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Corn May Be Big Opportunity at These Levels, Gilbertie and McGlone Say · Bloomberg Intelligence

0:05
Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm pim Fox.
0:08
Speaker 1: Along with my co host Lisa Bramowitz. Each day we
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Speaker 1: bring you the most important, noteworthy, and useful interviews for
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Speaker 1: you and your money, whether you're at the grocery store
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Speaker 1: or the trading floor. Find the Bloomberg p m L
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Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Well,
0:31
Speaker 1: corn is king. Corn markets are the biggest agricultural market
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Speaker 1: both in turns of tonnage as well as dollar amount
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Speaker 1: in the world. And here to tell us what to
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Speaker 1: expect from this market is Sala Gilberti, President, chief chief
0:47
Speaker 1: investment officer and co founder of two Cream Trading ll C,
0:51
Speaker 1: as well as Mike mclogan, commodity strategist for Bloomberg Intelligence.
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Speaker 1: So I want to start with you. You noted something
0:58
Speaker 1: pretty amazing to me that even as demand increases from
1:02
Speaker 1: ethanol and just globally, corn prices are around three dollars
1:08
Speaker 1: and fifty cents of bushel, which means corn prices are
1:10
Speaker 1: again at or below perceived cost of production. Does that
1:14
Speaker 1: mean that farmers have to raise prices cell, Well, it
1:17
Speaker 1: means the market has to raise prices. Farmers really don't
1:20
Speaker 1: control the price unless they stop planting, and in a
1:22
Speaker 1: way so indirectly they can control the price. What we've
1:25
Speaker 1: seen is in the past ten years, two times corn
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Speaker 1: has been at this level three fifty or below spot
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Speaker 1: corn and the prices doubled to over seven dollars. That
1:34
Speaker 1: happened in the two thousand seven two eight crop here
1:36
Speaker 1: and again in usage continues to rise. Demand is always
1:42
Speaker 1: rising for corn. Corn touches every part of your life.
1:44
Speaker 1: It's like oil, and when oil, you know, goes below
1:47
Speaker 1: the cost of production, money tends to be attracted. Their
1:50
Speaker 1: corn is once again at that three fifty level in spot.
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Speaker 1: We we can't say when for sure there will be
1:56
Speaker 1: a supply disruption. We know that it is very unlikely
1:59
Speaker 1: that there will demand disruption. So corns corn maybe a
2:02
Speaker 1: big opportunity here. Uh, Mike mcgloan wants you to come
2:05
Speaker 1: in on this because you know, there's only so much
2:08
Speaker 1: acreage out there, and farmers have to decide what the plant.
2:11
Speaker 1: And sometimes they say, I'm not gonna plant corn, I'm
2:13
Speaker 1: gonna plant soybeans. Uh. Why do they make those decisions?
2:17
Speaker 1: And what are they deciding right now? One reason? Money revenue,
2:21
Speaker 1: and that's A key factor that's happening right now is
2:24
Speaker 1: there's I'm looking at my screen. The US D estimates
2:28
Speaker 1: for corn revenue for this year are average acre is
2:30
Speaker 1: gonna lose ninety dollars per acre, yet they're still breaking
2:33
Speaker 1: even in soybean, so they're gonna plant more soybeans. So
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Speaker 1: that's probably the first time in history we're gonna see
2:38
Speaker 1: much more soybeans planted than the corn. A key factor
2:40
Speaker 1: there is it's an indication that US grain production is peaked,
2:43
Speaker 1: which is a very profound statement because we heard about it.
2:46
Speaker 1: You know, a great year again this year, but from
2:48
Speaker 1: a typical acre of land you get maybe four metric
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Speaker 1: tons of corn, but for soybeans it's about one. So
2:54
Speaker 1: the total production will continue decline, is very likely to
2:57
Speaker 1: continue decline. It's farmers chase profits and plant more beans
3:01
Speaker 1: and less corn, and that's probably it's an unsustainable trend
3:04
Speaker 1: until price is generally adjust to make a difference. Sal
3:08
Speaker 1: I'd like to to get your sense of why farmers
3:11
Speaker 1: are planting more soybeans at this point. When I don't,
3:15
Speaker 1: I mean I love tofu. We were talking earlier that
3:18
Speaker 1: you like tofu too, but that's not much driving this
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Speaker 1: is it. No, it's not. In fact, that demand for
3:23
Speaker 1: soybeans is so enormous from China, and China we saw
3:28
Speaker 1: them by I think Smithfield. They they are consuming more pork,
3:32
Speaker 1: more animal based proteins. They are importing all of the
3:35
Speaker 1: soybeans they can find from any source in the world
3:37
Speaker 1: in order to feed their animals. Remember, the number one
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Speaker 1: use of grains is to feed the animals that we
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Speaker 1: as humans eat, and so we might like the eat
3:44
Speaker 1: a lot of tofu, but the real consumption is for animals. Okay,
3:48
Speaker 1: so let's build on that. I mean, what at what
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Speaker 1: price point would farmers be incentivized to plant more corn? Well,
3:55
Speaker 1: they look at a ratio, and so they look at
3:57
Speaker 1: their inputs and their costs, and they look at what
4:00
Speaker 1: will make them more Either you know, d seventy five
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Speaker 1: bushels of corn or fifty or so bustels of soybeans.
