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P&L: Sears Will Get One Last Chance for Turnaround in 2017 · Bloomberg Intelligence

• 0:04
  Speaker 1: Welcome to the Bloomberg P and L Podcast. I'm PIM Fox.
• 0:08
  Speaker 1: Along with my co host Lisa Abramowitz. Each day we
• 0:11
  Speaker 1: bring you the most important, noteworthy, and useful interviews for
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  Speaker 1: you and your money, whether at the grocery store or
• 0:16
  Speaker 1: the trading floor. Find the Bloomberg P L Podcast on iTunes,
• 0:20
  Speaker 1: SoundCloud and at Bloomberg dot com. All, let's gonna check
• 0:29
  Speaker 1: on what's going on in the world of retail. Well,
• 0:31
  Speaker 1: I guess we shouldn't even call it necessarily just retail
• 0:34
  Speaker 1: because Sears Holdings has become more than just a retail story.
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  Speaker 1: It is a finance story in a big way. In
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  Speaker 1: here to tell us More's Bert Flickinger, Managing director Strategic Resource,
• 0:45
  Speaker 1: a group. He can be followed on Twitter at Bert
• 0:48
  Speaker 1: Underscore Flickinger. Alright, Bert Underscore Flickinger Underscore what's going on
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  Speaker 1: for us at Sears Holdings Because they just got a
• 0:56
  Speaker 1: loan but a credit facility, but they're also closing stores.
• 1:00
  Speaker 1: They're closing stores, and the worry, PIM UH to your
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  Speaker 1: good insight is same store sales or in a free fall,
• 1:07
  Speaker 1: declining anywhere from UH seven to ten percent on an
• 1:10
  Speaker 1: annualized basis and Typically when someone another department store chain,
• 1:15
  Speaker 1: for example Macy's closes stores, uh Macy's same store sales
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  Speaker 1: will increase in the surviving stores or the remaining stores.
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  Speaker 1: That's that's not the case with Sears, and it's f
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  Speaker 1: D Reports and Credit and tell of have reported very
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  Speaker 1: well for a long time on Sears holdings came out
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  Speaker 1: of a number of others. It's it's the ones that
• 1:36
  Speaker 1: can't rebalance themselves beyond the assets. The other thing FD
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  Speaker 1: Credit and tel reported those the average Sears um lease
• 1:45
  Speaker 1: pays out at about five dollars and fifty cents of
• 1:48
  Speaker 1: square foot, and on the open market it's probably worth something.
• 1:51
  Speaker 1: We're closer to seventeen to twenty dollars of square foot. So,
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  Speaker 1: like you said, okay, so sevent square foot versus five
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  Speaker 1: and a half bucks. Yes, I think we can do
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  Speaker 1: the math. We could definitely do the math. And we're
• 2:03
  Speaker 1: taking the math that Cheektawaga, New York, former home of
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  Speaker 1: George Westinghouse and Westinghouse in the intersection of the transportation
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  Speaker 1: border between the US and Canada, Sears is closing its
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  Speaker 1: store in the GALERIUMI mall profitable store, very good customer
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  Speaker 1: count but Sears can make millions assigning or flipping that
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  Speaker 1: lease or selling it back to Galeria as supposed to
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  Speaker 1: making a few hundred thousand years an operator of that store.
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  Speaker 1: At the same time, Sears gets to monetize its inventory
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  Speaker 1: and invest in other more profitable activities rather than retailing.
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  Speaker 1: Has Sears ever focused on online retailing in the way
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  Speaker 1: that Walmart says they want to focus on online retailing.
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  Speaker 1: That's the big opportunity that you're referencing as Sears is
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  Speaker 1: their online but not near where they need to be.
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  Speaker 1: And what we saw on our store checks across the
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  Speaker 1: country from the Carolinas to California is Sears has tremendous
• 2:59
  Speaker 1: quality of pair, particularly in lands and so the UH finishings,
• 3:04
  Speaker 1: the fifth the fabric, the quality, the value, the color palette.
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  Speaker 1: UH clearly eclipses Target, UM is on par with Coles
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  Speaker 1: and the bonton the other moderate UH department store chains.
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  Speaker 1: But Sears can't get the customer count in. So you
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  Speaker 1: really have to go back and retail history. And we're
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  Speaker 1: both retail historians. Is Arthur C. Martinez, CEO of Sacks,
• 3:27
  Speaker 1: fith aving Oh, Bob Mettler, president of Robinson May They
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  Speaker 1: go in with Peter Gerjeski of Young and Rubicam creates
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  Speaker 1: softer side of Sears and get people coming in to
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  Speaker 1: buy apparel. The margins are two to three times higher.
