Latest / Bloomberg Intelligence / UAW, Tech Earnings, Regional Banks, and Bonds

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UAW, Tech Earnings, Regional Banks, and Bonds · Bloomberg Intelligence

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Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney alongside
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Speaker 1: my co host Matt Miller.
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Speaker 2: Every business day we bring you interviews from CEOs, market pros,
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Speaker 2: and Bloomberg experts, along with essential market moving news.
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Speaker 1: Find the Bloomberg Markets Podcast on Apple Podcasts or wherever
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Speaker 1: you listen to podcasts, and at Bloomberg dot com slash podcast.
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Speaker 1: All right, we still have the auto workers on strike.
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Speaker 1: It seems like the strike is expanding in scope. We're
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Speaker 1: not doesn't seem any closer to a solution here, questions
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Speaker 1: what does it mean for these companies in their balance sheets?
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Speaker 1: So we got Joel Levington here. He runs all credit
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Speaker 1: research for Bloomberg Intelligence, and his day job he follows
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Speaker 1: these auto guys and the industrial companies from the credit perspective. So, Joel,
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Speaker 1: you know, when I think of the auto companies, I
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Speaker 1: don't think of them with the strongest balance sheets and
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Speaker 1: strongest credit profiles. And if this strike goes on, is
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Speaker 1: it a risk here or what type of risk is
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Speaker 1: it to their balance sheets and to their credit?
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Speaker 3: Yeah, Paul, it's a great question. And really the US
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Speaker 3: companies are autos have weaker balance sheets to begin within
1:02
Speaker 3: the European names. It hasn't really been too much of
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Speaker 3: a concern at this point, but as it extends already
1:09
Speaker 3: in week six, it becomes an issue. And really it
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Speaker 3: becomes an issue because the payables on these companies balance
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Speaker 3: sheets are huge, you know, in excess of thirty billion dollars,
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Speaker 3: and you don't really have receivables to offset that. So
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Speaker 3: you have this liquidity issue of you already lost mat machtables.
1:26
Speaker 3: Like you know, you're paying your suppliers every sixty days
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Speaker 3: and as as you have no sales, like you're thought
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Speaker 3: to pay them. On the flip side, remember they're selling
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Speaker 3: to their dealers, so they get the cash kind of upfront.
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Speaker 3: So that cash, right yeah.
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Speaker 2: Because when you sell a car to a dealer, you
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Speaker 2: don't get cash for it, right.
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Speaker 3: Right, Well, it's done through floor or usually done through
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Speaker 3: floor plays, so well essentially you get it very quickly,
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Speaker 3: and so there's a timing mismatch. You get the cash
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Speaker 3: up front and then you have to pay your supplier.
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Speaker 3: So when there's no more sales or when sales decline,
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Speaker 3: you don't have the money come in because you're not
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Speaker 3: selling to the dealer. But on the flip side, you
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Speaker 3: still have to pay your vendors, and so that's where
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Speaker 3: all the cash strain happens. If you were called during
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Speaker 3: the pandemic. Ford had an issue eight and a half
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Speaker 3: billion dollars worth of debt, which is a very high
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Speaker 3: coupon debt, which eventually they called in at a premium
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Speaker 3: on top of that just to keep their liquidity whole. So,
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Speaker 3: you know, hopefully that's not the situation we're in, but
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Speaker 3: certainly it feels more.
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Speaker 2: And we get into next year and we look back,
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Speaker 2: I'm sure this strike will be resolved in the next
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Speaker 2: few weeks. Seems like they're done. They just need to
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Speaker 2: strike a little bit longer, Is that right?
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Speaker 1: Is that kind of the feeling.
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Speaker 2: That's what I got from your interview with David Welch
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Speaker 2: this morning, which is that Sean Fayn has to make
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Speaker 2: a lot of noise. He had huge demands. They're going
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Speaker 2: to get a big pay bump, but obviously not the
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Speaker 2: pensions or the four day work week. Was acruiting for
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Speaker 2: the four day work week, yeah, I thought it would
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Speaker 2: be awesome. Four hour work week is what I'm for.
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Speaker 2: But when you look back at the second half of
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Speaker 2: twenty twenty three, how much of an impact is this
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Speaker 2: going to make on the top line?
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Speaker 3: Probably not that much. I mean there, I think, particularly
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Speaker 3: with Stillanta. So you know, like your hell Cat and
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Speaker 3: Dodge and Chrysler, they built inventory in front of this,
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Speaker 3: knowing that there might be a protracted.
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Speaker 2: And build a lot of jeep wranglers we heard in this.
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Speaker 3: I mean if you go to the so learn the
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Speaker 3: way in our town, they certainly have a lot on
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Speaker 3: their lots of Broncos and rams and jeep so wranglers
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Speaker 3: you mean and wranglers, yes, and so.
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Speaker 2: Broncos are coed.
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Speaker 3: No, well they have have to. Oh okay, but yeah,
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Speaker 3: like all the all the autos had lots of inventory
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Speaker 3: other lots, you know, knowing that you might have a
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Speaker 3: several week lack of supply coming out.
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Speaker 2: So wait, just a sidetrack on the Bronco thing. Uh,
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Speaker 2: you got a dealership in your town that has a
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Speaker 2: ton of Broncos on the lot. Do you go in there?
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Speaker 2: And I mean are they charging five or ten thousand
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Speaker 2: dollars over MSRP or can you actually just buy one?
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Speaker 3: I think you could just buy one?
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Speaker 4: Where do you live?
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Speaker 1: Would do that offline on the bench right the train station?
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Speaker 2: So what do you think the union is going to
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Speaker 2: get at the end of all this. I mean, it
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Speaker 2: looks to me like they're going to get twenty three
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Speaker 2: percent increase and pay right, maybe bigger compounded, but no pensions. Right,
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Speaker 2: They're not going.
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Speaker 1: To get that back.
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Speaker 3: No, I think you're totally right, and I think you're
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Speaker 3: probably in the twenty five percent zone is where it
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Speaker 3: kind of works out. I think one of the reasons
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Speaker 3: that you hear people like Dave walchho does a great
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Speaker 3: job in our Detroit office, talk about it being extended
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Speaker 3: is because if you think about from the UAW side
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Speaker 3: of things, they've had a complete decline in volume and
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Speaker 3: customers for decades, right, and they have to kind of
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Speaker 3: turn it around. So if you can pop a you know,
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Speaker 3: fifteen percent increase in salary on day one, that will
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Speaker 3: get other industries and other autos to be nice that
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Speaker 3: if the uaw's in town, certainly more people could join them,
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Speaker 3: which is really their goal and game to become more signing.
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Speaker 2: Their battery factories now. They I'm sure they hope that
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Speaker 2: some Tesla shops will look at the union and say,
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Speaker 2: you know what, let's do, Let's try it again.
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Speaker 3: Yeah, And all the non union shops down south or
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Speaker 3: in the West.
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Speaker 2: That would BMW.
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Speaker 3: BMW. Volkswagen is building a new two billion dollar scout facility,
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Speaker 3: so I'm not sure if anybody that's gonna happen.
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Speaker 2: But is that really gonna happen? I saw it at
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Speaker 2: the you know, the Import Mechanic in Bronxville, right around
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Speaker 2: the corner from Rosies. They had an international Scout on
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Speaker 2: their lot and I thought, man, that is cool, so cool,
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Speaker 2: but you have no room in your parking garage. I
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Speaker 2: don't know, but I I feel like, is it really
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Speaker 2: gonna happen? Are they Is Volkswagen really gonna revive that
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Speaker 2: brand and actually make a mass production product.
