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Bloomberg Intelligence: Lyft Margin Error, Uber Buyback Plan (Podcast) · Bloomberg Intelligence

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  Speaker 2: Even with today's thirty seven percent increase and lift, the
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  Speaker 2: stock still has a market cap, you know, six seven
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  Speaker 2: billion dollars worth.
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  Speaker 3: Uber's got you know.
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  Speaker 2: Multiples of that's skyrocket and such a huge divergence. So
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  Speaker 2: let's break down both of those numbers. We can do
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  Speaker 2: that with men Deep Singh. He follows some of the
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  Speaker 2: technical sectors of this market, follows pretty much everything in
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  Speaker 2: ten Yeah, so he's a technist for Bloomberg Intelligence.
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  Speaker 3: So let's start with Lyft.
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  Speaker 4: I took getting fired.
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  Speaker 3: I took a Lyft home last night because why because
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  Speaker 3: it was cheaper than.
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  Speaker 4: Uber by how much?
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  Speaker 2: By like twenty Yeah, and that's typical one one or
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  Speaker 2: the other not. I just arbitraged the too. Matt Miller
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  Speaker 2: does not do that. I arbitraged the too. I thought
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  Speaker 2: everybody did that. So anyway, what happened to Lyft with
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  Speaker 2: their earnings last night?
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  Speaker 5: Well, last night was bizarre because you know, you don't
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  Speaker 5: often see that in press releases.
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  Speaker 6: You there, but you know, at the end of the.
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  Speaker 5: Day, it was I think just a mistake that happened.
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  Speaker 5: It wasn't intentional in any way. And the stock move
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  Speaker 5: was pronounced because of you know, the short interest and uh,
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  Speaker 5: the fact that obviously people were not very optimistic going
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  Speaker 5: into the print. And look, I think in the case
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  Speaker 5: of Lyft, not much has changed in terms of execution.
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  Speaker 5: There's still kind of a distant number two. And you
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  Speaker 5: talked about taking a lift, but there are certain zip
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  Speaker 5: codes where they are able to meet the ETAs that
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  Speaker 5: Uber has, but in other zip codes they have no supply.
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  Speaker 5: So even if you want to take a lift, there
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  Speaker 5: is no availability.
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  Speaker 2: But my dude last night, like most markets I go to,
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  Speaker 2: he's got a n Uber sticker and he's got a
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  Speaker 2: Lift sticker, and he's got both apps open and they'll
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  Speaker 2: drive each other.
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  Speaker 6: Yeah, there is a huge amount.
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  Speaker 4: Of owner that and so literally it's apparently.
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  Speaker 3: It's just here's my reading and you're the effort. It's
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  Speaker 3: just Uber algorithm, Lift algorithm. They're different. They're going to
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  Speaker 3: give you different prices and things like that. But but from.
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  Speaker 5: A driver perspective, what Lift is doing is they are
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  Speaker 5: paying out more to lower drivers. So if it was
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  Speaker 5: a ten dollars ride, the driver is getting seven dollars
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  Speaker 5: or eight dollars from Lift, whereas from Uber they're getting
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  Speaker 5: six dollars.
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  Speaker 6: It's just an example.
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  Speaker 5: Yes, So that's where you know, the take rate matters
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  Speaker 5: what these companies keep versus.
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  Speaker 6: What the driver is getting. And that's the I think tactic.
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  Speaker 5: Lift is using to really pay more to the driver
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  Speaker 5: to bring on more supplies.
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  Speaker 7: So then how does that then play out? So at
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  Speaker 7: some point they get enough supply and then they can
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  Speaker 7: sort of make more money per ride and increase the shares.
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  Speaker 4: When does that moment happen?
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  Speaker 5: I mean scale is the only mote you can have
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  Speaker 5: in this business, scale and operating efficiency. And so what
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  Speaker 5: Uber has done is obviously they have the scale. They
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  Speaker 5: are six times bigger than Lift in just the mobility segment,
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  Speaker 5: and like think of the gross margin. The reason why
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  Speaker 5: this is a sixty percent gross margin business is because
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  Speaker 5: insurance costs is.