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  Speaker 1: UH Sears wins financially. Metler and Martinez save Sears the
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  Speaker 1: first time twenty years ago. Lambert to his credits, hired
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  Speaker 1: a lot of good people. If you could get the
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  Speaker 1: customers to give him one last chance, and with a
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  Speaker 1: twenty million dollar secure letter of credit that can go
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  Speaker 1: to UH two hundred million, that can go to three
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  Speaker 1: hundred million, this might be the one last chance for
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  Speaker 1: Sears in twenty seventeen, but it's Larry served from F
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  Speaker 1: and D and credit until said, if Sears doesn't do
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  Speaker 1: it this time, they gotta start selling the catch registers
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  Speaker 1: and cleaning out the cash drawers. All right, let's get
• 4:13
  Speaker 1: through a couple of other retailers, because we don't. I
• 4:15
  Speaker 1: always want to get your expertise, Neiman Marcus Group burged
• 4:18
  Speaker 1: off Goodman, what's going on there? Uh pim the bonds
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  Speaker 1: are really struggling. The same f D report Credit and
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  Speaker 1: tell the bonds of trade of the mid seventies are lower.
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  Speaker 1: So while Sears is trading a triple C plus uh
• 4:31
  Speaker 1: Neiman Marcus Burg Doors trading at triple C. And with
• 4:34
  Speaker 1: the Trump New York White House, it's really tough to
• 4:38
  Speaker 1: get into two of their most profitable stores, Burg Doors
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  Speaker 1: Men's and Women's on uh fifth Avenue, so that that's
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  Speaker 1: really problematic, especially after losing almost half a billion dollars
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  Speaker 1: in the third quarter. Tell us about Jake Crew, Jay Crew,
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  Speaker 1: uh fall Uh, It's it's gonna be tough. They went
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  Speaker 1: from the penthouse to the basement and just a few
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  Speaker 1: years has probably got enamored with beach houses. The qualities
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  Speaker 1: uneven in the stores, the inventory is wrong, the color
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  Speaker 1: pellette of what's selling isn't always right in stock. But
• 5:11
  Speaker 1: never bet against Mickey Drexler seminal genius of design and
• 5:15
  Speaker 1: retail uh and say same with Gena Lyons. So we're
• 5:19
  Speaker 1: hoping they come back, but they've dug themselves a big hole.
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  Speaker 1: So it really depends on the vendors there as well.
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  Speaker 1: But nine nine percent of the vendors supported Sears. Hopefully
• 5:28
  Speaker 1: they'll support j Crew and niemen Bergdorf to the tell
• 5:32
  Speaker 1: me about what's going on with J C. Penny is
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  Speaker 1: that to turnaround that's working. It's a turnaround that's working
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  Speaker 1: because they threw out Bill Ackman and as proverbial carpet
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  Speaker 1: baggers from Pershing Square that didn't know the detail and
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  Speaker 1: rhythm and retail left Penny on death store step another
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  Speaker 1: sex along Steve said Off X CEO comes in, teams
• 5:51
  Speaker 1: up with Mike Aullman. They created dream team around Marvin
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  Speaker 1: Ellison who got trained by one of the other seminal
• 5:58
  Speaker 1: geniuses of retail, Frank Blake, and Penny UH partnership with Sephora.
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  Speaker 1: They've got five more stores to do for perspective. Sephora
• 6:08
  Speaker 1: on the Chansa Liz attracts as many visitors in Paris
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  Speaker 1: is the Eiffel Tower and the Eiffel Tower as longer
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  Speaker 1: hours co exclusive with with Disney, Penny dot COM's building
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  Speaker 1: Penny Homes Building. So Penny is a big comeback as
• 6:21
  Speaker 1: his toys or us and both of them were left
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  Speaker 1: for dead, both the bonds UH and the credit ratings
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  Speaker 1: just a few years ago. And it's it's great to
• 6:29
  Speaker 1: see those Rocky Bellboll type comeback stories. Marvin Ellison at
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  Speaker 1: j C. Penny doing the job. Stock is up more
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  Speaker 1: this year. Marvin Ellison's the Rocky Bellball of retail retail
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  Speaker 1: uh or or the Bob townsendavas Uh we we try
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  Speaker 1: harder and the win. I want that. Maybe, you know,
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  Speaker 1: maybe you can print that as a banner for the
• 6:48
  Speaker 1: for the new year. Tell me about what's going on
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  Speaker 1: now at the Macy's because of course that is a
• 6:53
  Speaker 1: continuing story, Macy's continuing story UH closing hundred stores, the
• 7:00
  Speaker 1: Macy's International and Macy's Bloomingdale looks like it has high potential. UH.
• 7:05
  Speaker 1: Macy's has more fashion resources. Bloomingdale seems to be hitting
• 7:09
  Speaker 1: on all cylinders. Is we were going through North From stores,
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  Speaker 1: they seemed to be having a struggle with their associate
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  Speaker 1: shifting sales, particularly in the Shoot apartment to North from
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  Speaker 1: dot Com, so the commission sales people got less money
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  Speaker 1: they were interviewing at Bloomingdale's. We saw the same thing
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  Speaker 1: at the Neiman Marcus stores in Chicago, UH, California and elsewhere.