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Speaker 1: One or the other is going to come off of
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Speaker 1: that same maker. Importantly, though, for sustainability issues, it's really important.
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Speaker 1: Corn draws nitrogen out of the soil, and farmers think
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Speaker 1: about this all the time. Soybeans put it back in,
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Speaker 1: and so there's something called crop rotation where it's really
4:20
Speaker 1: advisable for a farmer who can supplement with with artificial fertilizers.
4:24
Speaker 1: But the best thing that farmer can do for his
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Speaker 1: soil is once in a while, when he's got a choice,
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Speaker 1: switch back to soybeans because it improves the general health
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Speaker 1: of his farm. Uh Mica. One of the things I
4:35
Speaker 1: want you to speak about, though, is what they're facing
4:37
Speaker 1: in terms of fuel costs right now with with farmers,
4:40
Speaker 1: because I don't get this. Uh. The United States is
4:43
Speaker 1: producing more oil and more natural gas than anybody can remember,
4:47
Speaker 1: and yet supplies for farmers are kind of getting squeezed.
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Speaker 1: What's up? What's up with that one word? Exports a
4:52
Speaker 1: key factor in in the US. I think the US
4:56
Speaker 1: commodity market right now, most notably energies we can export.
5:00
Speaker 1: We have a declining dollar that we had restrictions a
5:02
Speaker 1: few years ago. Those are gone. So if there's a
5:04
Speaker 1: better market overseas and there's more money to be made,
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Speaker 1: there's plenty of exports. So that is a key factors.
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Speaker 1: Cost of costs for farmers are increasing because patrol imune costs,
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Speaker 1: drying costs for corn are increasing, but exports and that's
5:16
Speaker 1: also a key factor in the grains, and it just
5:18
Speaker 1: hasn't happened yet. So we've seen a bottom in crude
5:21
Speaker 1: oil bottomed and what it's really like from the lows
5:24
Speaker 1: free years ago, we haven't seen that in the grain yet.
5:26
Speaker 1: And that's what it's probably gonna happen in a key
5:29
Speaker 1: driver's exports. So if we have a continued week dollar,
5:32
Speaker 1: unless there's some kind of straight train restrictions, it's almost inevitable.
5:35
Speaker 1: This substantial paradigm shift in big increase in US exports
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Speaker 1: should boost the price of US traded corn, soybeans, and
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Speaker 1: potentially weak So you were talking earlier about that ratio
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Speaker 1: of corn to soybeans. Where are we now? What's it saying? Um,
5:51
Speaker 1: it's telling farmers to plant soybeans. Um, it was telling
5:55
Speaker 1: them a couple of weeks ago to plant a lot
5:56
Speaker 1: more soybeans. Right now it's coming back into line because
5:59
Speaker 1: people are starting to speck like Mike is predicting that
6:02
Speaker 1: they will plant more soybeans versus corn. And again, you're
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Speaker 1: gonna get fifty bushels of soybeans off an acre or
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Speaker 1: you're gonna get a hundred and seventy five corn. That's
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Speaker 1: a big difference. If you switch to soybeans. So how
6:12
Speaker 1: much could you see corn prices rise? They're at about
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Speaker 1: three dollars and fifty cents of bushel right now. Where
6:18
Speaker 1: are they going to go by this time next year?