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  Speaker 6: Pretty high for right sharing, So how do you bring down.
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  Speaker 5: Insurance costs through scale? And that's what Uber has because
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  Speaker 5: it does, you know, six times more rides, then lift,
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  Speaker 5: and in the case of Lift, if they don't maintain
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  Speaker 5: the supply, then they're just going to keep losing share,
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  Speaker 5: which is what was happening.
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  Speaker 6: So they have to compete on price.
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  Speaker 5: The only way they can maintain their share is they
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  Speaker 5: if they offer a lower price, as they did with
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  Speaker 5: Paul last night.
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  Speaker 6: So that's that's the tactic. And I don't think.
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  Speaker 3: It's going to be term modeled.
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  Speaker 5: Yeah, so think of what happened with food delivery. There
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  Speaker 5: were so many players. Now you're down to two or three,
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  Speaker 5: you know, remaining it's Uber Door.
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  Speaker 3: I still will not pay for for my youngest in college.
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  Speaker 4: I have a hard time paying, but I'm.
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  Speaker 5: Not going to.
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  Speaker 3: We've established that firmly.
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  Speaker 4: I support this.
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  Speaker 6: Yeah, so there will be consolidation.
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  Speaker 5: But if uber is announcing a seven billion dollar buy back,
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  Speaker 5: you know they're not buying Instacart now, So that's and
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  Speaker 5: are they are buying left? Okay?
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  Speaker 4: Talk about that that buy back?
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  Speaker 7: What does that tell us like when you buy backstock,
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  Speaker 7: isn't that because you're no longer a growth company?
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  Speaker 4: Like? Is that the thing?
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  Speaker 6: Yes? I think there is that element.
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  Speaker 5: And also they're going to be prudent in terms of returning.
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  Speaker 6: Cash to the shareholders.
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  Speaker 5: So remember they acquired the freight business, that is a
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  Speaker 5: big drag on profitability. Uber didn't build freight business organically.
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  Speaker 5: They bought a company that didn't work out well. They
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  Speaker 5: bought Postmates for food delivery that didn't work out well.
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  Speaker 5: So their track record with Aquas isn't great. And so
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  Speaker 5: now they're saying is we are going to generate about
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  Speaker 5: seven to eight billion dollars in free cash flow. Well,
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  Speaker 5: guess what we are using seven billion out of that
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  Speaker 5: for buying back er stock. I mean, obviously it's going
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  Speaker 5: to be over a period of time, not in the
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  Speaker 5: next twelve months. But I think that's good sound capital allocation, stuality,
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  Speaker 5: And look, this company is generating.
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  Speaker 6: The mobility side is very healthy.
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  Speaker 5: They've got you know, mid twenty percent ebit dumb margins
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  Speaker 5: compared that to lift, which what got people excited is
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  Speaker 5: they could get to twenty percent ebit dumb margins.
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  Speaker 6: Well, not so fast. I guess that was the typo.
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  Speaker 2: So I say, all right, how about the Uber each business. Again,
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  Speaker 2: I don't support this. I mean, I know it's a
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  Speaker 2: great people love it, but not on my credit card.
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  Speaker 2: So talks about the each business.
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  Speaker 5: This is just to drive frequency, ok, just so that
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  Speaker 5: Paul has more transactions.
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  Speaker 4: Which is advertising.
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  Speaker 5: Then basically exactly and the only profit they're going to
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  Speaker 5: generate right now is through advertising. So the good thing
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  Speaker 5: working out for Uber is they have a membership's business,
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  Speaker 5: So that's your recurring subscription. You're going to buy an
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  Speaker 5: Uber membership that works for both mobility and delivery, and
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  Speaker 5: also they're going to show ads. So ads is a
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  Speaker 5: billion dollar rundread business now primarily driven by delivery and
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  Speaker 5: it's almost ninety percent gross market, so that's what's going
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  Speaker 5: to drive the delivery profitability. But on a transaction basis,
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  Speaker 5: this is zero.
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  Speaker 7: So this is sort of like Amazon Prime VIDDEO. Like
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  Speaker 7: it's just basically sell more subscriptions Amazon Prime up the
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  Speaker 7: price a little bit and then you get more viewers
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  Speaker 7: who were just into it and they buy more stuff
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  Speaker 7: on Amazon's Coming.