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  Speaker 1: So so it seems like Bloomingdale's and Macy's is recruiting
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  Speaker 1: the best of the brightest in a shrinking sector and
• 7:37
  Speaker 1: ultimately Macy's Bloomingdale's is the consolidator in the winter. All Right,
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  Speaker 1: Well that's Terry Lundgren at Macy's that shares a Macy's
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  Speaker 1: up about four percent this year with Jeff Janetta and
• 7:46
  Speaker 1: Karen Hoga. Very good leaders, quick ten seconds, Kate Spade,
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  Speaker 1: get bought or not bought. We'll get bought. It's selling
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  Speaker 1: in Paris, it's selling in Pasadena, California, in every place
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  Speaker 1: in between. People love the brand. Thanks very much, We
• 7:59
  Speaker 1: love you. Thanks a lot. Managing Director, Strategic Resource Group,
• 8:04
  Speaker 1: talking about all things retail, Washington, d C. On January
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  Speaker 1: the twenty one. Well, that will be a day after
• 8:23
  Speaker 1: the inauguration. What will the district leaders wake up to?
• 8:28
  Speaker 1: Here to tell us more is David Howell. He is
• 8:30
  Speaker 1: the executive vice president and chief information officer for mcinnerney Associates,
• 8:35
  Speaker 1: based of course in Washington, d C, which is home
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  Speaker 1: to Bloomberg one and one oh five point seven h
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  Speaker 1: D two. David Howell, thank you for being with us.
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  Speaker 1: Thank you. You are a veteran of the real estate
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  Speaker 1: industry in the district and in the region, and I
• 8:51
  Speaker 1: wonder if you could describe for people that are not
• 8:53
  Speaker 1: familiar with it, what is the biggest mistake we all
• 8:57
  Speaker 1: make about new administrations coming to Washington. Well, I think
• 9:02
  Speaker 1: there's a general um misperception that there's this avalanche of
• 9:06
  Speaker 1: new people that come to town that provide a huge
• 9:08
  Speaker 1: shot in the arm for our real estate market. UM,
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  Speaker 1: And that historically has not been the case. We don't
• 9:13
  Speaker 1: think it will be the case this time. Either. It
• 9:15
  Speaker 1: will be a boost, but it's not a it's not
• 9:17
  Speaker 1: a boom, and it's not a boom because just the
• 9:19
  Speaker 1: numbers of people that will turn over in the new administration,
• 9:23
  Speaker 1: they're not necessarily going to have the money to buy
• 9:25
  Speaker 1: new homes. Absolutely. You know, there's roughly four thousand presidentially
• 9:29
  Speaker 1: appointed jobs, um. And first of all, they don't all
• 9:32
  Speaker 1: happen on day one. It can take as long as
• 9:34
  Speaker 1: twelve and eighteen months to fill all those positions. Our
• 9:37
  Speaker 1: experience shows, and even thus far with the new Trump administration,
• 9:42
  Speaker 1: roughly half the people that will fill those jobs already
• 9:44
  Speaker 1: live in the Washington area, and roughly half the ones
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  Speaker 1: that are coming from out of town are going to
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  Speaker 1: rent rather than buy. So every sale is a welcome one.
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  Speaker 1: We we treasure every transaction, UM, but it's generally not
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  Speaker 1: enough to move the needle in a major way. Fifty
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  Speaker 1: homes are sold annually in the metro DC area, and
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  Speaker 1: you've got a population of anywhere from six hundred and
• 10:07
  Speaker 1: eighty thousand, and then it swells well over a million
• 10:11
  Speaker 1: every day when commuters come in. Tell us some of
• 10:14
  Speaker 1: the areas of Washington, d C. That you see are
• 10:18
  Speaker 1: thriving and improving, albeit without the effects of a new administration. Sure,
• 10:24
  Speaker 1: the district itself, that market has been incredibly hot, where
• 10:28
  Speaker 1: the suburban markets have not been quite as hot. So
• 10:30
  Speaker 1: the immediate surrounding counties, UM, in cities City of Alexandria, Arlington, Fairfax,
• 10:34
  Speaker 1: Montgomery County, in Maryland, Prince George's County, they're all doing
• 10:38
  Speaker 1: fairly well, but nowhere near as hot as the district.
• 10:41
  Speaker 1: The district's been our hot at market for the last
• 10:43
  Speaker 1: several years. UM. Why is that? UM? I think first
• 10:47
  Speaker 1: of all, the district's done a very good job in
• 10:50
  Speaker 1: UM sort of reorienting themselves to be more attractive to businesses.