6:19
Speaker 1: There's no towing. I can tell you that this is
6:22
Speaker 1: the midst of the corn harvest seasonal, so more corn
6:24
Speaker 1: is in a big pile than then there will be
6:26
Speaker 1: for the rest of the year, and so that generally
6:28
Speaker 1: creates a seasonal low um, so you can see a
6:32
Speaker 1: slow trickle upward of price for the next six months
6:34
Speaker 1: until the next planning season becomes clear. But again, twice
6:38
Speaker 1: in the last ten years, corn prices have doubled from
6:41
Speaker 1: the price that they're at right now. I'm just looking
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Speaker 1: at your E T F right corn, the two cum
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Speaker 1: corn E T F trading it about sixteen and a
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Speaker 1: half bucks a share. It was as high as almost
6:52
Speaker 1: twenty in July it was. And you've you've seen this
6:55
Speaker 1: relentless bear market with these these supplies of corn. But
6:58
Speaker 1: now the harvest is over. And again our fund wasn't
7:01
Speaker 1: around for both of those doubling prices, but it was
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Speaker 1: for the one, and you know, the fund did perform
7:07
Speaker 1: quite well, and I think it's went from the mid
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Speaker 1: twenties to the very low fifties. Mike, what's the best
7:11
Speaker 1: way for investors to uh to trade corn? Well, I
7:15
Speaker 1: have to admit when I look at a lot of
7:17
Speaker 1: the products and it sell levels. When I do this,
7:19
Speaker 1: I go to soybeans partly because historically you can invest
7:22
Speaker 1: in soybean and soybean product and you don't have that
7:25
Speaker 1: massive cost of carry. Now you might not get the
7:27
Speaker 1: performance right away, but that's one of the issues in
7:29
Speaker 1: commodities is you have a cost of carry. Soybeans are
7:31
Speaker 1: very easy to store and very inexpensive to store, so
7:34
Speaker 1: that generally you don't have that rolling futures cost I e.
7:36
Speaker 1: A contango and corn you have. It's a little more expensive,
7:39
Speaker 1: but you know that's just you have a different type
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Speaker 1: of market. So I look at soybeans is a longer
7:44
Speaker 1: term hold. It depends on where you are, but overall
7:48
Speaker 1: it's certain key levels like cell mentioned here. The risk
7:52
Speaker 1: is that we trickled down or re double in price
7:54
Speaker 1: over the next few years is the kind of way
7:56
Speaker 1: I look at it. And a little bit of a
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Speaker 1: weather event will do that, and I'm not predicting that,
8:00
Speaker 1: but just these demand versus supply trends imply prices and
8:02
Speaker 1: top probably need to increase or exports will make them increase. Gentlemen,
8:07
Speaker 1: want to thank you very much for joining us and
8:09
Speaker 1: lightening us about the world of commodities. Sal Gioberti is
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Speaker 1: the president and the chief investment officer and co founder
8:15
Speaker 1: of a two creum at Trading not just looking at
8:18
Speaker 1: his soybean e t F again of about four point
8:21
Speaker 1: three percent since August. Thanks very much. Mike mcgloanar commodity
8:25
Speaker 1: strategist for Bloomberg Intelligence. This is Bloomberg. Here to help
8:43
Speaker 1: us understand what's going on in the bond market is
8:45
Speaker 1: Tad Revel. He is the chief investment officer of TCW,
8:48
Speaker 1: helping to manage more than two hundred billion dollars based
8:52
Speaker 1: in Los Angeles. Tad, thank you very much for being
8:55
Speaker 1: with us. When if you could just begin by telling
8:57
Speaker 1: people who was Sir Thomas Gresham, why does it matter?
9:02
Speaker 1: And maybe tell us how that connects with the United
9:05
Speaker 1: States and the fact that we don't use silver in
9:08
Speaker 1: any of our money. That is, it is a bit
9:12
Speaker 1: of an obscure reference, but I think actually many people
9:14
Speaker 1: are familiar with the term. Gresham's loss. So Gresham was
9:20
Speaker 1: actually an advisor to the court of King Henry the
9:23
Speaker 1: eighth of financial advisor, and he put forth the observation
9:28
Speaker 1: that bad money drives out good money, and what he
9:31
Speaker 1: meant by that is that if there were or the
9:33
Speaker 1: observation was that if you have two identical face value
9:39
Speaker 1: type currencies, let's say gold coins, silver coins, copper coins, UM,
9:44
Speaker 1: people will essentially take the gold coins and put them
9:47
Speaker 1: in their drawer and utilize the copper coins to facilitate
9:51
Speaker 1: the circulation UM. In the case of the American experience,
9:54
Speaker 1: coinage was silver until n four Congress changed the law,
10:00
Speaker 1: and beginning in nineteen sixty five, when other medals base
10:04
Speaker 1: metals were used, all the silver coins basically disappeared. So
10:08
Speaker 1: Gresham's law is kind of an interesting insight into the
10:11
Speaker 1: human nature that actually most people are probably pretty familiar with,
10:15
Speaker 1: even if no one really knows UM the origins of
10:19
Speaker 1: the term well so so connecting it to to now
10:22
Speaker 1: and to market, it's the idea being that we've seen
10:25
Speaker 1: this incredible run up in equities and in riskier assets
10:29
Speaker 1: in the debt market as well as frankly safe assets.