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Speaker 3: They are, although if you look at the products that
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Speaker 3: they've shown online, it looks very very similar to the
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Speaker 3: Ribbean products. Yeah, just without a branding that nobody remembers.
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Speaker 1: Is that Gonna live?
6:02
Speaker 5: Is Gonna live reviewed?
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Speaker 3: I think Ken Live? You know, like they did a
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Speaker 3: convertible bond a couple of months ago, which really gives
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Speaker 3: them some liquidity in time for their next product to
6:12
Speaker 3: come out. But just like all of these ev companies,
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Speaker 3: they're years away from making profits, so it really becomes
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Speaker 3: what's your liquidity and access to the capital markets for
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Speaker 3: more of it? Because you're gonna need it.
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Speaker 2: Let me ask one more stupid car question, then I'll
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Speaker 2: yield around the flour. The cyber truck. Elon Musk on
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Speaker 2: the conference call, when he was so bummed out and
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Speaker 2: getting kind of philosophical and dark. Uh, he said, we
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Speaker 2: never should have, you know, launched into this special product.
6:39
Speaker 2: And you know we we we should have known that
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Speaker 2: this like you know, special edition would have been, would
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Speaker 2: have caused us to go back into production. Hell, he
6:47
Speaker 2: was talking about it as if it were limited.
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Speaker 1: Right.
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Speaker 2: Don't they want to challenge f one fifty, you know,
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Speaker 2: Chevy Silverado, you know Ram fifteen hundred, these massive volume
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Speaker 2: products with huge margins. Isn't that a market that they
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Speaker 2: want to take a piece of or is this just
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Speaker 2: like if you got one in the two year production run,
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Speaker 2: you're lucky and then it's done.
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Speaker 3: I don't think the cyber Truck is the answer to
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Speaker 3: the F one fifty or the Silverado. I think really
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Speaker 3: what they're trying to do there is really work on
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Speaker 3: giga casting, which is really making these huge casts, and
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Speaker 3: when you can do that, you can really cut down
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Speaker 3: production time really quickly. But I think where Tesla is
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Speaker 3: headed is really towards the Toyota side, towards making suv
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Speaker 3: not necessarily making a lot of money off of a
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Speaker 3: pickup truck, but really on the smaller cars, and I
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Speaker 3: think you'll see that with the model too. That's where
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Speaker 3: I think they can get super high volume and get
7:43
Speaker 3: it out to the largest amount of consumers. Right Their
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Speaker 3: business has always been about the retail person, not the consumer,
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Speaker 3: and not the commercial application like you'd seen in F
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Speaker 3: one fifty, So I think that's really where they're headed.
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Speaker 3: But having that ability to cast in great scale at
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Speaker 3: a short period of time, that can give them a
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Speaker 3: competitive advantage even against an amazing manufacturer like Toyota.
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Speaker 1: Ge geez back baby. After like a ten or twenty
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Speaker 1: year hiatus in terms of being a stock and a
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Speaker 1: company that seems to be headed in the right direction.
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Speaker 3: It costs me my hairline, but they are back at
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Speaker 3: action and doing really well, and I think there's potential
8:20
Speaker 3: rating upgrades which should you know, like enhance views of
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Speaker 3: their bonds. They will be separating their energy business in
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Speaker 3: the second quarter of next year or probably at the
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Speaker 3: end of the first quarter, and that really will keep
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Speaker 3: it as a pure aerospace company, and by all metrics
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Speaker 3: they should be back into the A category for the
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Speaker 3: first time in five years, and their bonds do not
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Speaker 3: reflect that. And so that's been a huge winner this year,
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Speaker 3: both in the stock market and in the bond market,
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Speaker 3: and I think that can continue into next year.
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Speaker 1: I'm just looking at the FA function for ge nineteen.
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Speaker 1: You're in twenty nineteen at ninety four billion of debt.
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Speaker 1: Now they've got like twenty three twenty four billion dollars.
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Speaker 3: Yeah, it's me it's amazing if you think about what
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Speaker 3: they did with the finance company. At one point, I
9:03
Speaker 3: think at their peak they had about half a trillion
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Speaker 3: dollars worth of dead outstanding and that's been whittled down
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Speaker 3: to the twenties, about twenty billion dollars today from almost
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Speaker 3: half a trillion.
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Speaker 5: So G is back.
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Speaker 1: It's just a shadow of itself though in terms of size.
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Speaker 3: They have skinny down to the core business of aerospace,
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Speaker 3: and they are really really a strong player in that
9:24
Speaker 3: business with a lot of aftermarket products and a twenty
9:28
Speaker 3: percent margin with very little capital intensity, so that can
9:31
Speaker 3: be a huge home run business. Investors, all right, and
9:34
Speaker 3: who's the CEO. We like this guy, Larry Colepe. He
9:36
Speaker 3: was great at Danahur and has done a tremendous job
9:38
Speaker 3: at g E.
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Speaker 1: See it can be done, so you know, Jack Welch,
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Speaker 1: Jeff mmelt now.
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Speaker 2: Joel Levington. Yeah, we got to get this guy in
9:47
Speaker 2: the studio for like a half hour.
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Speaker 1: I know, you know, he's mind.
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Speaker 2: He can talk about a million questions. Let's go to
9:51
Speaker 2: break so I can ask him some more questions.
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Speaker 1: All right, very good. Joe Levinton, he's the director research
9:54
Speaker 1: at Bloomberg Intelligence.
9:57
Speaker 6: You're listening to the Team Cancer Line program Bloomberg Markets
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Speaker 6: demand wherever you get your podcast.
10:11
Speaker 2: Matt sam Bankmin freed to testify at his for All troup.
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Speaker 1: Can we see this on TV?
10:15
Speaker 3: Is this stuff?
10:16
Speaker 5: Tell?
10:16
Speaker 2: I mean I first when I saw that headline crossed,
10:20
Speaker 2: I was so excited because sheerly because of the drama. Yeah,
10:25
Speaker 2: you know, the the decision I find questionable, but I
10:32
Speaker 2: guess I get it. I mean, it's a not a Reportedly,
10:36
Speaker 2: it's not always the smartest move to make. On the
10:39
Speaker 2: other hand, some people have said he needs to throw
10:43
Speaker 2: this hail Mary because he's losing the game. You know.
10:47
Speaker 2: Then then I got kind of bummed out because I
10:49
Speaker 2: remember it as Katie Greifeld was selling amount of surveillance
10:52
Speaker 2: state there's no cameras allowed. Yeah, and so we've seen
10:55
Speaker 2: everybody else who comes who's not in prison, who comes
10:58
Speaker 2: to testify, but we haven't seen Sam Bankman freed. And
11:03
Speaker 2: the chord sketches are I mean horrendous. I know it's subjective,
11:07
Speaker 2: but they're no bueno like, they're just not realistic at all.
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Speaker 1: Yeah, we need to get some cameras in there. Let's
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Speaker 1: see if I can make a phone call there.
11:14
Speaker 2: He's got a haircut, and I need to see it.
11:16
Speaker 2: You need to see Tom Kane's pointing out, no one
11:18
Speaker 2: cares if he gets a haircut. That's because we can
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Speaker 2: see it all the time, right, you know, all.
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Speaker 1: Right, we had some some tech earnings last night. We're
11:24
Speaker 1: gonna get some more of the Reindeer of this week.