• 10:55
  Speaker 1: Are like most other major cities, UM, we have enormous
• 10:58
  Speaker 1: traffic issues, and I think people are making quality of
• 11:01
  Speaker 1: life decisions that they want to live closer to where
• 11:04
  Speaker 1: they work and not have to deal with the enormous
• 11:07
  Speaker 1: commutes that sometimes suburban drivers and commuters have to deal
• 11:10
  Speaker 1: with UM and the district has just become a very
• 11:13
  Speaker 1: hip cool place to be, a hip cool place to be.
• 11:17
  Speaker 1: But you say that new construction is not keeping up
• 11:20
  Speaker 1: with household formation. Why not? Well, first of all, we've
• 11:24
  Speaker 1: got a lack of land UM. Like again most of
• 11:27
  Speaker 1: the major urban areas, UM is just tougher to find
• 11:30
  Speaker 1: places to build UM, and it's it's a challenge to
• 11:35
  Speaker 1: get developments through. All the jurisdictions have fairly long development
• 11:39
  Speaker 1: processes to go through. And based on the studies that
• 11:42
  Speaker 1: we read, UM, there's roughly a shortfall of fifty thousand
• 11:46
  Speaker 1: household units UM to keep up with household formation over
• 11:50
  Speaker 1: the next five years. So that contributes done ongoing shortage
• 11:54
  Speaker 1: of supply, particularly acute in the district. All right, so
• 11:56
  Speaker 1: you've got tight inventories. Talk about the expansion of public
• 12:00
  Speaker 1: transport and the rehabilitation of public transport in the district. Well,
• 12:05
  Speaker 1: it's it's hugely important in our metropolitan area UM, and
• 12:09
  Speaker 1: as some of your listeners may have heard, our metro
• 12:11
  Speaker 1: system has had some challenges of late, being diplomatic, which
• 12:16
  Speaker 1: is appropriate for being in Washington. UM. We've and so
• 12:21
  Speaker 1: Metro has kind of got to get get its act together. UM.
• 12:24
  Speaker 1: But frankly, I think one of the interesting things we've
• 12:26
  Speaker 1: seen it was tinging our agents a couple of weeks
• 12:28
  Speaker 1: ago with the safe track issues UM, and those are
• 12:31
  Speaker 1: the taking lines down for a period of time where
• 12:34
  Speaker 1: they're having to do extended maintenance. People are changing how
• 12:38
  Speaker 1: they're commuting UM. One of our agents was saying that
• 12:40
  Speaker 1: a lot of her clients have actually just switched to
• 12:43
  Speaker 1: Uber because it's more convenient. And when Metro is back
• 12:47
  Speaker 1: in its rightful place, UM, they may have a bit
• 12:50
  Speaker 1: of a battle getting some of those writers back. As
• 12:53
  Speaker 1: they say, necessity the mother of invention. Tell us about
• 12:56
  Speaker 1: interest rate increases, what I really have a change on
• 13:00
  Speaker 1: on whether people buy or don't buy in the area.
• 13:03
  Speaker 1: It certainly does have some impact, you know, with the
• 13:06
  Speaker 1: with the rate increase of roughly a half a percent
• 13:08
  Speaker 1: over the last six weeks or so, that's taken about
• 13:11
  Speaker 1: six percent of buying power away from prospective purchasers. And
• 13:15
  Speaker 1: that's certainly UM is a factor. But we've also learned
• 13:18
  Speaker 1: that interest rates are a factor and whether someone buys
• 13:21
  Speaker 1: a home, they're not the factor by any means. When
• 13:24
  Speaker 1: our company started over thirty years ago interest rates for
• 13:28
  Speaker 1: people still bought and sold home, so it's it's not
• 13:31
  Speaker 1: just that number, but there's no doubt that on the
• 13:34
  Speaker 1: short term it has both a real and a psychological
• 13:37
  Speaker 1: impact when you lose that buying power and you see
• 13:39
  Speaker 1: rates ticking up. UM. One of the things it does
• 13:42
  Speaker 1: is it gets some fence sitters off the fence and
• 13:44
  Speaker 1: into the market before they feel like they can get
• 13:47
  Speaker 1: priced out of the market because rates are too high.
• 13:50
  Speaker 1: But because we've had rates low for such a long
• 13:53
  Speaker 1: period of time, we don't really know where the psychological
• 13:56
  Speaker 1: wall is. UM. If it's five percent, five and a
• 13:59
  Speaker 1: half percent of rates get that high, if buyers finally
• 14:01
  Speaker 1: really get discouraged. But right now, let's face at four
• 14:05
  Speaker 1: person interest rates, which is where they are right now,
• 14:07
  Speaker 1: is still from an historical perspective, very low and very attractive.