10:32
Speaker 1: We've seen a run up and absolutely everything, and people
10:34
Speaker 1: are chasing the rally by pouring more money in. Is
10:37
Speaker 1: the implication here that we are on the precipice of
10:41
Speaker 1: a turning point, that this is bad money going into
10:44
Speaker 1: the market right now. I think that that's a that's
10:47
Speaker 1: a good metaphor for for the point which is that
10:50
Speaker 1: UH investors, I think are always counseled UM to be
10:55
Speaker 1: disciplined in their approach to UH, not overpaying for assets
11:00
Speaker 1: who taking a long term approach. But what does happen
11:02
Speaker 1: laid in the cycle is the phenomenon that you alluded to,
11:05
Speaker 1: which is that there is money that is hungry for
11:09
Speaker 1: for yielden income and at some point is willing to
11:12
Speaker 1: pretty much underwrite any risk in exchange for the income.
11:15
Speaker 1: The result is that you get assets of all sorts,
11:19
Speaker 1: those worthy and those less so that get bit up
11:22
Speaker 1: in price, and in effect it becomes an example of
11:24
Speaker 1: Gresham's law of investing, in which basically the bad underwriting UM,
11:29
Speaker 1: the money that is just far too willing to UH
11:33
Speaker 1: sponsor risk, starts to drive out the good money and
11:36
Speaker 1: the good underwriting that which is more discipline, and it
11:39
Speaker 1: creates a a point of cognitive dissonance for people because
11:42
Speaker 1: you said on the sidelines, if your discipline and you say,
11:45
Speaker 1: I just don't understand. Everybody else seems to be making
11:48
Speaker 1: money and I'm sitting this out. Is this really the
11:51
Speaker 1: right strategy for for me that I should take? And historically,
11:56
Speaker 1: actually it is, even though it doesn't feel that way
11:58
Speaker 1: in real time. Given given that sort of backdrop, is
12:02
Speaker 1: TCW moving more money in its fixed income portfolios to cash?
12:07
Speaker 1: Is it taking money out of certain markets? And if so,
12:11
Speaker 1: which ones? Well? The way we think about it, or
12:14
Speaker 1: the way we express it is that you should think
12:16
Speaker 1: in terms of in terms of fixed income, you should
12:19
Speaker 1: think about bendable assets and breakable assets. And by that
12:23
Speaker 1: what we mean is that a breakable asset is essentially
12:26
Speaker 1: an asset in the case of a bond, where you're
12:29
Speaker 1: going to ultimately suffer loss of principle um it will
12:33
Speaker 1: not recover or represent an economically viable asset. A bendable
12:39
Speaker 1: asset is an asset that will, we believe, ultimately provide
12:44
Speaker 1: full recovery of principle. But the use of the term
12:47
Speaker 1: bendable is meant to remind us all that that doesn't
12:50
Speaker 1: mean that there isn't going to be ups and downs
12:52
Speaker 1: and market related type volatility. So what what Yeah? What
12:57
Speaker 1: what's what's bendable and what's breakable? Yeah, exact exactly. Um. So,
13:02
Speaker 1: just as a large generalization, UH, the kinds of assets
13:06
Speaker 1: that you should think of as being bendable that are
13:08
Speaker 1: appropriate late in the cycle where we think we are
13:11
Speaker 1: are things like investment grade corporate bonds UM top of
13:14
Speaker 1: the capital structure type of investments in some of the
13:17
Speaker 1: securitized credit areas. So those would include typically triple A
13:23
Speaker 1: rated commercial back mortgage backed securities. They would include programs
13:27
Speaker 1: such as the UH the FELP student loan program, which
13:31
Speaker 1: basically is government guaranteed full faith and credit obligations UH
13:35
Speaker 1: student loans. They would include agency mortgages. And then that
13:39
Speaker 1: begs the question, so what would be breakable? Well, um,
13:42
Speaker 1: that of course is the rub of it, which is
13:45
Speaker 1: that you need to pre identify that which will be
13:48
Speaker 1: breakable before you essentially get into the end of the
13:51
Speaker 1: cycle when markets tend to be absolutely unforgiving. Traditionally, you
13:56
Speaker 1: will see breakable assets in such asset classes as UH
14:00
Speaker 1: high yield securities below investment grade. You'll oftentimes see them
14:04
Speaker 1: in emerging markets, and you'll typically see them down the
14:07
Speaker 1: capital structure in some of the securitized credits. If you're
14:10
Speaker 1: buying a triple B a double B commercial mortgage, you
14:14
Speaker 1: better be careful about the level of due diligence that
14:17
Speaker 1: you're doing because an asset like that, we would suggest
14:19
Speaker 1: is potentially in the breakable category. So does that mean
14:22
Speaker 1: that TCW is actively selling HILD bonds, emerging market bonds,
14:26
Speaker 1: and some lower rated investment grade bonds. Right. So it's
14:30
Speaker 1: important to convey this is that the statements I made
14:33
Speaker 1: were generalizations, and there are sometimes particular differences. But as
14:37
Speaker 1: a general statement, we have de emphasized the high yield
14:42
Speaker 1: element in our portfolios for a significant period of time.
