part of markets that there will be a reacceleration. That's
12:33
Speaker 6: my base case, and we'll see. In my opinion, markets
12:37
Speaker 6: anticipate that in advance, discount that in advance, which we
12:41
Speaker 6: would mean small caps and cyclicals are likely to outperform.
12:46
Speaker 3: All right, Christina, did you like break dancing? Like? How
12:48
Speaker 3: do we feel about that? In the Olympics so no
12:50
Speaker 3: one else will talk about this with me in radio?
12:52
Speaker 3: How did you feel about it?
12:54
Speaker 6: Well, I was very curious about it. I have to
12:56
Speaker 6: say that's something that I think of fondly as a
13:00
Speaker 6: out of the eighties. But I'm not sure I've seen
13:04
Speaker 6: breakdance moves like the ones I saw at the Olympics,
13:06
Speaker 6: so I didn't know if there were different rules in place.
13:08
Speaker 3: This is fair enough. John Tucker has something he wants
13:10
Speaker 3: to say, sport. No, it's not a whatever. Skate Do
13:14
Speaker 3: you think skateboarding is a sport?
13:16
Speaker 2: Yes?
13:17
Speaker 3: Okay, So what's the difference because they're on a board? Okay,
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Speaker 3: I don't know. I don't know about that. I loved it.
13:24
Speaker 3: I'm so sad it's over all getting into a curmudgeon.
13:26
Speaker 3: By the way, I'm not turning you into anything. I'm
13:29
Speaker 3: just setting you up with certain questions. All right, Christina,
13:32
Speaker 3: thanks a lot. We appreciated Christina Hooper, chief Global market
13:36
Speaker 3: strategist at Invesco, to be totally fair to John Tucker.
13:39
Speaker 3: I'm not entirely clear on the break dancing thing either,
13:42
Speaker 3: but I support winners and that's all fine.
13:45
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14:00
Speaker 3: The headline in a good way is Gocha Bank buying
14:03
Speaker 3: about fourteen point nine percent of Key Corp for about
14:05
Speaker 3: two point eight billion dollars. Now, remember Key Corp was
14:09
Speaker 3: one of the regional banks that was hit pretty hard
14:12
Speaker 3: in the tumult of twenty twenty three. So naturally, who
14:15
Speaker 3: do we go to? Herman Chan Bloomberg Intelligence senior analyst
14:18
Speaker 3: for US regional banks. Usually we call on him when
14:20
Speaker 3: things are going poorly. But this feels to be a
14:22
Speaker 3: good thing for Key Corp. Can you walk us through.
14:26
Speaker 3: Let's walk us through what Key Corp actually was before
14:29
Speaker 3: a Scochia bank decided to get in here.
14:30
Speaker 9: Sure, so Key Corp regional bank based in Ohio Cleveland,
14:35
Speaker 9: strong presence in commercial ending and has a really robust
14:41
Speaker 9: investment bank and capital markets capability for its size. On
14:44
Speaker 9: the flip side, the bank was really has been really
14:48
Speaker 9: pressured by the higher interest re environment. It got caught
14:52
Speaker 9: off sides a little bit by both its hedging strategy
14:55
Speaker 9: and its investments in lowly yielding securities when interest rates
14:58
Speaker 9: were near zero. So it's it's margin and profitability has
15:02
Speaker 9: lagged the peer group over the past couple of years.
15:05
Speaker 9: That being said, things were improving and didn't require any
15:10
Speaker 9: additional capital infusion. There was on a path to self help.
15:16
Speaker 9: Margin had already reached the bottom. But now the with
15:19
Speaker 9: the two point eight billion capital infusion from Scotia Bank,
15:22
Speaker 9: they can accelerate that earnings profitability improvement story.
15:27
Speaker 3: How long does it take to get something like this done? Like,
15:30
Speaker 3: has this been in the works for a while or what?
15:31
Speaker 9: Yeah, it seems like based on both the calls that
15:36
Speaker 9: that Key Corp. And Scotia Bank conducted earlier this morning,
15:40
Speaker 9: the CEOs had ongoing conversations about a potential investment. From
15:46
Speaker 9: what I understand, Scotia Bank wanted to expand in the
15:49
Speaker 9: US and had done a lot of due diligence in
15:54
Speaker 9: looking at opportunities, and Key Porp was their top choice.
15:58
Speaker 9: So it adds a great earning stream and exposure to
16:04
Speaker 9: the US for Scotia Bank and for Key Corp. It
16:07
Speaker 9: really improves its capital and liquidity and really puts them
16:11
Speaker 9: on offense rather than playing defense for the past couple
16:13
Speaker 9: of years.