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  Speaker 6: Is the way.
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  Speaker 5: So they like Uber talked about this concept of being
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  Speaker 5: a super app almost three four years ago and they
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  Speaker 5: have been working towards it. Now they have integrated taxi.
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  Speaker 5: Remember when Uber came to the scene, they were supposed
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  Speaker 5: to or they actually disrupted taxis. Now they have onboarded
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  Speaker 5: Taxis on the platform to boost supply, and Taxis is
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  Speaker 5: about five percent of their business, So clearly, you know.
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  Speaker 6: You come a full circle there.
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  Speaker 5: You have integrated Taxis and their thing is will bring
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  Speaker 5: everything related to transportation on one app and you can
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  Speaker 5: find any and everything.
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  Speaker 2: Neahi, I mean, he's done an amazing job turning that
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  Speaker 2: company around.
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  Speaker 6: Minus the acquisitions.
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  Speaker 5: If it was buying stuff, and that's.
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  Speaker 6: What he did at Expedia. Expedia was built around acquisitions.
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  Speaker 8: There.
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  Speaker 5: I think acquisitions worked out probably better than they did
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  Speaker 5: in Uber, but clearly acquisitions wasn't and.
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  Speaker 2: So one of the potential acquisitions I was out there
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  Speaker 2: was Instacart to ramp up the Uber eats. But you're
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  Speaker 2: now saying the stock buybacked signals that un likely to do.
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  Speaker 6: That's completely out of question.
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  Speaker 5: I mean, the question is can door Dash buy something
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  Speaker 5: given Like the reason why Lift's stock moved this much
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  Speaker 5: is because the valuation is like one time CB to sales.
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  Speaker 6: Compare that to.
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  Speaker 5: Five times ZV do sales or Airbnb ten times ZV
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  Speaker 5: do sales.
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  Speaker 6: So clearly a.
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  Speaker 5: Lot of the growth prospects are reflected in the lifts valuation.
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  Speaker 2: Yeah, Airbnb will do that next time. I'm just I'm
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  Speaker 2: just not comfortable that concept. But I know a ton
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  Speaker 2: of people are around the world and they love it.
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  Speaker 2: So we'll get to that next time.
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  Speaker 7: Staying or renting out your renting out your house or
• 8:20
  Speaker 7: staying at someone else's.
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  Speaker 3: House, both both, you know, I don't know, but I
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  Speaker 3: might not that weird. Yeah, coming into somebody else's It's more.
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  Speaker 4: Like an investment property lot at the time.
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  Speaker 2: All right, man, Deep Seeing Senior Tech anais Bloomberg Intelligence.
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  Speaker 2: We appreciate you stopping buy.
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  Speaker 1: You're listening to the Bloomberg Intelligence Podcast. Catch us live
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  Speaker 7: I want to take a little deeper into the small
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  Speaker 7: cap world because the rust of two thousands up one
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  Speaker 7: point six percent of the narrative, if you just rewind
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  Speaker 7: the money, was that we were broadening out this rally
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  Speaker 7: in the S and P, that it wasn't just big tech.
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  Speaker 7: We were finally seeing small caps get a little bit
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  Speaker 7: of a bit. Well, let's talk to Brian Smoluck. He's
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  Speaker 7: principal and portfolio manager of the Hood River Small Cap
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  Speaker 7: Growth Fund. He joins us from Palm Beach, Florida, much
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  Speaker 7: to Paul Kane as he looks at the palm trees
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  Speaker 7: in the background.
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  Speaker 4: Hey, Brian, kill me. Do you buy small caps here?
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  Speaker 6: Like?
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  Speaker 7: Are they actually going to finally make a good comeback?
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  Speaker 6: I think so.