14:45
Speaker 1: We have emphasized the triple A in securitized credit and
14:49
Speaker 1: the investment grade. So I don't want to, you know,
14:52
Speaker 1: go too far and say that, you know, we wouldn't
14:54
Speaker 1: buy a high yield security in this type of environment.
14:57
Speaker 1: We would subject it to a level of due diligence
14:59
Speaker 1: and level of skepticism that I think you're that is
15:02
Speaker 1: supposed to be appropriate laid in a credit or asset
15:06
Speaker 1: price cycle ted just quickly, the people that you speak with,
15:11
Speaker 1: do you feel that they are acting out of emotion
15:15
Speaker 1: or out of some kind of rational thought process. UM.
15:20
Speaker 1: I think it's actually mostly habit People become habituated uh
15:24
Speaker 1: to to taking risk laid in the cycle. And I
15:27
Speaker 1: think an interesting way to think about it is that,
15:32
Speaker 1: uh if you look at market related measures of risks,
15:35
Speaker 1: so things like the VIX index, which measures stock market
15:40
Speaker 1: implied volatility or stock market implied risk. There are other
15:43
Speaker 1: indicries like the MOVE index that measures that in treasuries.
15:46
Speaker 1: Until a few days ago, these indicries were hovering at
15:49
Speaker 1: twenty five years twenty five year loads. If market participants
15:53
Speaker 1: were being utterly rational. The only conclusion you could draw
15:56
Speaker 1: from that is that market participants must literally be saying
16:00
Speaker 1: this is the safest investment environment in twenty five years.
16:04
Speaker 1: If you think market participants are not literally and rationally
16:07
Speaker 1: saying that, than what you're really observing is a very
16:10
Speaker 1: crowded trade UM in the sense that many, for too
16:14
Speaker 1: many people probably are over their skis as it related
16:18
Speaker 1: to credit risk taking. Tad Revell, thank you so much
16:21
Speaker 1: for joining us. Tad Revel, chief investment officer for TCW,
16:24
Speaker 1: which overseas two hundred and one billion dollars and is
16:27
Speaker 1: based in Los Angeles. When a company defaults, typically it's
16:43
Speaker 1: because it has run out of money to pay its bills,
16:46
Speaker 1: but every so often it means something very different. If
16:48
Speaker 1: you take a look at the credit default swaps of Huffnanian,
16:51
Speaker 1: which is New Jersey's biggest home builder, it looks like
16:54
Speaker 1: the company is about default. If you look at the bonds,
16:57
Speaker 1: it looks like they are nowhere near defaulting and are lying.
17:00
Speaker 1: This is a hedge fund battle that we want to
17:03
Speaker 1: illuminate with our own. Shodar Naturaj and he is a
17:06
Speaker 1: high yield the debt and syndicated a loan reporter for Bloomberg.
17:09
Speaker 1: He breaks a lot of news. He writes great articles.
17:12
Speaker 1: You can find them on at the Bloomberg as well
17:14
Speaker 1: as Bloomberg dot com. Um, sure, can you just give
17:17
Speaker 1: us a sense what's going on here under the surface
17:19
Speaker 1: having to do with have Nanian credit default swaps and bonds.
17:23
Speaker 1: I mean, it's one of those situations that just leaves
17:25
Speaker 1: a lot of people scratching their heads on how this
17:28
Speaker 1: is even allowed. Essentially, you have a company who's sails
17:31
Speaker 1: it down, credit metrics are worsening, and they have a
17:35
Speaker 1: good chunk of debt that is about a mature so
17:37
Speaker 1: they need to figure out a way how they can
17:38
Speaker 1: refinance their debt, and in WOX and G s O,
17:41
Speaker 1: which is black Son's credit unit, ostensibly as the White
17:44
Speaker 1: Knight offering what might seem like a good deal to
17:47
Speaker 1: the company, but there is this unusual provision. They want
17:50
Speaker 1: the company to be able to default on the credit
17:52
Speaker 1: default swaps contract so that they get a payout on that,
17:56
Speaker 1: and that obviously has a lot of people on the
17:57
Speaker 1: other side of the trade very upset. So basically you
18:00
Speaker 1: have hundreds of millions of dollars at stake in the
18:03
Speaker 1: credit default swaps market that are totally independent of the
18:07
Speaker 1: company and the company's dealtload. Like the company doesn't actually
18:10
Speaker 1: have to pay out in any of this, right, so
18:12
Speaker 1: why wouldn't the company say we will take better financing terms,
18:17
Speaker 1: We're going to lower our interest rates, except black Stones
18:20
Speaker 1: offer and not make our payments quite on time, so
18:24
Speaker 1: that a bunch of hedge funds are forced to pay
18:26
Speaker 1: out black Stone make them whole on the whole transaction,
18:30
Speaker 1: and everyone goes on there, mary or not some merry way.