• 14:11
  Speaker 1: Thanks very much, David Howe, Executive vice president, chief information
• 14:14
  Speaker 1: Officer McNerney Associates. Sixteen the year marks the beginning of
• 14:31
  Speaker 1: the end of hedge funds as we've known them, so
• 14:34
  Speaker 1: writes Katherine Burton. Cathy Burton is our hedge fund reporter
• 14:38
  Speaker 1: joins us Now for Bloomberg News. Kathy Burton, thank you
• 14:40
  Speaker 1: very much for being with us. You're welcome. So tell
• 14:43
  Speaker 1: me about agonists. This is really from Milton. It means
• 14:48
  Speaker 1: it's about Samson wrestling with adversity and trouble. You say, now,
• 14:52
  Speaker 1: the title of your report is hedge fund Agonists. What's
• 14:56
  Speaker 1: going on in the hedge fund world? Well, the hedge
• 14:59
  Speaker 1: fund world is finally or investors are finally realizing that
• 15:03
  Speaker 1: they shouldn't be paying managers to in the normal two
• 15:08
  Speaker 1: and twenty as it's known. Uh. Basically, the managers get
• 15:12
  Speaker 1: rich off the management fees even if they don't make
• 15:15
  Speaker 1: money for their investors, which they haven't been doing for
• 15:19
  Speaker 1: several years now. Is that why the theme, at least
• 15:22
  Speaker 1: for Robert Mercer's The Hedge Fund Titan Robert Mercer the
• 15:27
  Speaker 1: theme for his holiday costume party was villains and Heroes. No,
• 15:31
  Speaker 1: I think that's more of a political uh uh, political comment.
• 15:37
  Speaker 1: But he's one of the managers who's actually managed to
• 15:41
  Speaker 1: make money all these years, all right, So if he's
• 15:44
  Speaker 1: managed to make money, then isn't it just a natural
• 15:47
  Speaker 1: selection in which those that don't won't have customers, and
• 15:51
  Speaker 1: those that do, we'll have customers that are willing to
• 15:53
  Speaker 1: pay the fees or not really No, that's exactly what's
• 15:57
  Speaker 1: happening now. We're seeing a many more closures UM then
• 16:01
  Speaker 1: we have in the past. UH. This year looks to
• 16:04
  Speaker 1: be on track to have the most closure since that's
• 16:07
  Speaker 1: an innate financial crisis, and people expect to UH, people
• 16:12
  Speaker 1: expect that the industry could be cut by as much
• 16:15
  Speaker 1: as a quarter over the next year, as much as
• 16:18
  Speaker 1: a quarter. What what takes? What took the investors so
• 16:21
  Speaker 1: so such a long time to actually do the math
• 16:23
  Speaker 1: and and discover that they weren't making the money they
• 16:27
  Speaker 1: thought they were. I think what happened is that a
• 16:30
  Speaker 1: lot of the money that came in came from pension funds,
• 16:33
  Speaker 1: and they didn't start investing until relatively recently. So they
• 16:38
  Speaker 1: and they're very slow moving, So they sort of started
• 16:41
  Speaker 1: to invest just as returns overall started to fall, and
• 16:45
  Speaker 1: so it probably took them five or so years to
• 16:48
  Speaker 1: get into the program, to figure out it didn't work,
• 16:51
  Speaker 1: and then to get out. That's what's happening now. Well,
• 16:53
  Speaker 1: you document that public retirement plans in Kentucky, New York,
• 16:57
  Speaker 1: New Jersey, Rhode Island, they pulled the plug. They pulled
• 17:00
  Speaker 1: money rather from hedge funds, as did the State University
• 17:04
  Speaker 1: in Maryland and other endowments. That's correct, and there are
• 17:08
  Speaker 1: other people that are. If they're not cutting their allocations
• 17:11
  Speaker 1: the hedge funds, they're definitely cutting the number of managers
• 17:14
  Speaker 1: they use. The University of California is doing that, and
• 17:17
  Speaker 1: they may also end up cutting their exposure as well
• 17:20
  Speaker 1: if they continue this trend. What kinds of hedge funds
• 17:24
  Speaker 1: will be left? Just those that perform well in the
• 17:27
  Speaker 1: past or have a track record that is measurable in decades. Yes,
• 17:32
  Speaker 1: and I think that it's going to be uh the
• 17:35
  Speaker 1: smaller funds to a lot of them that are more nimble,
• 17:38
  Speaker 1: that are able to make money. Uh. A lot of
• 17:41
  Speaker 1: the funds that used to be good are their return
• 17:45
  Speaker 1: suffered as they added assets. Now those assets also translated,
• 17:51
  Speaker 1: as you described, into fees, and those fees translated into
• 17:54
  Speaker 1: things such as higher real estate prices in New York
• 17:58
  Speaker 1: City's condos and a sky. That's absolutely correct. Um, the
• 18:05
  Speaker 1: number of billionaires on the FORBS four hundred has grown
• 18:10
  Speaker 1: a lot amongst the hedge fund set, and those people
• 18:13
  Speaker 1: have UM certainly driven up prices of real estate in
• 18:17
  Speaker 1: certain buildings and UH, certain art. Yeah. Well, you give
• 18:21
  Speaker 1: the example. In two thousand and six, a leven hedge
• 18:25
  Speaker 1: fund managers were in the Forbes four hundred. Fast forward
• 18:30
  Speaker 1: ten years, that number climbs to twenty seven. Right. So,
• 18:37
  Speaker 1: and is it as much a public relations disaster for
• 18:41
  Speaker 1: the hedge fund industry as it is a performance issue? Yes,
• 18:46
  Speaker 1: that is true because people got tired, especially in the
• 18:50
  Speaker 1: public pension sounds where there's unions and uh, teachers and firemen,
• 18:56
  Speaker 1: and they don't like to see these guys spending a
• 18:58
  Speaker 1: lot of money and their conspicuous consumption um when they're
• 19:02
  Speaker 1: not getting much in the way of returns. So they're
• 19:04
  Speaker 1: actually connecting the personal behavior of the hedge fund manager
• 19:10
  Speaker 1: with the returns that they see when they're just looking
• 19:13
  Speaker 1: for an increase in the amount of money they make. Exactly. Yeah. Now,
• 19:18
  Speaker 1: just to follow up on these apartments, these trophy real
• 19:21
  Speaker 1: estate investments, I wonder if you could just tell us
• 19:23
  Speaker 1: about Steve Cohen, who is now running his own family office.