16:14
Speaker 3: How are the banks like Key Corp doing as interest
16:17
Speaker 3: rates may fall somewhat soon.
16:19
Speaker 9: Yeah, I guess I would contrast it with the tumult
16:23
Speaker 9: of March and April of last year. The banks had
16:28
Speaker 9: largely been very defensive pretty much up to the end
16:33
Speaker 9: of last year. Reducing its lending capacity, trying to improve
16:39
Speaker 9: its capital and liquidity ahead of both fears about deposits
16:44
Speaker 9: leaving and also higher regulatory burden. Right now, it seems
16:48
Speaker 9: like they're in a much stronger position. Capital has been
16:52
Speaker 9: built up, they're back to lending. The only issue is
16:55
Speaker 9: there's not a lot of demand, and the banks are
16:58
Speaker 9: positioned for potentially or interest rates that can improve some
17:02
Speaker 9: lending going forward. They've had a lot of the potential
17:05
Speaker 9: rate decline, so they're in a fairly good position to
17:09
Speaker 9: really prosecute the opportunity.
17:12
Speaker 3: What about deposits? Has deposit flight stopped, particularly if rates
17:17
Speaker 3: wind up coming down. I'm just waiting for my market's
17:19
Speaker 3: account all of a sudden started to tick lower and
17:22
Speaker 3: yield where are we here with that?
17:24
Speaker 9: My high savings account is already ticked down in anticipation
17:28
Speaker 9: for Rencooks, so American Express, I'm not a big fan
17:31
Speaker 9: of that. I would say that the posits have really stabilized.
17:36
Speaker 9: There's no real rush to build the posits now because
17:39
Speaker 9: as I said before, there's not a lot of demand
17:42
Speaker 9: for the lending side, so you don't need a lot
17:45
Speaker 9: of deposits to really fuel that that you know, the
17:49
Speaker 9: muted demand appetite out there for loans. That being said,
17:53
Speaker 9: the positle cards aren't rising either, and they're pretty stable
17:56
Speaker 9: because the Feds stabilized there the Fed funds rate for
18:01
Speaker 9: a bit now, and we'd expect, you know, some stable
18:05
Speaker 9: margin depending on the bank, some could be upcome, some
18:09
Speaker 9: could be down over the next year just based on
18:11
Speaker 9: their balance sheets.
18:12
Speaker 3: Are there other potential targets for investments from other banks
18:16
Speaker 3: in this kind of scenario.
18:17
Speaker 9: Yeah, from what I understand that there's a unique way
18:22
Speaker 9: of accounting for the Canadians where some small portion of
18:29
Speaker 9: investments in financial institutions has a as a positive capital calculation,
18:36
Speaker 9: So it might be more focused on the Canadians in general.
18:40
Speaker 9: But that being said that we have seen some pickup
18:44
Speaker 9: in traditional M and A activity in the United States.
18:48
Speaker 9: Discover Capital one is the biggest one that we're still
18:50
Speaker 9: waiting for regulatory regulatory approval, and then there's some smaller
18:54
Speaker 9: banks that have done some deals as well. So it
18:57
Speaker 9: seems like that the the activity is going to rebound
19:01
Speaker 9: even more once we get rate cuts.
19:03
Speaker 3: All right, really good stuff, Thank you so much. Herman
19:05
Speaker 3: chan He is so happy when he comes in and
19:08
Speaker 3: doesn't have to talk about banks blowing up, so exactly.
19:11
Speaker 9: I'm no longer the grim Reapers.
19:14
Speaker 3: It was like Sam Fizzelli for a while with COVID,
19:16
Speaker 3: and it was Herman Chan with the bank blow up,
19:17
Speaker 3: and now you know, we're in a different places. Herman
19:19
Speaker 3: Chan Bloomberg Intelligence, senior analysts for US regional banks. We
19:22
Speaker 3: very much appreciate that.
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Speaker 5: Thirty, Alex Stee, Paul Swinny live here in our Bloomberg
19:46
Speaker 5: Interactive Broker's studio. Also streaming video on YouTube ahead over
19:51
Speaker 5: YouTube dot com and search Bloomberg Podcast. That's where you
19:53
Speaker 5: will find us. Boy, if you think back a week ago,
19:56
Speaker 5: right now, the market was panicking. It felt like, I mean, people,
20:00
Speaker 5: we're selling everything across the board, and it is a
20:02
Speaker 5: real confluence of events there that really spooked the market.