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Speaker 1: You got Amazon still to go after the close, Mogiano,
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Speaker 1: Let's check out with Angelo Zenom. He's a senior industry
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Speaker 1: analyst at CEE f R, A Research Angela. We had
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Speaker 1: last night Alphabet better known as Google, and Microsoft reports
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Speaker 1: some numbers and it seems like for both companies it's
11:42
Speaker 1: all about the cloud. Give us your takeaways from some
11:44
Speaker 1: of those big name tech names last night.
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Speaker 7: Yeah, no, absolutely, it is all about the clouds. You know,
11:49
Speaker 7: I have to saying those numbers.
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Speaker 4: I mean, Alphabet was it a disappointment on the cloud
11:54
Speaker 4: side of things. Sharp deceleration, I think, well below what
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Speaker 4: anybody anticipated at a twenty two percent growth rate. We
12:00
Speaker 4: were looking closer to twenty six to twenty eight percent.
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Speaker 4: And you know, they're clearly losing.
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Speaker 7: Share to Microsoft and Azure, which saw actually an acceleration
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Speaker 7: of their cloud business.
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Speaker 4: Growing twenty nine percent from the twenty six percent growth
12:15
Speaker 4: right we saw just last quarter on their end of things.
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Speaker 4: And listen, I mean, as far as Alphabet is concerned,
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Speaker 4: they are a much smaller player on the cloud side
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Speaker 4: of things, so they should be growing above the growth
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Speaker 4: pace of Microsoft, and the fact that they're not is
12:29
Speaker 4: a big problem. I think the other issue with Alphabet,
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Speaker 4: as far as the numbers we're concerned is as you
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Speaker 4: start falling behind the competition, there's always concern that you
12:38
Speaker 4: may need to spend a little bit more to kind
12:40
Speaker 4: of keep.
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Speaker 7: Up with the pack, and I think going into twenty
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Speaker 7: twenty four, there could be some concern that, you know,
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Speaker 7: maybe Alphabet will need to spend a little bit more
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Speaker 7: than what insensus out there is anticipating.
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Speaker 4: So that's probably what's weighing on the stock significantly.
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Speaker 8: And an on.
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Speaker 4: Microsoft side of things, I'd say it's as good a
12:58
Speaker 4: quarter as you possibly you know, probably we could have
13:00
Speaker 4: gotten executing again on the cloud side, like I mentioned,
13:03
Speaker 4: but also when you kind of look at office commercial growing,
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Speaker 4: you know, high teens growth percentage pace, and then you
13:10
Speaker 4: know Copilot launching next week, it gives them all the
13:13
Speaker 4: momentum in the world kind of going into the December
13:15
Speaker 4: quarter and into calendar twenty twenty four, as they seem
13:19
Speaker 4: like they are kind of the clear leader here on
13:21
Speaker 4: the AI side of things.
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Speaker 2: Yeah, I mean a leader, a leader on cloud right
13:27
Speaker 2: and a leader in AI, both places that Google seems
13:31
Speaker 2: to be dragon. I mean, I see I note that soon.
13:34
Speaker 2: Dar Pachai over at Alphabet says, I'm pleased with our
13:38
Speaker 2: financial results in our product momentum this quarter with AI
13:41
Speaker 2: driven innovations across search, YouTube, and blah, blah blah blah blah.
13:46
Speaker 2: I don't see any AI driven innovations there, and it's possible,
13:50
Speaker 2: it's likely that they're there and I just don't notice.
13:53
Speaker 2: But isn't that important the marketing side of it important?
13:57
Speaker 2: Are they doing anything with artificial intelligence? Yeah?
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Speaker 7: I mean listen, I mean, one, they are kind of
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Speaker 7: ahead of the game in terms of the infrastructure that they're.
14:07
Speaker 4: Building, at least as far as kind of their internally
14:10
Speaker 4: the design ship, right their TPUs, which were they were
14:13
Speaker 4: way ahead of the game on that side of things,
14:15
Speaker 4: So you know, in terms of kind of getting a
14:17
Speaker 4: lower plush structure. From that perspective, I think they are
14:20
Speaker 4: ahead of the game. But and and listen, just like
14:24
Speaker 4: you know, Meta which is going to report up for
14:25
Speaker 4: the close that I they are going to be a
14:28
Speaker 4: leader in terms of kind of you know, leveraging their
14:31
Speaker 4: AI into you know, improving kind of you know the
14:35
Speaker 4: back end and getting you know, such general experience in
14:38
Speaker 4: terms of you know, their third business as well as
14:41
Speaker 4: you know, implementing it into YouTube here over time. But yeah,
14:45
Speaker 4: I mean to your point, at the at the at
14:48
Speaker 4: the onset here kind of early days, it doesn't look
14:51
Speaker 4: like that alphabet at least kind of early on is
14:55
Speaker 4: executing and implementing some of the AI capabilities across their
14:59
Speaker 4: ECO system, maybe the way you know Microsoft is doing
15:03
Speaker 4: on their end.
15:04
Speaker 7: Or what you know, potentially Meta is actually doing with
15:07
Speaker 7: some of their rankings and recommendations on their.
15:10
Speaker 4: End as well. So definitely kind of you know, we
15:13
Speaker 4: investors want to see more out of alphabet clearly given
15:16
Speaker 4: the stock performance here that we just haven't seen yet
15:19
Speaker 4: on the AI side of them.
15:20
Speaker 1: Well, how about on the metafront again re reporting after
15:24
Speaker 1: the close? What's the street really looking for there? I
15:26
Speaker 1: mean again at digital advertising play like Google stocks up
15:30
Speaker 1: one hundred and fifty six percent year to date. What's
15:33
Speaker 1: what's the meta story here? Is all cost cutting or
15:35
Speaker 1: is there still a cloud play there as well?
15:38
Speaker 5: So listen, I think.
15:39
Speaker 4: It's I would say there's a cloud play here. But
15:42
Speaker 4: you know, as far as kind of meta is concerned,
15:45
Speaker 4: I mean, the growth rates are accelerating here into Q
15:48
Speaker 4: three and Q four. We're looking at digital ad growth
15:51
Speaker 4: for them to accept twenty percent, and you look at
15:55
Speaker 4: Alphabets too, results, right, it wasn't all bad. They actually
15:57
Speaker 4: did see some nice search numbers, some good YouTube note numbers,
16:01
Speaker 4: so the digital ads, you know, the ad space is
16:03
Speaker 4: performing fairly well. I think, you know, maybe there is
16:06
Speaker 4: some concern about what guidance is going to look like
16:08
Speaker 4: here in Q four, given some of the comments made
16:11
Speaker 4: from Snap last night in terms of you know, what's
16:13
Speaker 4: going on in the Middle East, although I wouldn't expect,
16:16
Speaker 4: you know, much negativity on that side of things right now,
16:19
Speaker 4: but maybe to your point, I think All Eyes is
16:21
Speaker 4: going to be on the court side of things, more
16:24
Speaker 4: along the lines of what twenty twenty four is going
16:26
Speaker 4: to look like.
16:27
Speaker 7: They should give some indication here like they did last
16:29
Speaker 7: year in terms of.
16:30
Speaker 4: On their call. We do expect, you know, a big
16:33
Speaker 4: hike on the cap X side of things. But if
16:35
Speaker 4: op by you know, for instance, is north of one
16:37
Speaker 4: hundred billion here in twenty twenty four, that's going to
16:40
Speaker 4: cause the stock to you know, to see a negative reaction.