• 19:28
  Speaker 1: Just described because he's he's not a dumb bunny. What
• 19:32
  Speaker 1: he bought what nine thousand square foot duplex at one
• 19:36
  Speaker 1: Beacon Court, that's correct. I think he paid about twenty
• 19:40
  Speaker 1: million dollars for it, So even if he sells it
• 19:42
  Speaker 1: at the highly reduced UH price of sixty seven million,
• 19:47
  Speaker 1: he'll still be making a lot of money. But at
• 19:49
  Speaker 1: one point he thought he could get a hundred and
• 19:51
  Speaker 1: fifteen million dollars for that apartment. But now I guess
• 19:55
  Speaker 1: it's a bargain at sixties sixty seven and a half
• 19:57
  Speaker 1: million exactly. So still make a huge off it, but
• 20:00
  Speaker 1: not quite as much as he thought he was going
• 20:02
  Speaker 1: to make. Just give you about ten seconds. Are there
• 20:04
  Speaker 1: any hedge funds that are that are combating this whole
• 20:07
  Speaker 1: issue and getting ahead of the game. Uh, certainly, some
• 20:10
  Speaker 1: of the quantitative guys are raising money um and people
• 20:15
  Speaker 1: like Renaissance Technologies is still putting up huge returns, although
• 20:19
  Speaker 1: they don't take a lot in the way that's hoide money.
• 20:21
  Speaker 1: But thanks very much. Cathy Burton, our hedge fund reporter
• 20:24
  Speaker 1: for Bloomberg News. You can follow her on Twitter at
• 20:28
  Speaker 1: Burton Cathy. What to do with your money in ten
• 20:44
  Speaker 1: Perhaps nothing, but maybe not. Maybe the dog of the
• 20:47
  Speaker 1: Dow theory is the way to go. Let's find out
• 20:50
  Speaker 1: from jug Doug Cioca. He is the chief executive officer
• 20:53
  Speaker 1: and partner at Cavar Capital Partners, helping to manage a
• 20:56
  Speaker 1: little bit more than half a billion dollars. He's based
• 20:58
  Speaker 1: in Leawood, Kansas. Doug great to always speak with you, um,
• 21:02
  Speaker 1: dogs of the Dow. Why don't we start there because
• 21:05
  Speaker 1: that may highlight why the Dow Jones Industrial Average is
• 21:09
  Speaker 1: up nearly four this year while the SMP is up
• 21:13
  Speaker 1: a little bit more than Yeah, PIM, thanks for having
• 21:17
  Speaker 1: me on a happy new year, and I think it's
• 21:20
  Speaker 1: been interesting. There seems to be a lot of tax
• 21:22
  Speaker 1: loss selling that's taking place in certain sectors of the
• 21:24
  Speaker 1: Dow in the SMP. But you know, whether it's in
• 21:27
  Speaker 1: staples or healthcare and what we are calling the trailblazers
• 21:31
  Speaker 1: of this changing face of retail, right, those companies that
• 21:34
  Speaker 1: focus on direct to consumer as opposed to same store sales.