20:05
Speaker 5: The market stabilized kind of midday and into the afternoon
20:08
Speaker 5: on Monday, and then kind of clawed back some of
20:10
Speaker 5: that selling later in the week, which brings us today
20:13
Speaker 5: kind of a mixed market, red and green on the
20:15
Speaker 5: screen here. But let's see where we go from here,
20:17
Speaker 5: and we do that with a professional. Sarah Ponzik, Financial Advisor, UBS,
20:22
Speaker 5: Private Wealth Management, full disclosure. That's where the Sweeney pile
20:26
Speaker 5: of cash is at UBS. So they have a whole
20:29
Speaker 5: wing just taking care of me. That's nice. Yes, I've
20:32
Speaker 5: heard that Tonio c He does it just because he
20:38
Speaker 5: likes me. All right, Sarah, what were you What kind
20:41
Speaker 5: of conversations were you having with your clients last week?
20:44
Speaker 5: It must have been Monday. Must have been a little dicey,
20:46
Speaker 5: it was.
20:47
Speaker 1: And what a difference just a couple of days makes
20:50
Speaker 1: On Monday, if you woke up and you looked at
20:53
Speaker 1: the headlines, then you saw what had happened overseas, and
20:56
Speaker 1: then you looked at futures markets, and then the market
20:58
Speaker 1: opened at nine thirty am and it was just a
21:00
Speaker 1: sea of red.
21:01
Speaker 10: It felt like the world was falling apart. And I did.
21:03
Speaker 1: I mean I had incoming calls all day long from
21:07
Speaker 1: clients asking what is going on?
21:10
Speaker 10: Do we need to be concerned?
21:11
Speaker 1: Should we be selling our stock portfolio, and the answer
21:14
Speaker 1: was emphatically no, because as we saw by the end
21:17
Speaker 1: of the week, what a difference a couple of days makes.
21:20
Speaker 1: And if we think back to why why did Monday happen?
21:24
Speaker 1: Last week, there was a confluence of events. Yes, we
21:27
Speaker 1: saw the yen carry trade unwinding. It was, you know,
21:31
Speaker 1: just more concerns about recession posts that jobs report, and
21:37
Speaker 1: just also consider the fact that we had seen almost
21:40
Speaker 1: no volatility this year. We were due for some volatility,
21:45
Speaker 1: and then it just took a couple of days an
21:47
Speaker 1: initial job as claim suport, which showed maybe the labor
21:49
Speaker 1: market isn't as dire as the prior Friday had really suggested,
21:53
Speaker 1: which usually doesn't move markets, but it did. And then
21:55
Speaker 1: by the end of the week, if you had fallen
21:57
Speaker 1: asleep the entire week, you would have never known Monday happened.
22:00
Speaker 1: The S and P five hundred was unchanged by the end.
22:02
Speaker 3: I so wish that I had done that. I sleeping
22:05
Speaker 3: as my superpower. I could definitely have done that for
22:07
Speaker 3: like a whole week. So, Sarah, I guess the question
22:10
Speaker 3: then is, so if someone says, oh my gosh, I'm panicking,
22:12
Speaker 3: do I change what I do. You're like, no, just
22:14
Speaker 3: hang tight, But can you rotate kind of within that
22:17
Speaker 3: and take advantage then of some of the opportunity that
22:20
Speaker 3: came about.
22:21
Speaker 1: Absolutely last week presented opportunity. So especially if you're someone
22:25
Speaker 1: who's been sitting on cash and it's been great, you
22:28
Speaker 1: can sid in a money market, you're earning you know,
22:30
Speaker 1: five and a half percent in cash, fantastic.
22:32
Speaker 10: But now we're closer than.
22:34
Speaker 1: Ever to really believing that that's not going to be
22:37
Speaker 1: the case in quite some time. We're going to see
22:39
Speaker 1: interest rates coming down. So what do you want to
22:40
Speaker 1: do with that cash? Obviously, if you're conservative, you could
22:43
Speaker 1: go by high quality fixed income. But last week really
22:47
Speaker 1: presented an opportunity in the stock market. If you were
22:49
Speaker 1: someone who's been waiting for an entry port, entry point,
22:53
Speaker 1: last Monday presented that self, you know, start putting that
22:56
Speaker 1: cash to work, getting invested, putting a plan in place
22:59
Speaker 1: to get invested in the equity market, And when you
23:01
Speaker 1: think about certain pockets of the market, I mean, we
23:04
Speaker 1: just saw tech absolutely hammered last week, and tech is
23:08
Speaker 1: still a place that we're really still optimistic about. And
23:12
Speaker 1: if you look at US tech valuations last month, they
23:15
Speaker 1: were trading around thirty two times twelve month forward earnings.
23:18
Speaker 1: Now they're down to around twenty seven, so more reasonable
23:22
Speaker 1: and again an opportunity to get invested in a place
23:25
Speaker 1: that had been so high flying and many were just
23:28
Speaker 1: scared chase returns in the beginning of the year.