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  Speaker 9: The CPI print yesterday clearly didn't help things near term,
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  Speaker 9: given the FED was a little bit too aggressive in
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  Speaker 9: December when they talked about aggressive cuts this year. But
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  Speaker 9: I think once the CPI does settle down to a
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  Speaker 9: level of people are comfortable with where the Fed's going
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  Speaker 9: to cut, it's a matter of when, not if, then
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  Speaker 9: small caps will outperform. You see that when people want
• 9:51
  Speaker 9: to put on risk, small cap, particularly small cap growth,
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  Speaker 9: tends to put on a really big move, and then
• 9:55
  Speaker 9: in Q four last year when that happened, the space
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  Speaker 9: really ripped. And it's been a fairly protracted period of
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  Speaker 9: big underperformance for the last several years. So the setup
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  Speaker 9: is good given valuations, earnings revisions are trending. Positive spreads,
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  Speaker 9: which are a great leading indicator for small cap stocks,
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  Speaker 9: have tightened significantly to just a little over one hundred
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  Speaker 9: basis points, So the odds are highly in the space's
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  Speaker 9: favor for it to app perform over the next twelve months.
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  Speaker 2: Hey Brian, Am I going to get an evaluation break
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  Speaker 2: if I go down into smaller mid MidCap territory relative
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  Speaker 2: to the S and P five hundred?
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  Speaker 9: Yeah. So if you look at small cap growth versus
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  Speaker 9: the SMP, it usually trades at a premium. Right now,
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  Speaker 9: it's trading around eighteen times twenty twenty five earnings versus
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  Speaker 9: the SMP at twenty times, so you do get a
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  Speaker 9: discount there, And that's part of what I was saying
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  Speaker 9: why the setup is good because you get a relative
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  Speaker 9: valuation break. Usually the growth is faster and small cap names.
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  Speaker 9: I wouldn't expect this upcoming cycle to be any different.
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  Speaker 9: So that's why you'll get probably some multiple expansion and
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  Speaker 9: positive ring servision which would lead to our performance over
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  Speaker 9: the next twelve months.
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  Speaker 7: Hey Brian, would you have made a different argument six
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  Speaker 7: months ago because small caps did have a moment last
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  Speaker 7: year in that moment was short lived? Is the argument
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  Speaker 7: different now?
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  Speaker 9: I would say it's honestly pretty similar. You know, we're
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  Speaker 9: bombs up stock pickers trying to find companies with a
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  Speaker 9: dislocation of fundamentals valuation. It's been a constructive setup, and
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  Speaker 9: six months ago it actually was good when you look
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  Speaker 9: into Q four and small capt putting up playing a
• 11:30
  Speaker 9: move on to being up around nineteen percent for the
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  Speaker 9: year last year, so it was solid. But it has
• 11:36
  Speaker 9: been a waiting game for small cap and you need
• 11:39
  Speaker 9: race to cooperate with spreads for the sector to work.
• 11:45
  Speaker 2: Fortress Aviation FTAI is the ticker.
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  Speaker 3: What's the call there, Brian.
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  Speaker 9: We like the stock, it's one of our bigger positions.
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  Speaker 9: It's been really huge over the last eighteen months. We
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  Speaker 9: think there's some significant legs left in the story for
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  Speaker 9: it to really work. It trades it around twenty times earnings.
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  Speaker 9: They have a new module repair business for engines that's
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  Speaker 9: growing around one hundred percent, and we think there's upside
• 12:15
  Speaker 9: in that area, particularly when you look at all the
• 12:17
  Speaker 9: news in the supply chain and airlines across the world
• 12:20
  Speaker 9: really need to optimize how well their current engines were
• 12:23
  Speaker 9: given that they can't get new engines or new planes
• 12:26
  Speaker 9: when Boeing's having all these problems. Meanwhile, the asset value
• 12:30
  Speaker 9: on their current their current engines has been moving up
• 12:35
  Speaker 9: because of the supply to demand and balance created by
• 12:37
  Speaker 9: the fact that new planes really can't make it out
• 12:40
  Speaker 9: the door, and you have rising demand around the world
• 12:42
  Speaker 9: continuing for passenger travel.
• 12:46
  Speaker 7: You also have Celsius, which is it's like a Red
• 12:49
  Speaker 7: Bull energy drink, right, I know it's different, but it's
• 12:52
  Speaker 7: the same kind of idea.
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  Speaker 4: You like this company, how come?