• 21:38
  Speaker 1: Seems like some paradigm shifting has caused a little bit
• 21:41
  Speaker 1: of consternation in certain sectors that um, we think offer
• 21:46
  Speaker 1: some pretty good opportunity going into next year. Right, So
• 21:49
  Speaker 1: much of what we're trying to determine from an asset
• 21:53
  Speaker 1: allocation perspective is, you know what areas of the stock
• 21:56
  Speaker 1: market have pulled forward the prospects of economic and earnings
• 22:01
  Speaker 1: per share improvement ahead of it actually materializing it. Can
• 22:04
  Speaker 1: you give us some details thats hows some industry goose
• 22:07
  Speaker 1: particularly I know industrial stocks, well, industrial stocks, financials, and
• 22:12
  Speaker 1: and and energy post election have been on a parabolic
• 22:16
  Speaker 1: UH scream higher, which is great. And I think that
• 22:19
  Speaker 1: it is embedding some optimism that was dormant for a
• 22:24
  Speaker 1: period of several years. And you know, whether it's because
• 22:27
  Speaker 1: that the set is going to have the green light
• 22:28
  Speaker 1: and be buttressed by underlying economic growth that it feels
• 22:31
  Speaker 1: that it can raise rates progressively and that's a very
• 22:34
  Speaker 1: positive immediate impact for profitability of banks. Whether this functional
• 22:39
  Speaker 1: fiscal policy that we're hopeful will make its way through
• 22:42
  Speaker 1: the legislative process is going to be great for industrial
• 22:46
  Speaker 1: companies that have seen a pretty significant ebb in their
• 22:51
  Speaker 1: order flow um or whether it's it's the energy stocks
• 22:54
  Speaker 1: that now feel like, okay, shoot the US, let's join OPEC.
• 22:58
  Speaker 1: I mean, we've got enough natural gas, we've got enough energy.
• 23:02
  Speaker 1: If if a mom had had hit and poined himself
• 23:04
  Speaker 1: the energy president and we've had all these discoveries, can
• 23:08
  Speaker 1: Trump then get it effectively transported through pipelines where it
• 23:11
  Speaker 1: can actually make a material improvement in the economy and
• 23:14
  Speaker 1: bring back the whole manufacturing base that we feel may
• 23:16
  Speaker 1: have been abandoned. So are just gonna say, just breaking
• 23:20
  Speaker 1: on on energy. I didn't know. I just recently learned
• 23:23
  Speaker 1: this that the United States is on a tap to
• 23:25
  Speaker 1: pump about eight point eight million barrels of oil a day, correct,
• 23:31
  Speaker 1: I mean, we're somewhere around there now, but we're that
• 23:35
  Speaker 1: was the level that it was about two years ago.
• 23:37
  Speaker 1: Because of course the price of oil having come down,
• 23:40
  Speaker 1: a lot of wells have been shut in and so on.
• 23:43
  Speaker 1: You know, we're doing We're producing that amount of oil
• 23:46
  Speaker 1: with a third of the number of rigs. So the technology,
• 23:50
  Speaker 1: I mean, it's just underscores the technology change that has
• 23:54
  Speaker 1: gone on in the in the energy business. I agree,
• 23:57
  Speaker 1: and it's fascinating. And I think that was one of
• 23:59
  Speaker 1: the red the predictions when they were in place of
• 24:02
  Speaker 1: Famously Dennis Gartman, I think in February said oil would
• 24:05
  Speaker 1: never bring back to forty in his lifetime because it
• 24:08
  Speaker 1: wasn't that there was a lack of demand. There was
• 24:11
  Speaker 1: an ebulent amount of an amazing amount of supply, and
• 24:14
  Speaker 1: that supply was going to be um drilled for in
• 24:18
  Speaker 1: mind so efficiently that there would be no reason to
• 24:21
  Speaker 1: see such upward pressure on prices at any point in
• 24:24
  Speaker 1: the future. So yeah, I think that that plays a
• 24:26
  Speaker 1: big part. And the technological progression and efficiency stress is
• 24:31
  Speaker 1: across industries, which is really interesting as much as the
• 24:35
  Speaker 1: technological and the innovative components are out offshoot of tech.
• 24:41
  Speaker 1: The tech the tech industry which has been one of
• 24:43
  Speaker 1: the main laggards after the election because of this um
• 24:47
  Speaker 1: this theory that Trump hates tech because of the lack
• 24:51
  Speaker 1: of very prominence, certainly doesn't hate Twitter in the campaign. No,
• 24:56
  Speaker 1: he loves Twitter. So alright, So having so looking at
• 24:59
  Speaker 1: let's say you got it us an allocation model, and
• 25:01
  Speaker 1: you're saying to yourself, all right, now that I've made
• 25:03
  Speaker 1: some gains in energy stocks, I've made some gains in industrials, financials,
• 25:08
  Speaker 1: and I need to rebalance, right, this is my discipline.