23:30
Speaker 5: So aside from technology, which again a lot of folks
23:33
Speaker 5: are saying, stick with it, stick with it, where else
23:36
Speaker 5: do you guys see opportunities at there? Because there are
23:39
Speaker 5: again a lot of people that are thinking about if
23:40
Speaker 5: interest rates are coming down, this might be a time
23:43
Speaker 5: for me to think about doing take on more risk Bres.
23:46
Speaker 10: Yes, absolutely so.
23:47
Speaker 1: We've still been very much pushing at the top of
23:50
Speaker 1: our list, I would say high quality growth, which you
23:52
Speaker 1: know at the top of that list is tech. But
23:54
Speaker 1: when you think about more so tactical trades, maybe looking
23:57
Speaker 1: to small caps.
23:58
Speaker 10: You know, we did see a big.
24:00
Speaker 1: Rotation to small caps in July when we started thinking
24:03
Speaker 1: about interest rates potentially coming down. When we think about
24:05
Speaker 1: interest rates moving lower, small caps are going to be
24:07
Speaker 1: that prime beneficiary of that. They have a lot of
24:09
Speaker 1: debt on their balance sheets. But at the same time,
24:13
Speaker 1: if you're someone who is concerned about a recession, and
24:15
Speaker 1: I will say for now a soft landing is still
24:18
Speaker 1: our base case. But in the case of a recession,
24:20
Speaker 1: small cap small caps.
24:22
Speaker 10: Is really not where you want to be overweight, so.
24:24
Speaker 1: Finding that balance but small caps potentially, and then also
24:27
Speaker 1: you can look at some other cyclical industries like industrials.
24:30
Speaker 1: If we do start to see you know, growth continue
24:33
Speaker 1: to move forwards, interest rates come down, maybe balancing out
24:37
Speaker 1: that high growth exposure with a little bit of cyclicality.
24:39
Speaker 1: But again, if we do see more concerns that a
24:42
Speaker 1: recession might be on the horizon cyclicals and small caps,
24:46
Speaker 1: that's where it can get a little bit dicey.
24:47
Speaker 3: It was interesting though, I'm just looking at a one
24:49
Speaker 3: month comp chart of the S and P and the
24:51
Speaker 3: rustle and they didn't really diverge that much. Like small
24:54
Speaker 3: caps didn't tank in relation to the S and P.
24:57
Speaker 3: They sort of moved in tandem. Today they're a little
24:58
Speaker 3: bit off, maybe a little bit more than but like
25:01
Speaker 3: not that much.
25:02
Speaker 1: No, it really was when we think about the rotation
25:04
Speaker 1: we saw in July, it was a one week major
25:07
Speaker 1: snap in which we saw small caps outperform. And now,
25:10
Speaker 1: like like you mentioned, Alex, we really haven't seen a
25:13
Speaker 1: continuation of that, and we are actually of the belief, Look,
25:16
Speaker 1: you should have diversification, you should have a little bit
25:18
Speaker 1: of small caps mid caps in your portfolio.
25:20
Speaker 10: But when we think about where, where is really where
25:23
Speaker 10: are we going.
25:24
Speaker 1: To see the bulk of the growth and the bulk
25:25
Speaker 1: of returns and outperformance in the years to come. We
25:29
Speaker 1: still believe that's high quality growth, large cap tech, and
25:33
Speaker 1: large part because look, we went from talking about great
25:36
Speaker 1: economic projections to talking about maybe a recession, and frankly,
25:41
Speaker 1: if there are recession concerns, where do people go. They
25:44
Speaker 1: want high quality, they want growth, they want earnings, and
25:46
Speaker 1: nowadays that has become megacap tech.
25:49
Speaker 10: So we still are optimistic there.
25:51
Speaker 1: Yes, you want diversification, but we're not huge proponents of
25:54
Speaker 1: a major rotation, just quite yet.
25:56
Speaker 5: All right, you're in South Florida. It seems like everybody
25:58
Speaker 5: and your brother's coming down there.
26:00
Speaker 3: Yeah, sure, she's from there.
26:01
Speaker 1: So well, that's actually what I say all the time,
26:04
Speaker 1: alex Is, Look I did. I moved down to Florida
26:07
Speaker 1: twenty twenty one, when the entire world living in Florida,
26:10
Speaker 1: everyone's still moving there. But I say, in defense, look
26:13
Speaker 1: I was here first.
26:13
Speaker 10: I grew up here. I promise I'm not an outsider.