18:34
Speaker 1: Because the guys on the other side are arguing that
18:36
Speaker 1: the company in this case would be intentionally interfering with
18:39
Speaker 1: another contract that they have with third parties, because what
18:42
Speaker 1: g s O is doing is they're effectively buying up
18:45
Speaker 1: the default swaps, betting on a default while simultaneously knowing
18:49
Speaker 1: that they will be able to force the default. And
18:51
Speaker 1: that doesn't smell right to a lot of people on
18:53
Speaker 1: the other side of the trade, who are obviously trying
18:55
Speaker 1: to protect their own relative value trades. Who's on the
18:57
Speaker 1: other side you have? You have hedge funds like Solas,
19:01
Speaker 1: c Qus, there are a few other big names involved.
19:05
Speaker 1: We know that the credit trades has involved people like Goldman, Citadel,
19:10
Speaker 1: black Rock, and you have someone like an Apologlobal Management
19:14
Speaker 1: their credit unit which is on the same side as you,
19:16
Speaker 1: so as they have been buying a lot of the swaps,
19:18
Speaker 1: so they will profit if there is a payout in
19:21
Speaker 1: those contracts. But doesn't this just raise the very sort
19:24
Speaker 1: of philosophical issue of how a credit the fault swap
19:28
Speaker 1: works because the credit the fault swap, while it may
19:32
Speaker 1: not be directly tied to something that underlies it, like
19:36
Speaker 1: the value in this case of Hobnanian, it is a
19:40
Speaker 1: separate entity. So it's almost as if you're selling insurance
19:43
Speaker 1: for someone's automobile, and then the premium gets traded back
19:48
Speaker 1: and forth, and people say, I want that premium to
19:52
Speaker 1: go up, which means that you would get into an accident.
19:54
Speaker 1: So you have someone who's throwing tax on the road
19:57
Speaker 1: hoping that the car will get into an axe it
20:00
Speaker 1: in because that will raise the premium, and then the
20:02
Speaker 1: insurance company is left holding the bag. Is that It's
20:05
Speaker 1: kind of the way this thing works. It feels like
20:08
Speaker 1: and and and and the byproduct of this this is
20:10
Speaker 1: a byproduct really of the growth we've seen in the
20:13
Speaker 1: credit to false source market. These are essentially insurance contracts.
20:17
Speaker 1: You're buying the contracts just so that you're able to
20:19
Speaker 1: head your position. At least that was the original goal, right,
20:21
Speaker 1: but that's been teased out. In other words, the person
20:23
Speaker 1: who's buying that contract is now no longer really interested
20:27
Speaker 1: in the health of the underlying asset, or they're interested
20:30
Speaker 1: in is the value of the contract goes up or down,
20:34
Speaker 1: and that's something that is traded just as if it
20:37
Speaker 1: was a separate entity. And that's an interesting point to
20:40
Speaker 1: make because the last time something like this happened, and
20:43
Speaker 1: you know, black Stone got a lot of flak for it,
20:45
Speaker 1: and this happened with the Spanish gaming company. Blackstone made
20:48
Speaker 1: a very specific point, and I'd like to read out
20:51
Speaker 1: about their statement from back then. They said the losers
20:54
Speaker 1: on the other side of the trade was sophisticated hedge
20:57
Speaker 1: funds using credit to false swaps to bet on the
21:00
Speaker 1: timing of a default. They were like gamblers betting on
21:03
Speaker 1: the overrun the spread, but having an interest, having no
21:06
Speaker 1: interest in the outcome of the game. Of course, the
21:08
Speaker 1: guys on the other side would argue that that's absolutely
21:11
Speaker 1: not true, and that's why we have this bitched battle
21:13
Speaker 1: right now. Interesting story, it's a great story and one
21:17
Speaker 1: that I think will probably continue and the lawyers will
21:21
Speaker 1: certainly make out with this. I will just note that
21:24
Speaker 1: that company that Shodar was talking about was Coderi, and
21:28
Speaker 1: it was featured the whole affair and Blackstone's role, and
21:30
Speaker 1: it was featured on the John Stewart Show back in
21:33
Speaker 1: It was that we perceived publicly as being rather ridiculous,
21:37
Speaker 1: given how divorced it was from you know, the underlying Well,
21:41
Speaker 1: there's no ridiculous in trying to make money, right, I mean,
21:44
Speaker 1: it's all about whatever the opportunity presents itself. Thanks very
21:47
Speaker 1: much for enlightening us. Shoot our not Taraj and he
21:50
Speaker 1: is our high yield, dead and syndicated loan reporter. And
21:52
Speaker 1: also my thanks to are my colleague Lisa Bramwitos, co
21:56
Speaker 1: author of the piece. Thank you very much. Well, it
22:10
Speaker 1: looks like twenty one century Fox has yet another couple
22:14
Speaker 1: of suitors. Comcast and Verizon evidently have looked into acquiring
22:18
Speaker 1: a big portion of a twenty one century Fox, swooping
22:22
Speaker 1: in after talks with Disney cooled off. And here to
22:25
Speaker 1: give us some more perspective is Geta Ranganathan, who is
22:29
Speaker 1: a technology and media analyst for Bloomberg Intelligence, coming to
22:33
Speaker 1: us from our BI headquarters in Princeton, New Jersey. Geta.