16:44
Speaker 4: So I think All Eyes is really going to be
16:46
Speaker 4: on the ops number here tonight.
16:49
Speaker 2: All right, Angelo, thanks so much for joining us. Angelos
16:51
Speaker 2: you know there from CFRA talking to us about the
16:53
Speaker 2: results that we've seen and those that are coming.
16:56
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17:14
Speaker 1: All Right, interest rates and moving higher. I thought that's
17:17
Speaker 1: good for net interest to come for the banks. We've
17:19
Speaker 1: seen some big banks put up some big net interest
17:21
Speaker 1: income numbers. But it also impacts the value of the
17:24
Speaker 1: bonds on the balance. I forgot about that part of it.
17:27
Speaker 1: Herman Chan joins us. He's a senior ANILSE. He doesn't
17:29
Speaker 1: forget anything ever, forget us regional banks and fintech. He
17:32
Speaker 1: covers it all for Bloomberg Intelligence. So, Herman, how talk
17:36
Speaker 1: to us about this rising industry environment? What does it
17:38
Speaker 1: mean for kind of the regional banks out there in
17:40
Speaker 1: the United States that most of us do our banking with.
17:43
Speaker 9: Right, Sure, so higher rates typically are better for banks,
17:47
Speaker 9: but they need to be moving in a slow measured
17:50
Speaker 9: fashion with rates whipsawing they that they did earlier last year.
17:56
Speaker 9: This year that has proven to be a bit more
18:00
Speaker 9: volatile for banks. So you saw the benefit of that
18:03
Speaker 9: last year when interest rates rose and that interest income
18:07
Speaker 9: rows for the banking group. Now those benefits are being
18:13
Speaker 9: being pushed back to consumers and business customers as the
18:18
Speaker 9: posit costs are rising. So it's been a double edged
18:22
Speaker 9: sword on the rate front. You mentioned earlier that higher
18:27
Speaker 9: rates means higher unrealized gains in their bond holdings, and
18:31
Speaker 9: that's happening, and that's weakening book value.
18:34
Speaker 2: Billy Herman, do so when I think of these bonds
18:38
Speaker 2: that are underwater back in March, I imagined regional banks
18:43
Speaker 2: using April, May, June, July, and August to get rid
18:49
Speaker 2: of those holdings. Why on earth would you still want
18:52
Speaker 2: to have zero coupon treasuries.
18:56
Speaker 9: Well, the issue is that if you sell the bonds,
18:59
Speaker 9: then you chrisp the loss on their balance sheet, right,
19:02
Speaker 9: so that the banks don't want to do that, especially
19:04
Speaker 9: ahead of tougher capital rules and tougher capital requirements.
19:08
Speaker 2: I have, hey, not all of it, but didn't don't
19:10
Speaker 2: you try and minimize your underwater bond portfolio.
19:13
Speaker 9: You can do that in a few ways. You can hedge,
19:17
Speaker 9: so some banks have done that, which is good to see.
19:19
Speaker 9: So any future rate movements will be less pronounced on
19:23
Speaker 9: the unrealized losses, but some haven't and maybe you could
19:27
Speaker 9: say they dropped the ball on that front.
19:29
Speaker 2: So they're still holding these they haven't found some greater
19:32
Speaker 2: fool they have to take to take those portfolio They
19:35
Speaker 2: have not.
19:35
Speaker 1: They're just waiting for these.
19:38
Speaker 9: Underwater securities to mature quarter after quarter.
19:42
Speaker 1: Wow, all right, So what's the market? What's the stock
19:46
Speaker 1: market doing to the regional bank names or they're just
19:48
Speaker 1: thrown all of them out the window or are they
19:50
Speaker 1: trying to find winners and losers?
19:52
Speaker 9: At this point, it seems like there's a lot of
19:54
Speaker 9: negative sentiment out there, and we've seen a number of
19:57
Speaker 9: banks in my coverage universe fifty two week closed over
20:00
Speaker 9: the past week or so. So we talked about weaker margins.
20:06
Speaker 9: There's not a lot of loan growth as well, and
20:08
Speaker 9: then we haven't really seen the the the client in
20:11
Speaker 9: asset quality that's coming ahead for the regionals in terms
20:14
Speaker 9: of exposure to office properties and the like. So there there. Unfortunately,
20:19
Speaker 9: there's a lot of headwinds and it's hard to foresee
20:23
Speaker 9: some of these side ones going away over the next
20:25
Speaker 9: you know, three to six months.
20:27
Speaker 1: Is there a valuation call here where I mean these
20:30
Speaker 1: things has been trading forever. There's great history to see
20:33
Speaker 1: how these names have traded. Is a floor where people
20:38
Speaker 1: just say, boy, if it gets the point eight book,
20:40
Speaker 1: I'm just holding my nose and binessings it eight.
20:44
Speaker 2: Yeah, I don't know. Is point four?
20:46
Speaker 1: Maybe point four? Is there a point? And if so,
20:49
Speaker 1: where are we relative to that point?
20:50
Speaker 3: Yeah?
20:50
Speaker 9: We're probably around like one times tangible book value, which
20:54
Speaker 9: historically has been a very low valuation, UH.
20:58
Speaker 2: In this country, because I remember I spent years in Germany.
21:01
Speaker 5: Right, it's different.
21:02
Speaker 2: Over where one is like, wow, if only I could
21:05
Speaker 2: have one time tangible book value.
21:08
Speaker 5: Bank would love that.
21:08
Speaker 9: I guess it's different across the pond. But here in
21:12
Speaker 9: the US, one time stangible seems to be closer to
21:15
Speaker 9: a trough valuation the stocks that bounce off of those
21:18
Speaker 9: lows you know, in May and June. But now we're
21:22
Speaker 9: sort of back towards that that trough level, So there
21:26
Speaker 9: is UH. I would also point out that historically some
21:29
Speaker 9: of these stronger banks do grow through m and A
21:33
Speaker 9: and periods of weakness. So if you see some further
21:36
Speaker 9: turmoil for the space, some of the stronger players do
21:40
Speaker 9: transact in M and A to get bigger at very
21:43
Speaker 9: attractive pricing. So that's something that could happen over time.
21:47
Speaker 1: You know, I'm just wondering about loan growth because Torch
21:50
Speaker 1: and Slock, the economist over Topollo was out with a
21:53
Speaker 1: note a couple of days ago, and you had it,
21:54
Speaker 1: you know, saying basically thirty three there are thirty three
21:57
Speaker 1: million small businesses in the United States, which I didn't
22:00
Speaker 1: that number. That's good having your back pocket. But their
22:02
Speaker 1: average barring costs has now reached ten percent. At ten percent,
22:08
Speaker 1: am I taking out a loan to expand my business
22:11
Speaker 1: or to start a new business? What are your banks
22:13
Speaker 1: telling you?
22:14
Speaker 9: Yeah, they've talked about that very point, that banks that
22:18
Speaker 9: bank clients and business customers are delaying investing because of
22:22
Speaker 9: the higher rate environments. They've talked about potentially waiting for
22:26
Speaker 9: spreads to tighten a bit more, which may be a
22:28
Speaker 9: bit wishful thinking at this point. So you have seen
22:32
Speaker 9: less demand across the regional banking space by business customers
22:36
Speaker 9: because of the higher interest rates.
22:38
Speaker 1: Yep, very good, herman, Chant, Thank you as always giving
22:41
Speaker 1: us keeping us up to data on what's happening in
22:43
Speaker 1: the world of the regional banks across the US.