26:17
Speaker 5: Is it still is it? Are they still coming? Do
26:19
Speaker 5: you think? I mean, I know you and your office
26:21
Speaker 5: and all the other folks down there are welcoming everybody down.
26:23
Speaker 1: It's Look, it's it's not twenty twenty one, twenty twenty
26:26
Speaker 1: two anymore. It's definitely slowed. Even if you look at
26:29
Speaker 1: the real estate market by US prices haven't come down,
26:32
Speaker 1: but they are not, you know, sky continuing to skyrocket
26:35
Speaker 1: at ridiculous, ridiculous paces. So I would say, yes, every
26:39
Speaker 1: now and then, I'm still meeting people on the street
26:42
Speaker 1: you say, oh, I just moved here from New York,
26:43
Speaker 1: I just moved here from New Jersey. I just moved
26:45
Speaker 1: here from California. All the time, but it has slowed
26:50
Speaker 1: from you know, the breakneck pace at which we were
26:52
Speaker 1: seeing just a couple of years ago.
26:53
Speaker 3: All those stories that like there's not enough schools, like
26:55
Speaker 3: not a private schools, not enough highways for all the traffic.
26:59
Speaker 1: Like I know, yes, there's traffic has gotten a lot worse.
27:05
Speaker 1: And at the same time, anyone who has kids, not
27:08
Speaker 1: yet me, but thinking about if you're moving down here,
27:11
Speaker 1: you've got to get your kid on waitless for school.
27:15
Speaker 1: Public schools are all overcrowded for trying to get you know,
27:18
Speaker 1: a young child into daycare. They're the first person you
27:21
Speaker 1: have to tell that you might be having a child,
27:23
Speaker 1: because you know, you have to get on the weight load.
27:26
Speaker 1: All my neighbors are telling me this. But yeah, I
27:29
Speaker 1: know it's it's it's definitely different.
27:31
Speaker 10: It's very real.
27:31
Speaker 1: All those stories that you hear, they come from a
27:34
Speaker 1: place of truth.
27:35
Speaker 5: It's just you wonder how, I mean, how long that
27:37
Speaker 5: economy can support all that? I mean, I.
27:41
Speaker 10: Wonder the same.
27:42
Speaker 1: No, we have seen a slowing it's it's not the same,
27:44
Speaker 1: but we're still welcoming people down there.
27:47
Speaker 3: With Florida taxes, like, you don't pay a lot of tax, no.
27:50
Speaker 10: State income tax.
27:52
Speaker 3: Wait, doesn't that change because you got to like build
27:55
Speaker 3: the stuff like or just.
27:56
Speaker 5: Get its revenue.
27:57
Speaker 1: Property taxes are higher, Okay, so are higher property taxes,
28:02
Speaker 1: you know, real estate taxes. But yeah, no state income tax,
28:05
Speaker 1: of which I would also say, you know, I have
28:07
Speaker 1: a lot of clients up here.
28:08
Speaker 10: That's why I'm in studio today.
28:10
Speaker 1: I'm right here visiting clients, a lot of people trying
28:13
Speaker 1: to change residency for that very reason really, So it's
28:16
Speaker 1: definitely a factor that comes into play, you know, with
28:19
Speaker 1: the alert.
28:19
Speaker 5: So that's that's why if your financial advisor, like Sarah,
28:24
Speaker 5: you have to be up on the municipal bond market buying.
28:27
Speaker 5: See we're going to get Alex into the municipal bond market.
28:30
Speaker 3: Hey man, I have to handle all those segments when
28:32
Speaker 3: you're out. On Friday, I started sending prep messages to
28:35
Speaker 3: our producer.
28:36
Speaker 10: Great tax free income, Alex, Great tax free.
28:38
Speaker 3: No, it's just it hurts my brain. But before we
28:41
Speaker 3: let you go, though, I had a question about the
28:43
Speaker 3: cash so money market fun cash, right, that's sitting there,
28:45
Speaker 3: You're like five percent that's going to go away. Is
28:47
Speaker 3: there like a level where you guys think about where
28:49
Speaker 3: you're like, if it hits three percent, that's when the
28:52
Speaker 3: cash really moves, Like I've been thinking about that with
28:54
Speaker 3: say my high savings account.
28:56
Speaker 10: That is a good question.
28:57
Speaker 1: I don't know if there's really a level in which
28:59
Speaker 1: people are going to say, oh my gosh, now I
29:01
Speaker 1: need to start moving cash. I think that mentality, that
29:03
Speaker 1: psychological shift needs to start happening now because look, interest
29:07
Speaker 1: rates are going to come down. We more so think
29:09
Speaker 1: about it, especially if you're someone who's living off of
29:10
Speaker 1: your portfolio, think of it, Okay, how much are you
29:13
Speaker 1: spending every year off your portfolio?