22:37
Speaker 1: You know, I'm struck by the market action. In response
22:39
Speaker 1: to this news, twenty one century Fox shares up four
22:42
Speaker 1: percent so far today in trading, whereas Comcast shares down
22:46
Speaker 1: Verizon also up. Why is this being viewed as a
22:48
Speaker 1: negative for Comcast or is it so? Um so, Lisa,
22:53
Speaker 1: Comcast has had a lot of regulatory struggles in the past.
22:58
Speaker 1: Um they definitely for a severe setback when UM the
23:02
Speaker 1: d o J basically athwarted their efforts to buy Time
23:05
Speaker 1: Warner Cable and so I think the regulatory regulatory threat
23:09
Speaker 1: is probably perceived as the biggest concern for Comcast kind
23:13
Speaker 1: of trying to go after Fox, especially at this time.
23:17
Speaker 1: This is really a very interesting time when we see
23:20
Speaker 1: that the d o J is kind of giving a
23:22
Speaker 1: T and T a hard time UM for its Time
23:25
Speaker 1: Warner acquisition UM and and obviously the name that's coming
23:28
Speaker 1: up a lot in those talks is Comcast and how
23:31
Speaker 1: the d o J is not very happy with, you know,
23:33
Speaker 1: the Comcast acquisition of NBC Universal. So adding more content
23:37
Speaker 1: obviously could really set off a whole streak of regulatory review.
23:43
Speaker 1: Can we just go to maybe the four different categories
23:46
Speaker 1: of major businesses for Century Fox and why people would
23:50
Speaker 1: want them such as Comcast or Verizon, even the cable
23:53
Speaker 1: network programming? Who wants that? And and how valuable is it? So?
23:58
Speaker 1: Cable network programming they have of a whole bunch of
24:01
Speaker 1: different types of assets there. They have, um, you know,
24:04
Speaker 1: their regional sports networks as well as you know FS one,
24:08
Speaker 1: which is a national sports network now that apparently is
24:11
Speaker 1: not up for sale. Their biggest portion of the cable
24:15
Speaker 1: network business or at least, the one that is the
24:18
Speaker 1: most profitable is Fox News Channel, that again is not
24:21
Speaker 1: up for sale. So so what we're left with is
24:24
Speaker 1: really a few general entertainment networks like f FX, UM,
24:28
Speaker 1: you know, FX Movie Channel, some of the smaller brands,
24:31
Speaker 1: and then National Geographic UM. Now this is what looks like,
24:36
Speaker 1: is UM you know, is what Fox is looking to
24:39
Speaker 1: put up for sale. UM. It could be complementary UM
24:43
Speaker 1: for for let's say, a Disney or a Comcast kind
24:46
Speaker 1: of adding that Nature channel, adding a little bit of UM,
24:49
Speaker 1: you know, adding kind of deepening their entertainment UM profile. UM.
24:54
Speaker 1: So that that that's the part of the business that
24:56
Speaker 1: they're willing to give up. And I think the most
24:58
Speaker 1: important part from a cable net working standpoint, which would
25:02
Speaker 1: be of interest especially to Comcast in Disney, is their
25:05
Speaker 1: international portfolio of cable channels. And and Fox really is
25:09
Speaker 1: an absolute media behemoth in India with its ownership of
25:13
Speaker 1: Star India has about fifty eight or fifty nine regional channels.