22:46
Speaker 6: You're listening to the Team Canser Live program Bloomberg Markets
22:50
Speaker 6: weekdays at ten am eastering on Bloomberg dot com, the
22:53
Speaker 6: iHeartRadio app, and the Bloomberg Business App, or listen on
22:57
Speaker 6: demand wherever you get your podcasts.
23:01
Speaker 1: Brian Whalen joins us. He is the co CIO and
23:05
Speaker 1: generalist portfolio manager at TCW in the fixed income group.
23:09
Speaker 1: Over there, they get a couple shekels under management, so
23:10
Speaker 1: we always appreciate getting Brian's thoughts. Brian, again, we got
23:13
Speaker 1: yields moving higher, and I guess what kind of got
23:15
Speaker 1: a lot of people's attention over the last week or so,
23:17
Speaker 1: is boy, you don't have to just you know, stay
23:20
Speaker 1: in a two year and get five percent. You can
23:21
Speaker 1: go all the way out to curve now the thirty
23:24
Speaker 1: percent and get five percent. On the US Treasury, what
23:26
Speaker 1: do you make about the movement in rates we've seen recently.
23:30
Speaker 5: Yeah, it's been brutal.
23:31
Speaker 10: It kind of got kicked off this summer when the
23:33
Speaker 10: Treasury announced higher anticipated you know, debt issuance, and that
23:38
Speaker 10: just kind of unraveled, you know, volumes of kind of
23:40
Speaker 10: ebbed and flows. But it just kind of feels like
23:42
Speaker 10: a market that nobody wants to step in front of,
23:44
Speaker 10: regardless of the of the value, that at least we see,
23:47
Speaker 10: and I think a lot of others are starting to see,
23:49
Speaker 10: you know, as you said, all the way across the
23:51
Speaker 10: curve at this point.
23:53
Speaker 2: So what has to happen before you can be comfortable
23:57
Speaker 2: getting back in here? I was thinking about when I
24:00
Speaker 2: was a kid, I used to be so bummed out
24:04
Speaker 2: that I missed buying like seventeen percent ten year treasuries, yes,
24:08
Speaker 2: right in the early eighties, and I always thought I
24:10
Speaker 2: wish my parents had bought more of those, you know,
24:12
Speaker 2: before I sort of understood how it all worked. Am
24:16
Speaker 2: I going to look back at this moment and think
24:19
Speaker 2: I wish I bought five percent ten years.
24:22
Speaker 10: I think, so, I do. I remember the same feeling.
24:24
Speaker 10: But I've hearing about people buying, you know, seventeen percent
24:26
Speaker 10: strips way out you know, the curve and duration and
24:29
Speaker 10: this incredible total return to the bond market.
24:31
Speaker 5: I don't think we could promise that.
24:33
Speaker 10: The math just doesn't work that way, but I would
24:36
Speaker 10: tell you, you know, you know, think about five percent across
24:38
Speaker 10: the curve. Think about like what that's telling you in
24:40
Speaker 10: terms of like you know the bond math. It either
24:42
Speaker 10: means that we're going to be here at a five
24:44
Speaker 10: percent funds rate for the next five years, you know,
24:46
Speaker 10: it's it's goldilocks, you know, for a decade, or it
24:50
Speaker 10: means that the Fed still got to raise rates significantly
24:53
Speaker 10: from here hundreds of basis points, only to then unwind
24:56
Speaker 10: that by a lot more on the way down, so
24:58
Speaker 10: that over the next ten years you average five percent.
25:01
Speaker 10: Both scenarios seem pretty unlikely to us, So it seems like,
25:05
Speaker 10: you know, five percent on the treasury curve looks like
25:08
Speaker 10: great value and something we always try to remind ourselves,
25:10
Speaker 10: as you know, you can't time the turn.
25:12
Speaker 5: You know, more likely than not, whether it's.
25:15
Speaker 11: A you know, it's a you know it's a kind
25:17
Speaker 11: of multi kind of standard deviation event, you know, some
25:21
Speaker 11: sort of financial accident, so to speak, or it's just
25:24
Speaker 11: kind of the natural, kind of.
25:25
Speaker 10: Organic letting the air out of the economy and seeing
25:28
Speaker 10: unemployment start to rise and consumer spending start to come down.
25:32
Speaker 10: Either way, when the turn comes, you're probably not gonna
25:35
Speaker 10: be able to kind of catch that. So it's best
25:37
Speaker 10: to start kind of adding now dollar cost averaging in
25:40
Speaker 10: getting long understanding that you may be a little some
25:43
Speaker 10: bumps and bruises along the way, but over the long
25:45
Speaker 10: term it's going to provide a really nice return for you.
25:47
Speaker 2: Well, let me ask a similar question. It's kind of
25:51
Speaker 2: the same question a different way. I got a viewer
25:53
Speaker 2: or listener writing in asking if you have a rates
25:56
Speaker 2: for you here. Are we higher because of technical inflation
26:00
Speaker 2: and stronger growth or is it fundamental structural change in
26:05
Speaker 2: ownership of rates and issuance to remain very elevated.
26:09
Speaker 10: I think the ladder, the whole issuance thing is a
26:12
Speaker 10: little bit kind of like finding a narrative to fit
26:15
Speaker 10: the price action. I mean, historically there is no correlation
26:19
Speaker 10: between issuance and the way rates move. You can see
26:22
Speaker 10: periods where there's issuance is high and rates go high,
26:24
Speaker 10: and you can see periods where issuance is increases but
26:27
Speaker 10: rates rally because of the more macro event.
26:30
Speaker 8: You know.
26:30
Speaker 10: I think we're here because, let's be honest, the US
26:34
Speaker 10: economy has been stronger than people expected, and so the
26:37
Speaker 10: FEDS had to go higher. We haven't seen anything break yet,
26:41
Speaker 10: you know, outside of a few regional banks you know,
26:44
Speaker 10: earlier this year, and so I think there's just a
26:47
Speaker 10: fear that it might take more to kind of slow
26:51
Speaker 10: this economy down and bring inflation back down toward two percent.
26:54
Speaker 10: You know, But the house view here at TCW is
26:56
Speaker 10: that you know that that fear is more about kind
26:59
Speaker 10: of looking through the rear view mirror as opposed to
27:03
Speaker 10: kind of looking forward and understanding that all this monetary titan,
27:07
Speaker 10: not just here in the US but globally, it just
27:09
Speaker 10: acts with a lack, you know, and people get impatient.
27:11
Speaker 10: But you know, this lag, whether it's from the time
27:13
Speaker 10: the Fed started hiking or when the curve went inverted,
27:17
Speaker 10: you know, there's nothing unusual about it.
27:18
Speaker 4: You know.
27:19
Speaker 5: They say it's a lag for reason.
27:20
Speaker 10: And this has been consistent, and I think it's just
27:22
Speaker 10: going to take a little bit of patience to pay off.
27:24
Speaker 2: But if you look at so one of the other
27:27
Speaker 2: things I started doing after the regional banks broke down
27:31
Speaker 2: is looking at debt. Go on the Bloomberg to see
27:34
Speaker 2: who's holding all this US paper. And I just can't
27:38
Speaker 2: imagine that previously was always like the Japanese and the
27:43
Speaker 2: Chinese and all these foreign investors were buying our treasuries.
27:48
Speaker 2: You watch the dysfunction in the US government and the
27:52
Speaker 2: fact that even in a strong economy, we want to
27:55
Speaker 2: have two trillion dollar deficits, Like, why would any foreigner
28:00
Speaker 2: I want to hold this paper?