29:15
Speaker 10: Maybe you still want to keep.
29:16
Speaker 1: That in cash or cash like securities like a CD
29:18
Speaker 1: or a Treasury bill, so you know that even if
29:20
Speaker 1: there's volatility in the market, you don't have to sell
29:23
Speaker 1: your stocks at a discount. You're not worried about that
29:25
Speaker 1: you have enough cash on hand anything beyond that unless
29:28
Speaker 1: you have something that that cash is Earmark tour, you
29:31
Speaker 1: probably want to get that invested.
29:32
Speaker 5: So in a typical you know, ubs account that that
29:35
Speaker 5: you handle. Have your clients been holding more cash because they,
29:38
Speaker 5: in fact can make a decent return.
29:40
Speaker 10: I would say yes.
29:41
Speaker 1: Over the last year we've been trying to encourage them
29:45
Speaker 1: to get invested, and most of the time, look, we
29:48
Speaker 1: like to put an entire plan in place and say look,
29:50
Speaker 1: especially if you're someone look work, we work with a
29:52
Speaker 1: lot of business owners. You come at a liquidity event
29:55
Speaker 1: and all of a sudden, you have a lot of
29:57
Speaker 1: cash on hand. That's scary. You would control over your business,
30:00
Speaker 1: you don't have control over the capital markets. How do
30:02
Speaker 1: you think about investing that? So it's not as though
30:05
Speaker 1: you were going to go ahead and you're going to
30:06
Speaker 1: get all of that cash invested in a month. You're
30:09
Speaker 1: going to take time to get that invested, but maybe
30:11
Speaker 1: locking in yields and fixed income now before yields come down,
30:15
Speaker 1: and then on the stock side, figuring out how much
30:17
Speaker 1: risk are you comfortable with and maybe dollar cost averaging
30:20
Speaker 1: over six months, twelve months, even eighteen months, depending on
30:23
Speaker 1: your risk tolerance. But that's really where the psychological psychological
30:27
Speaker 1: shift takes place, when you go from running a business
30:30
Speaker 1: where you have so much control over your income to
30:33
Speaker 1: all of a sudden being subject to volatility in the
30:35
Speaker 1: capital markets. It's working through that change.
30:37
Speaker 5: Interesting, all right, Sarah, thank you so much for joining us.
30:40
Speaker 5: Always great to see you. Sarah as a former reporter
30:42
Speaker 5: here at Bloomberg.
30:43
Speaker 3: Now she's doing I haven't seen you since Kaley's wedding.
30:46
Speaker 1: It's fine, right, I just saw Kelly. She's in town
30:48
Speaker 1: just for the day, so I was so lucky I
30:50
Speaker 1: got to say hi.
30:51
Speaker 5: All right, Sarah Pinzac. She's a financial advisor ubs private
30:54
Speaker 5: wealth management down there in Boca Ratona, Florida. This is
30:59
Speaker 5: hot in the summer.
31:00
Speaker 3: But why do you go to California? From to Florida. Well,
31:04
Speaker 3: they're like the same for me.
31:05
Speaker 10: No, no, no, it's in the taxas.
31:09
Speaker 5: The weather in California is not warm. I guess that's
31:11
Speaker 5: true unless you're inland and then it's crazy hot. But
31:14
Speaker 5: on the coast it's cool. They have instead of having fog,
31:16
Speaker 5: you know what, they have marine layer.
31:18
Speaker 10: Marine layer.
31:19
Speaker 5: It's not fog. It's a marine layer. That's how they
31:22
Speaker 5: do in San Diego, Carmel. It's just fog. So we'll see.
31:28
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31:32
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31:35
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31:38
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31:46
Speaker 3: Bloomberg Intelligence Radio. We are live from the INTERACTI Broker
31:49
Speaker 3: Studio right here in Midtown Manhattan. Also check us out
31:52
Speaker 3: on YouTube. The Big Take story are always the best stories.
31:56
Speaker 3: They dig into different topics that not only Wall Street
31:59
Speaker 3: but also Main Street can kind of sync their teeth into.
32:02
Speaker 3: And today's big story, A Big Take story is no different.
32:05
Speaker 3: The title is Hedge Funds Smell Blood as lenders turn
32:10
Speaker 3: on each other. The title was so good I read
32:12
Speaker 3: the whole piece before I even knew I was doing
32:14
Speaker 3: this segment. Eliza Reynolds Hannon joins us. She's senior debt
32:17
Speaker 3: reporter and she's standing by, so Eliza, before we get
32:20
Speaker 3: into the nuts and bolts of the story. The way
32:23
Speaker 3: I think of it is, Okay, you're a company, you
32:25
Speaker 3: need money, you go, you go to lenders, you take
32:27
Speaker 3: out some loans, and there's a capital structure, and that's it.