• 25:11
  Speaker 1: I'm going to rebalance my portfolio. What do you have
• 25:14
  Speaker 1: to add to do the rebalancing. You have to add
• 25:16
  Speaker 1: more tech. You need to have more tech, need to
• 25:18
  Speaker 1: add more healthcare, And I think you have to double
• 25:21
  Speaker 1: back on some of the staple stocks, no question, I
• 25:23
  Speaker 1: mean I think this there is an overreaction in the
• 25:26
  Speaker 1: market to some perceived threat of unwinding the globalization efforts
• 25:30
  Speaker 1: that tech has really been the primary representation thereof. I
• 25:34
  Speaker 1: think there are unfounded concerns about the restrictions on intelectric
• 25:38
  Speaker 1: capital mobility for tech companies as well with VISA threat
• 25:43
  Speaker 1: propositions and things of that nature that I actually think
• 25:46
  Speaker 1: this is far more embarked than it is bite and
• 25:50
  Speaker 1: I think for Trump to really extract the benefit of
• 25:52
  Speaker 1: becoming the pro economy president, he realizes that tech has
• 25:56
  Speaker 1: to be a sidecard to that propulsion. All right, So
• 25:59
  Speaker 1: if you are unbalanced in your asset allocation, take a
• 26:04
  Speaker 1: look at what you take a look at technology, take
• 26:06
  Speaker 1: a look at at healthcare and also biotechnology. I would
• 26:10
  Speaker 1: imagine as part of that no, it within healthcare, I
• 26:13
  Speaker 1: mean everything throughout the vertical him UM as it relates
• 26:19
  Speaker 1: to producing drugs, purchasing drugs, in consuming drugs, that that
• 26:24
  Speaker 1: that vertical has been under assault, whether it starts with
• 26:27
  Speaker 1: Martin Squarelli in the catapults forward with the epipenda BACCLE
• 26:31
  Speaker 1: and UM. Then we're trying to understand what we're in
• 26:34
  Speaker 1: the in the in the process of PBM really fits
• 26:38
  Speaker 1: and HSU Pharmacy benefit management companies. Correct, We we're just
• 26:44
  Speaker 1: I believe we're just talking recently about United Health and
• 26:47
  Speaker 1: they have an optim unit that accounts for about of
• 26:51
  Speaker 1: their profits and that is basically a technology business and
• 26:54
  Speaker 1: it has a pharmacy benefit management UH division within that.
• 27:00
  Speaker 1: How many about bonds? If you have gains in bonds,
• 27:02
  Speaker 1: should you take them or should you wait? Well, if
• 27:07
  Speaker 1: you have gains in bonds and you probably had a
• 27:09
  Speaker 1: very strong bond portfolio, given the pullback in bond prices
• 27:13
  Speaker 1: that's taken place over the last six or seven weeks,
• 27:16
  Speaker 1: we think there's a lot of opportunity in the fixed
• 27:18
  Speaker 1: income market just because you had you had a pull
• 27:22
  Speaker 1: back very similarly to what took place during the tape
• 27:25
  Speaker 1: Re tangion to two thousand thirteen. But it has provided
• 27:29
  Speaker 1: entry points that on a spread basis, we've not seen
• 27:32
  Speaker 1: really sustainably since maybe before the Great Recession. So we
• 27:36
  Speaker 1: still think that again, given that there's been some enthusiasm
• 27:39
  Speaker 1: and tenantities rips in some of these market sectors, it
• 27:42
  Speaker 1: has been equal in offsetting with the drugging that's taken
• 27:44
  Speaker 1: place in some of these bond sectors. There's a lot
• 27:47
  Speaker 1: of opportunity, almost like the dogs of the Dow theory,
• 27:49
  Speaker 1: and fixed income, particularly in tax exempts or tax exmps,
• 27:53
  Speaker 1: have have kind of been a double whammy insomuch as
• 27:56
  Speaker 1: people say, Okay, rates are going up, so we gotta
• 27:58
  Speaker 1: get out of our current bonds as well as any
• 28:00
  Speaker 1: bonds surrogates and taxes are going lower, so the benefit
• 28:04
  Speaker 1: tangibly or quantitatively of that exemption is going to fall.
• 28:08
  Speaker 1: So if you see that back up multiplied in the
• 28:12
  Speaker 1: muni space, we still think that it's there's some very
• 28:15
  Speaker 1: good value in there. Thanks very much. Doug Sioca is
• 28:18
  Speaker 1: the chief executive and partner at cav Our Capital Partners.
• 28:22
  Speaker 1: Joining us from Leewood, Kansas. Thanks for listening to the
• 28:31
  Speaker 1: Bloomberg pian L podcast. You can subscribe and listen to
• 28:35
  Speaker 1: interviews at iTunes, SoundCloud, or whatever podcast platform you prefer.
• 28:40
  Speaker 1: I'm pim Fox. I'm out there on Twitter at pim Fox.
• 28:44
  Speaker 1: I'm out there on Twitter at Lisa Abramo. It's one
• 28:47
  Speaker 1: before the podcast. You can always catch us worldwide on
• 28:50
  Speaker 1: Bloomberg Radio.