28:02
Speaker 1: Good?
28:02
Speaker 5: No, two days one.
28:05
Speaker 10: I'm first of all, you know, we pretty much always
28:07
Speaker 10: run deficits, that's nothing new. And we're always dysfunctional, you know,
28:11
Speaker 10: We're just the least dysfunctional out there, or one of
28:13
Speaker 10: the least, and so I don't, I don't. That doesn't
28:16
Speaker 10: hold a lot of water for us. I think more
28:19
Speaker 10: relevant to the reason we haven't seen foreign investors buying
28:22
Speaker 10: a lot of US treasuries or agency mortgage backed securities
28:25
Speaker 10: has to do with the fact that the hedging costs
28:27
Speaker 10: have been so high, and that really relates to where
28:30
Speaker 10: short term interest rates are, and that's been set by
28:32
Speaker 10: the FED. So as the Fed's taken rates from zero
28:34
Speaker 10: to five percent, it's become very expensive for non US
28:37
Speaker 10: investors to buy our debt. However, if we are at
28:42
Speaker 10: or kind of very close to the peak in that rate,
28:44
Speaker 10: more likely than not, the US dollar over time will
28:46
Speaker 10: start to come down, the hedging costs will come down,
28:49
Speaker 10: and the value of US treasuries at five percent or
28:52
Speaker 10: four and a half percent or four percent it's going
28:54
Speaker 10: to actually start to be more appealing to the non
28:57
Speaker 10: US investor.
28:58
Speaker 2: I like the we've always run deficits. It makes me
29:01
Speaker 2: feel a little better because in my house it's the same.
29:04
Speaker 2: You know, I'm always spend more money than I make. See,
29:06
Speaker 2: I just tell the world we're good for it. But
29:08
Speaker 2: at a certain point, it's got to worry you. Right
29:10
Speaker 2: at Stephen Major wasn't worried until he was. And and uh,
29:16
Speaker 2: you know, at some point it's got to be too
29:19
Speaker 2: we're borrowing too much money.
29:22
Speaker 10: No, yeah, it's got to work. And you know what,
29:25
Speaker 10: you know, it's it's a little bon bond vigilantes. It's
29:27
Speaker 10: where that's come from. And at some point, the bond
29:30
Speaker 10: market's gonna raise rates. It's gonna it's gonna make the
29:33
Speaker 10: interest costs such a high burden that we're gonna have
29:36
Speaker 10: to fix our deficit problem and we're gonna have to
29:39
Speaker 10: realign spending. We're gonna have to be you know, more frugal,
29:42
Speaker 10: you know, with with our pennies. And so it kind
29:44
Speaker 10: of feels like we're getting there. You know, we're seeing
29:46
Speaker 10: you know, the percentage of interest costs as a percentage
29:48
Speaker 10: GDP jump here and if we continue to hang at
29:51
Speaker 10: these rates, it's gonna have to make some forcesome from
29:55
Speaker 10: very difficult decisions in d C.
29:56
Speaker 5: So you know, more than likely than not that's coming
29:58
Speaker 5: one way or the other.
30:00
Speaker 1: Ran, Let's get to any important stuff. Yale football yell
30:02
Speaker 1: is three and three. They welcome into New Haven this
30:06
Speaker 1: weekend the Columbia Tigers. Tell us about Yeale football this year?
30:08
Speaker 1: What do you got?
30:10
Speaker 10: You know, what a great program. Tony Reno's got over there.
30:13
Speaker 10: He came in years ago and he took a program.
30:16
Speaker 10: He's made it one of the best in the league.
30:17
Speaker 10: We won the title last year, as I'm sure.
30:19
Speaker 5: You know and all your viewers know that. This year
30:23
Speaker 5: it hasn't been as good as last year.
30:25
Speaker 10: But they've got a very very solid offense, and I
30:27
Speaker 10: think we're going to turn this season around. And went
30:29
Speaker 10: on out which includes you know, winning the Big hYP
30:32
Speaker 10: and finishing with a victory over Harvard at right before Thanksgiving.
30:35
Speaker 1: Good stuff, good stuff for so we like to watch
30:38
Speaker 1: IVY League football a lot of fun. Looks like there's
30:40
Speaker 1: a lot of party in the league this year. All right,
30:44
Speaker 1: great stuff, buddy, Thank you, Brian Well.
30:45
Speaker 2: Going to an IVY League football it's great.
30:47
Speaker 1: I will say, yeah, it's fun.
30:48
Speaker 2: Yeah, you should go to it.
30:49
Speaker 1: I mean where you live, you should go to Columbia game.
30:51
Speaker 1: That's actually pretty pretty close, and that's a great stadium too.
30:53
Speaker 1: So Brian Well and co Cio, Generalist Portfolio Mager TCW
30:57
Speaker 1: Fixed Income Group.
30:58
Speaker 6: You're listening to the tape our live program, Bloomberg Markets
31:02
Speaker 6: weekdays at ten am Eastern on Bloomberg Radio, the tune
31:05
Speaker 6: in app, Bloomberg dot Com, and the Bloomberg Business App.
31:08
Speaker 6: You can also listen live on Amazon Alexa from our
31:11
Speaker 6: flagship New York station Just Say Alexa playing Bloomberg eleven thirty.
31:16
Speaker 1: As Matt just mentioned, the Wall Street Journal breaking the
31:18
Speaker 1: story just earlier this morning that Israel has decided to
31:22
Speaker 1: delay its invasion of Gaza, presumably to allow the US
31:27
Speaker 1: to move some additional missile systems into the region. We
31:31
Speaker 1: want to check in with somebody who kind of knows
31:33
Speaker 1: how this stuff is done, and that's Jack Divine. Jack
31:35
Speaker 1: is the president and founding partner of the Arcan Group.
31:38
Speaker 1: Before that, he spent thirty two years at the Central
31:41
Speaker 1: Intelligence Agency all over the world, so he knows how
31:43
Speaker 1: this stuff gets done. Jack, what do you make of
31:45
Speaker 1: the of the news here today that it appears that
31:47
Speaker 1: Israel is going to delay we don't know for how
31:49
Speaker 1: long it's invasion of Gaza.
31:53
Speaker 8: I think we have a balancing task here. I think
31:59
Speaker 8: on one side, the faster you go in, the more
32:01
Speaker 8: quicker you suppress the mass, the better it is in
32:05
Speaker 8: terms of controlling them before they get dug in deeper.
32:13
Speaker 8: At the same time, you have the world looking at
32:15
Speaker 8: the situation and you're losing your bound the field pressures
32:20
Speaker 8: coming at you. And then the over really balancing problem
32:24
Speaker 8: is though hostages, and I think everyone is trying to
32:27
Speaker 8: do the best they can to maximize the number of
32:31
Speaker 8: hostages and hopefully all and I think that's the balancing
32:36
Speaker 8: the military part being getting it done quickly and so on,
32:41
Speaker 8: and getting the hostages. So I think there's a balancing act.
32:45
Speaker 8: I don't think it.
32:46
Speaker 5: Can go on too much longer, though.
32:48
Speaker 8: I think that this delay is probably one that the
32:52
Speaker 8: Israelis felt was within their limits. But I don't know
32:55
Speaker 8: how long they can hold off.