32:31
Speaker 3: And if I default, then the person on the bottom
32:32
Speaker 3: end of the capitol structure doesn't get a money, doesn't
32:34
Speaker 3: get the money, or it gets a reduced payment. And
32:38
Speaker 3: that's normal, right, That's not where we are anymore in
32:41
Speaker 3: this world. No, it's not.
32:44
Speaker 7: It's like the security that you thought you once enjoyed
32:48
Speaker 7: as a lender, especially as secured lender or a top
32:50
Speaker 7: priority lender, just kind of can disappear right before your.
32:54
Speaker 6: Eyes these days.
32:55
Speaker 7: And that's because the lender protections on these leverage loans
33:00
Speaker 7: or high yield bonds has just eroded over a decade
33:04
Speaker 7: of high competition for the higher yielding paper in the
33:07
Speaker 7: market in a bid to get a chunk of some
33:10
Speaker 7: of those rare, really nice, high yielding loans. Investors have
33:15
Speaker 7: agreed to waive all sorts of terms and protections that
33:17
Speaker 7: once put them in the position to be able to
33:19
Speaker 7: say not so fast.
33:20
Speaker 10: You know, I basically own.
33:22
Speaker 3: You now, which is really crazy because then it also
33:26
Speaker 3: opens the door to then a company going to all
33:29
Speaker 3: its different creditors right and trying to strike different deals.
33:32
Speaker 3: Can you walk me through that part?
33:35
Speaker 4: Right?
33:35
Speaker 7: So what happens is the company needs often at least
33:39
Speaker 7: a majority, bare majority, of lenders to agree to pulling
33:46
Speaker 7: some of these maneuvers, like stripping assets from the collateral
33:49
Speaker 7: package of one loan and moving them into a new,
33:52
Speaker 7: unrestricted subsidiary, in order to all of a sudden have
33:55
Speaker 7: new collateral that it can raise that against. So it
33:59
Speaker 7: goes to lenders and says, hey, if you agree to this,
34:03
Speaker 7: you know, you and a few friends who all together
34:05
Speaker 7: hold fifty one percent of this loan. Sometimes it's a
34:08
Speaker 7: higher percentage, we will let you actually skip ahead of
34:12
Speaker 7: the rest in the new capital structure. We'll let you,
34:15
Speaker 7: for instance, be the funds who can put in the
34:18
Speaker 7: new debt that we're asking for, which we'll be backed
34:21
Speaker 7: by the old assets that you used to think you
34:23
Speaker 7: already had as collateral, and for that reason, you actually
34:27
Speaker 7: won't have to write off this whole investment. You'll have
34:29
Speaker 7: another chance at collecting even more yield and eventually getting
34:33
Speaker 7: repaid on everything.
34:34
Speaker 3: So how do hedge funds come in on this?
34:36
Speaker 7: Then, well, the hedge funds have you know, distressed investors
34:40
Speaker 7: are no stranger to underhanded tactics or kind of just
34:45
Speaker 7: rough strategies, but nevertheless you have sort of seen them
34:50
Speaker 7: go through stages of grief, it seems, with regard to
34:52
Speaker 7: this new order. So in the beginning, somewhere in denial,
34:58
Speaker 7: you saw them say not my not my company, not.
35:00
Speaker 6: My private equity sponsor.
35:02
Speaker 10: They wouldn't do me like that.
35:03
Speaker 7: And as it's happened, even more and more they started saying, Okay,
35:06
Speaker 7: we need to go on the defensive. We need to
35:09
Speaker 7: organize to you know, almost protest that this that this happened,
35:14
Speaker 7: and say, already, you know sixty percent of us have
35:17
Speaker 7: gotten together and said we're not going to work with you,
35:19
Speaker 7: and so you can't actually pull this off. And that's
35:22
Speaker 7: we talk about in the story, that's the co op
35:24
Speaker 7: agreement phenomenon. But others are now saying forget defensive. We
35:29
Speaker 7: need to get offensive, And so they are piling up
35:34
Speaker 7: on cash so that when indeed the company does say,
35:37
Speaker 7: whoever here can give us new money, We're going to
35:40
Speaker 7: put you in the prime position and you can kick
35:42
Speaker 7: all your peers down in the repayment line. You know,
35:46
Speaker 7: we're going to give you the actual the new claim
35:48
Speaker 7: to that collateral as long as you top us off
35:51
Speaker 7: with some new financing. So the way to play this
35:55
Speaker 7: new phenomenon well and when is to always have cash
35:59
Speaker 7: on hand that you can and say, hey, put me
36:01
Speaker 7: in the best position and I'll give you a little
36:03
Speaker 7: more financing.