25:17
Speaker 1: It's a media giant UM and just that portion of
25:20
Speaker 1: the business ALAN should be worth about twelve to fifteen
25:22
Speaker 1: billion at least. The growing market as opposed to the
25:26
Speaker 1: U S which is you know, mature and possibly even
25:28
Speaker 1: in decline. You think that would be of interest to
25:30
Speaker 1: John Malone and Liberty It could be. Jean Malhone is
25:35
Speaker 1: always always features right at the doubin in media mn A. Alright, television,
25:39
Speaker 1: how about the television business? So the television business is
25:42
Speaker 1: clearly not for sale, uh, you know, from from a
25:45
Speaker 1: few different standpoints. First of all, um, Fox has a
25:48
Speaker 1: broadcast network as well as the TV station business, and
25:52
Speaker 1: both Comcasts and Disney have significant broadcast presence and just
25:57
Speaker 1: the FCC would not allow any single company to own
26:00
Speaker 1: two major broadcast networks. So the broadcast piece is going
26:04
Speaker 1: to remain with Fox. Uh, not for sale. Um. The
26:08
Speaker 1: other part of their business which possibly is up for
26:11
Speaker 1: sale is the film and the TV studio business, which
26:14
Speaker 1: is you know, filmed entertainment. Now, this is an area
26:16
Speaker 1: that Fox has had a little bit of struggles with.
26:19
Speaker 1: So the TV production is actually pretty robust. They've produced
26:22
Speaker 1: like great hits like you know, This is Us and whatnot. Um,
26:26
Speaker 1: But on the film side, it's been a little bit
26:28
Speaker 1: more erratic. Um. They just don't have the franchises and
26:32
Speaker 1: the cloud that let's say, a Disney or a Comcast
26:35
Speaker 1: Universal Studio has and they really struggled, and I think, um,
26:39
Speaker 1: they've figured that it's going to take them some very
26:42
Speaker 1: very significant investments to kind of revive that portion of
26:45
Speaker 1: their business, and so they're probably willing to just to
26:49
Speaker 1: sell it and give it up to to somebody else,
26:51
Speaker 1: maybe a bigger, bigger rival. I don't understand the timing
26:54
Speaker 1: of this. Why is Century Fox right now looking to
27:00
Speaker 1: sell some of its assets. I think the traditional media
27:03
Speaker 1: company has realized. Media companies have realized that, um, you know,
27:08
Speaker 1: Netflix has and other digital companies have clearly appended the
27:12
Speaker 1: media landscape. It's time for these companies to kind of, um,
27:18
Speaker 1: hone in on their narrow themselves down, kind of hone
27:21
Speaker 1: in on their core competencies. Fox probably realizes that, um,
27:26
Speaker 1: you know, it's core competencies in the news and the
27:28
Speaker 1: sports side of the business, not so much the film
27:31
Speaker 1: because it requires a lot of investments. Um And and
27:35
Speaker 1: they've kind of they've they've they've made these investments, so
27:37
Speaker 1: they've they've done it for national geographic, they really haven't
27:40
Speaker 1: seen that translate into ratings yet, and so they've probably
27:43
Speaker 1: kind of decided it's time to sell. When when they
27:45
Speaker 1: can still get a good price. How about the direct
27:48
Speaker 1: broadcast satellite television, So that is really up in the air. UM.
27:54
Speaker 1: That is their business, which is sky Um, which is
27:58
Speaker 1: a direct um to sell light Um kind of a
28:02
Speaker 1: pay TV business, distribution business in Europe. UM. They already
28:06
Speaker 1: own a thirty nine percent stake in sky and last
28:09
Speaker 1: at the end of last year they made a fifteen
28:12
Speaker 1: billion dollar bids to go ahead and acquire the remaining
28:16
Speaker 1: six stake. Now that deal has run into a lot
28:20
Speaker 1: of regulatory, um you know, obstacles, and they've obviously been
28:24
Speaker 1: frustrated by that. So I'm not really sure how that
28:26
Speaker 1: is going to play out. It's still under regulatory review.
28:29
Speaker 1: Fox believes that they can get the deal done by
28:32
Speaker 1: the middle of eighteen, but again a lot of uncertainty there.
28:36
Speaker 1: They probably feel that it's best to kind of sell
28:38
Speaker 1: that to either a Comcast or Disney or whoever is
28:40
Speaker 1: willing to buy UM and get rid of that regulatory uncertainty.
28:45
Speaker 1: Thanks for joining us, Kit Raganath on our technology and
28:48
Speaker 1: media analyst for Bloomberg Intelligence, the Shares of Century Fox
28:52
Speaker 1: or up for Thanks for listening to the Bloomberg P
28:58
Speaker 1: and L podcast. You can subscribe and listen to interviews
29:01
Speaker 1: at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer.
29:06
Speaker 1: I'm pim Fox. I'm on Twitter at pim Fox. I'm
29:09
Speaker 1: on Twitter at Lisa Abramo wits one. Before the podcast,
29:13
Speaker 1: you can always catch us worldwide on Bloomberg Radio