32:57
Speaker 2: They do seem to be losing momentum. I thought they
32:59
Speaker 2: were going to go in to Gaza, you know, it
33:01
Speaker 2: was reportedly imminent two weeks ago. And I get that
33:07
Speaker 2: they want to soften targets inside there, that's the terminology
33:11
Speaker 2: they use. But it seems like world leader after world
33:14
Speaker 2: leader has flown over to Israel to try and get
33:17
Speaker 2: them to put this off, to try and get them to,
33:20
Speaker 2: you know, breathe in, breathe out, and think about what's
33:23
Speaker 2: about to happen. Is it possible that that tactic works
33:29
Speaker 2: and we don't get a ground invasion in Gaza or
33:32
Speaker 2: do you think that's a foregone conclusion.
33:37
Speaker 8: I don't think the Israeli political life can withstand that.
33:43
Speaker 8: In other words, you had such a massacre, impacting not
33:47
Speaker 8: just the immediate victims, but their relatives and the spirit
33:51
Speaker 8: of the country. I think if you walk away without
33:54
Speaker 8: Hamasp being destroyed, I think they'll be huge to satisfaction.
33:57
Speaker 8: I don't think it's in whose carrier they're the settle
34:00
Speaker 8: for that, But I do think they're trying to be
34:04
Speaker 8: smart to make sure they've done everything they can to
34:07
Speaker 8: try and deal with the world opinion and pressure about
34:12
Speaker 8: the situation. But at the end of the day, I
34:15
Speaker 8: don't think it's inconceivable to me that you have a ceasefire.
34:19
Speaker 8: So to me, the hostages, I think the bolt has
34:21
Speaker 8: to be bitten, and I do believe there were some
34:25
Speaker 8: natural delays. I mean they weren't in position. I mean,
34:27
Speaker 8: they were not really set up to do the invasion,
34:30
Speaker 8: so that takes a little time and then you have
34:32
Speaker 8: to soften it up. But I think this is from
34:35
Speaker 8: where I sit, it looks to me like they're well
34:38
Speaker 8: within reach of going in and doing what they have
34:40
Speaker 8: to do.
34:40
Speaker 2: To me, the hostage has reason interesting work against them. Yeah,
34:46
Speaker 2: I wonder what you think about you know, Erdowan today
34:49
Speaker 2: said he doesn't think Hamas is a terrorist group, but
34:52
Speaker 2: it's difficult to look at what they did on October
34:55
Speaker 2: seventh and not call that terrorism. We do not, at
34:59
Speaker 2: least as a public policy, negotiate with terrorists. So what's
35:02
Speaker 2: happening here?
35:04
Speaker 8: Well, you have here to go, but you have many
35:06
Speaker 8: other leaders, you have the head of the UN. I
35:08
Speaker 8: mean it's very disappointing. I mean, we can't distinguish between
35:13
Speaker 8: massacres and slaughtering and trying to defend your country.
35:17
Speaker 5: I mean in our universities.
35:19
Speaker 8: It's to me, it's shocking, and I think we have to,
35:22
Speaker 8: when this is done, reevaluate where we stand. I do
35:26
Speaker 8: think there's an opportunity. There is a silver lining of
35:29
Speaker 8: the Israelis succeed as I think, which will be to
35:34
Speaker 8: get rid of Hamasa. I mean, they'll spring up again,
35:36
Speaker 8: but there'll be a breathing period to look at some
35:39
Speaker 8: longer lasting peace arrangement. But right now it's stunning to see.
35:44
Speaker 8: I don't know how you get there, to be honest,
35:46
Speaker 8: it's and I just feel you must.
35:50
Speaker 2: Have been out of touch.
35:50
Speaker 8: I didn't watch any news or listening to Bloomberg. Yeah,
35:53
Speaker 8: that's took place. I mean it was savagery.
35:57
Speaker 1: Jack. What role do you believe currently the United States
36:01
Speaker 1: military and intelligence is playing as we speak.
36:06
Speaker 8: I mean Israeli. So is Israel has been a long
36:09
Speaker 8: time ally, certainly our principal ally in the Middle East.
36:13
Speaker 8: I suspect we're doing everything we can on the intelligence
36:17
Speaker 8: front to assist. I also think militarily, I don't see
36:21
Speaker 8: boots on the ground. I do think there are risk
36:25
Speaker 8: having the fleet there, but I think it's the right move,
36:29
Speaker 8: and I think we're showing strength so that we're really
36:32
Speaker 8: trying to contain the Iranians rather than dealing with anything
36:35
Speaker 8: ready directly to Hamas and the guys of the Israelis
36:40
Speaker 8: will take care of that, all.
36:42
Speaker 1: Right, Jack, Thank you so much for joining us. Really
36:43
Speaker 1: appreciate you jumping on here last minute. Jack Devine. He's
36:46
Speaker 1: a president and founding partner of the Arcan Group, a
36:49
Speaker 1: thirty two year veteran of the Central Intelligence Agency. We
36:52
Speaker 1: always like getting a few minutes of Jack's time when
36:55
Speaker 1: there are breaking geopolitical events, and there seem to be
36:58
Speaker 1: plenty of those these days.
37:00
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37:03
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37:07
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37:10
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37:19
Speaker 1: All right, I look at We've been talking about rates
37:21
Speaker 1: a lot over the last several weeks. How about this rate?
37:24
Speaker 1: The bank rate thirty year fixed mortgage eight point zero
37:29
Speaker 1: four percent? Are you kidding me crazy? I feel like
37:32
Speaker 1: a rockstar now with my six percent mortgage I got
37:34
Speaker 1: earlier in the year. We also had new home sales.
37:37
Speaker 1: Today they don't care about the rates of twelve point
37:39
Speaker 1: three percent. After a decline last month of eight point
37:43
Speaker 1: two percent, So all over the place, let's figure out
37:45
Speaker 1: what's happening in the residential real estate market. We do
37:48
Speaker 1: that the Kate Kaminski, she's the COO of Walton Global.
37:51
Speaker 1: Kate give us just kind of an overview here. It
37:53
Speaker 1: seems like with mortgage rates this high, who can afford
37:57
Speaker 1: to buy a house these days?
38:00
Speaker 12: Well, thanks for having me on, gentlemen. Excited to be
38:03
Speaker 12: joining you here and talking about this today. You know,
38:08
Speaker 12: that really is the question who can afford to get
38:11
Speaker 12: into homes with rates at where they're at five basis
38:15
Speaker 12: points from from a week ago. And we don't necessarily
38:19
Speaker 12: see the light at the end of the tunnel yet.
38:22
Speaker 12: But I think the stats that you just reference, the
38:25
Speaker 12: twelve point three percent that we're seeing up in September,
38:29
Speaker 12: you know, we're really bullish on new home sales and
38:34
Speaker 12: production right now. You're seeing new homebuilders that represent about
38:39
Speaker 12: thirty five to forty percent of today's new home sales,
38:43
Speaker 12: which is up from fifteen to eighteen percent before. And
38:47
Speaker 12: we're attributing that primarily to these new home builders very
38:51
Speaker 12: aggressively buying down mortgages for these buyers. You know, the
38:56
Speaker 12: typical consumer is they feel that five is about the
39:02
Speaker 12: average mortgage rate that they should be paying. And these
39:05
Speaker 12: new home builders are putting in programs whereby they're getting
39:09
Speaker 12: those new buyers down from eight percent to five percent
39:13
Speaker 12: through different different mechanisms of rate it items.
39:18
Speaker 2: So how does this work out, Kate? I mean, what
39:22
Speaker 2: do you do at Walton Global and what is your
39:25
Speaker 2: expectation for Q four and twenty twenty four.