36:04
Speaker 3: Man, this makes my head hurt. I mean, this is
36:07
Speaker 3: a dumb question. But if I'm a senior debt lender,
36:10
Speaker 3: why do I want to get involved in this at all?
36:12
Speaker 3: If I don't know if I could go to bed
36:13
Speaker 3: one night and feel very secure in my investment and
36:15
Speaker 3: the next morning wake up and have like thirty cents
36:17
Speaker 3: on the dollar, Like, why would I even do that?
36:20
Speaker 6: Well, you kind of don't have a choice.
36:22
Speaker 7: There's not anywhere else to go in the market up
36:25
Speaker 7: until now to get those high returns that will keep
36:28
Speaker 7: you employed as a portfolio manager or keep you getting
36:32
Speaker 7: new money in. It's a little bit of a you know,
36:37
Speaker 7: an immediacy bias that you want. You're only looking to
36:40
Speaker 7: the next quarter or the quarter after that. You need
36:43
Speaker 7: to be churning out these high yields for your investors
36:45
Speaker 7: to stay happy, and you really are just kind of
36:47
Speaker 7: crossing your fingers and hoping it doesn't come to your company.
36:51
Speaker 7: But then when it does, these liability management exercises, so
36:55
Speaker 7: they're called, or the instances of violence, are often designed
36:59
Speaker 7: to actually give the company another chance at a turnaround.
37:02
Speaker 7: So if the obstacles to the company are a bit
37:06
Speaker 7: macroeconomic based or you know, supply demand, there's some sort
37:10
Speaker 7: of phenomenon that's not totally secular. They say, you know what,
37:16
Speaker 7: we can take on a little bit more of an
37:17
Speaker 7: interest burden, and if we can just get to next year,
37:19
Speaker 7: when all of a sudden this or that regulation will change,
37:22
Speaker 7: this company can actually turn it around. We avoid filing
37:26
Speaker 7: for bankruptcy, and then everything will work out fine. So,
37:29
Speaker 7: you know, the hedge fund managers who go to sleep
37:31
Speaker 7: and decide to keep investing in this are kind of
37:34
Speaker 7: feeling like they don't have anywhere else to turn to
37:37
Speaker 7: generate the iells that they need to generate.
37:39
Speaker 3: How many of those companies actually do survive, though.
37:42
Speaker 7: That's the important question, and so some of that data
37:45
Speaker 7: is really trickling out now, and we do analyze it
37:47
Speaker 7: in the story. Some of them survive, but we have
37:52
Speaker 7: seen increasingly the companies that do one of these exercises
37:56
Speaker 7: in say twenty twenty one, by twenty twenty three, they
37:59
Speaker 7: ended up having to file for bankruptcy anyway, and that's
38:02
Speaker 7: where you see. You might think that that means the
38:05
Speaker 7: whole exercise was meaningless, but in a way, it becomes
38:08
Speaker 7: all the more meaningful because that's where the removal of
38:13
Speaker 7: collateral or the transfer of collateral really becomes relevant. Because
38:17
Speaker 7: in a bankruptcy, and say the company is getting liquidated,
38:19
Speaker 7: or even if it's not, all those creditors got pushed
38:23
Speaker 7: down and their collateral was taken away from them. They're
38:25
Speaker 7: recovering zero cents on the dollar or one or two
38:29
Speaker 7: or three cents we show in a chart.
38:30
Speaker 10: And those who.
38:31
Speaker 7: Frogged them by putting a new capital.
38:34
Speaker 10: They come out pretty well.
38:35
Speaker 7: They get ninety cents on the dollar, ninety five seventy
38:38
Speaker 7: Just you see the devastating impact that the original asset
38:44
Speaker 7: Shift has on creditors. When all is said and done
38:47
Speaker 7: in the company needs to hand out its assets in
38:50
Speaker 7: order to give people recoveries.
38:52
Speaker 3: Eliza really appreciate it. I also heard it's your day
38:54
Speaker 3: off and you're doing this anyway. That shows dedication. Thank
38:57
Speaker 3: you very much, Eliza, Roynald Hannah and a senior debt reporter.
39:01
Speaker 3: Really great story is today's Big Take. You can check
39:03
Speaker 3: it out. You can read more of this story on
39:05
Speaker 3: the Bloomberg and at bloomberg dot com slash Big Take
39:08
Speaker 3: again that headline hedge funds smell blood as lenders turn
39:13
Speaker 3: on each other. Definitely go ahead and check that out.
39:16
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