39:29
Speaker 12: Yeah, So we're a global real estate investment and asset
39:34
Speaker 12: management firm and we specialize in land. We're looking to
39:39
Speaker 12: buy land that's in the path of growth, that that
39:42
Speaker 12: is primarily intended for sale to new home builders, and
39:46
Speaker 12: so we're a pretty critical part of the supply chain.
39:49
Speaker 12: We believe in in the new home building space because
39:53
Speaker 12: we're selling to these builders who are really focused on
39:57
Speaker 12: that first time home buyer. And so Walton creates pretty
40:02
Speaker 12: creative financing mechanisms, off balance sheet financing mechanisms for these
40:07
Speaker 12: homebuilders who are looking for ways to keep as much
40:11
Speaker 12: cash on hand, keep their margins high so that they
40:14
Speaker 12: can do things like these rate buy down programs and
40:18
Speaker 12: deploy their excess capital, which these homebuilders have a lot
40:21
Speaker 12: of that right now. They've been waiting for this opportunity
40:25
Speaker 12: to expand their market shares.
40:27
Speaker 2: Well, you're like, but so sorry forgive me because I
40:31
Speaker 2: don't understand the ins and outs of this business so well.
40:33
Speaker 2: But these new homebuilders are subsidizing mortgages for buyers because
40:40
Speaker 2: rates are too high, and you are subsidizing the loans
40:45
Speaker 2: to these new homebuilders to get your land because the
40:48
Speaker 2: rates are so high. Like, at some point the bucks
40:50
Speaker 2: got to stop, right, Well.
40:53
Speaker 12: You know, we we think that it's going to continue on.
40:57
Speaker 12: We think we have a few more years of.
40:59
Speaker 2: This, and I I just mean, somebody at the end
41:01
Speaker 2: of the day has got to pay for it, right,
41:02
Speaker 2: So you know, you can't continue to find creative financing solutions,
41:08
Speaker 2: Like at some point it's got to get paid for.
41:10
Speaker 1: So how does that all? It's like a house of cards.
41:13
Speaker 5: Yep.
41:13
Speaker 12: Well, you know, we're definitely seeing the increased price of
41:19
Speaker 12: resale homes, which is why again we're focused on that
41:23
Speaker 12: new home build market. I was just traveling in Florida
41:27
Speaker 12: last week and there are still places where we have
41:30
Speaker 12: new communities that are going up being built by the
41:33
Speaker 12: public builders, and there's homes in there selling for two
41:36
Speaker 12: hundred thousand and an under in some instances, and so
41:39
Speaker 12: I think that drive to affordability is critical. We need
41:44
Speaker 12: to be focusing on that right across the country so
41:48
Speaker 12: that we're matching the home buyer with what they're earning
41:52
Speaker 12: and what they can afford. And so you know, we've
41:54
Speaker 12: got we've got a real lock up in the resale
41:57
Speaker 12: market right now because we've continued to see the value
42:01
Speaker 12: of those homes increase and that's just not sustainable.
42:04
Speaker 5: I completely agree with you.
42:06
Speaker 12: But so that's why we continue to think that the
42:09
Speaker 12: new home building space is going to be where these
42:12
Speaker 12: buyers are fleeing to. We have a fundamental undersupply of
42:17
Speaker 12: homes in this country. Depending on what economists you speak to,
42:20
Speaker 12: it's between two and six million homes that we need
42:23
Speaker 12: to build because of the underbuilding that was occurring after
42:27
Speaker 12: the Great Recession. And so you know, these new home
42:30
Speaker 12: builders are or where the the affordability lies.
42:34
Speaker 1: So when you're out there these days, what's the cost
42:36
Speaker 1: of land that you guys are looking at, what's the deal?
42:38
Speaker 1: What's the deals you're looking at today versus maybe four
42:42
Speaker 1: or five years ago in terms of acquiring land.
42:45
Speaker 12: Yeah, you know that really is specific to every market
42:51
Speaker 12: that we're in uh you know, we we are looking
42:54
Speaker 12: for land that has UH is in a development friendly
43:00
Speaker 12: municipality or county. That continues to be one of the
43:03
Speaker 12: biggest challenges that we're seeing across the country as well,
43:07
Speaker 12: these areas where growth is coming, not wanting to accept
43:11
Speaker 12: this growth and provide the necessary approvals. But that's that's
43:15
Speaker 12: where the opportunity lies. And and so we we focus
43:19
Speaker 12: on areas where there's access to infrastructure, and we've really
43:23
Speaker 12: got pro growth governments in and around the area that
43:28
Speaker 12: are going to help get these off the ground. So
43:31
Speaker 12: you know, there's there's not a specific price per acre
43:35
Speaker 12: that we're focusing on because that varies by state and
43:38
Speaker 12: per region. But we really focus here at Walton in
43:42
Speaker 12: the sun Belt, you know, the southern smile of the US,
43:47
Speaker 12: because of those major market trends that that we follow,
43:53
Speaker 12: job growth, population growth, you know, net domestic migration. It's
43:58
Speaker 12: it's a pretty simple equation, and you know that's that
44:02
Speaker 12: has been our model for the last forty five years
44:05
Speaker 12: that we've been doing this.
44:06
Speaker 1: Who do you compete against because we've heard this same
44:09
Speaker 1: you know, strategy on the real estate side from basically
44:12
Speaker 1: everybody in the home building, food chain, So who do
44:15
Speaker 1: you It's got to be competitive. When a partial property
44:17
Speaker 1: comes up in you know, suburban Dallas or suburban Austin
44:21
Speaker 1: or suburban Tampa. I got to think ten of the
44:24
Speaker 1: smartest and most well capitalized people are in there trying
44:27
Speaker 1: to get that land. How competitive is your market?
44:30
Speaker 12: So it's definitely a competitive marketplace. But where I would
44:34
Speaker 12: say Walton's niche is is that we're buying land that's
44:38
Speaker 12: a little bit earlier in the cycle. Most of your
44:42
Speaker 12: builders today, they because of what happened and after the
44:46
Speaker 12: Great Recession and the long duration that it took for
44:50
Speaker 12: everything to normalize, they all have pressures from Wall Street
44:54
Speaker 12: to keep land off their balance sheets, and so you
44:57
Speaker 12: know they're looking for land at that they can be
45:01
Speaker 12: building and selling homes within twenty four months, and so
45:05
Speaker 12: they're compressed on wet assets they can actually purchase. And
45:09
Speaker 12: even many of the land bankers and groups that they
45:11
Speaker 12: work with, they have a pretty short time horizon for
45:15
Speaker 12: when that land needs to be cash flowing, okay, homes
45:18
Speaker 12: being built and sold to third parties. Where Walton comes
45:21
Speaker 12: into play is we have a little bit more patient capital,
45:25
Speaker 12: not too patient, but a little bit more where we'll
45:28
Speaker 12: buy land that is a little bit earlier in the cycle,
45:31
Speaker 12: and we'll hold it while that homebuilder is doing the
45:35
Speaker 12: entitlement work, getting it ready to literally stick a shovel
45:38
Speaker 12: in the ground, and that's the time when we'll transfer
45:41
Speaker 12: the land to them. So it's pretty unique in that
45:44
Speaker 12: space and where we find the opportunities.
45:47
Speaker 1: All right, Kate, thanks so much for joining us. Really
45:49
Speaker 1: appreciate it talking about some of the commercial real estate development.
45:52
Speaker 1: Kate Kaminski, COO of Walton Global, Thanks.
45:57
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46:01
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46:05
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46:10
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46:12
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