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  Speaker 3: Yeah, we've owned it for a while.
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  Speaker 9: It's a secular market share gainer. We think in the
• 13:01
  Speaker 9: category it's gone from around two percent share to ten
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  Speaker 9: percent share. We think they can reasonably get to twenty
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  Speaker 9: percent share. They have a partnership with Pepsi that's ramped
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  Speaker 9: up over the last twelve months. Pepsi's the largest distributor
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  Speaker 9: in the world. And fortuitously they left Budweiser, which obviously
• 13:21
  Speaker 9: wasn't great with all the bud light issues that they
• 13:25
  Speaker 9: were having. And we think the streets at about forty percent,
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  Speaker 9: they could easily grow fifty this year and the stocks
• 13:31
  Speaker 9: has can around thirteen percent share, and as I said earlier,
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  Speaker 9: we think they can get to twenty And have.
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  Speaker 4: You ever had them on those energy drinks? No, I'm
• 13:38
  Speaker 4: scared of them.
• 13:39
  Speaker 3: Yeah, a little bit bitlius.
• 13:42
  Speaker 9: Yeah, Celsius is a little bit healthier. It's all natural ingredients.
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  Speaker 9: You still get the boost from caffeine. It's two hundred
• 13:48
  Speaker 9: milligrams of caffeine. So I definitely wouldn't take it for
• 13:50
  Speaker 9: you to go to bed, but it tastes better, it's
• 13:52
  Speaker 9: healthier than some of the other drinks out there.
• 13:54
  Speaker 3: Yeah, I don't know.
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  Speaker 2: Hey, Brian, what's a what's a how do you divine
• 13:59
  Speaker 2: kind of like the market cap? Like what's a small cap,
• 14:02
  Speaker 2: what's a MidCap?
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  Speaker 6: Few?
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  Speaker 3: And what happens when they maybe grow out of those levels.
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  Speaker 9: So the last the last six months has been abnormal
• 14:12
  Speaker 9: for the sector, and that there's been a huge bifurcation.
• 14:15
  Speaker 9: So within the Russell two thousand growth, for example, super
• 14:18
  Speaker 9: Micro is actually in the benchmark and it's over a
• 14:21
  Speaker 9: thirty billion market cap. So normally I would say the
• 14:24
  Speaker 9: range is between call it one hundred million up to
• 14:28
  Speaker 9: six or seven billion, but it has expanded over time.
• 14:31
  Speaker 9: The sweet spot really is in that two to five
• 14:35
  Speaker 9: billion dollar range, and those stocks tend to be a
• 14:37
  Speaker 9: little bit more inefficient, and we don't typically sell stock
• 14:40
  Speaker 9: when it gets too big. It's really when we think
• 14:42
  Speaker 9: it's efficiently priced based on the fundamentals, or we think
• 14:45
  Speaker 9: something bad is going to happen, we'll step aside.
• 14:47
  Speaker 7: It is a leading question because we're talking about you
• 14:50
  Speaker 7: manage a small cap growth fund, but growth versus value
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  Speaker 7: in the rustle? Is it the same kind of thing
• 14:56
  Speaker 7: as what we see in the general market growth, tech,
• 14:59
  Speaker 7: everything else.
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  Speaker 9: Well, in small cap growth you do have a larger
• 15:05
  Speaker 9: percentage of software companies, semiconductor companies, biotech, and a little
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  Speaker 9: bit less financials and then some of the higher growth consumers.
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  Speaker 9: But small cap growth and small cap value are relatively
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  Speaker 9: highly correlated. But in different area there can be biggest versions,
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  Speaker 9: Like in twenty twenty you saw growth massively outperformed value
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  Speaker 9: and then it completely inverted the prior year. We frankly
• 15:29
  Speaker 9: try to be agnostic and try to find companies that
• 15:33
  Speaker 9: are growing reasonably quickly called fifteen percent, but are inefficiently priced,
• 15:37
  Speaker 9: So we kind of thread the needle there.
• 15:39
  Speaker 2: There's a good article in the Bloomberg Terminal today Florida
• 15:41
  Speaker 2: boom cools an area where home insurance costs tripled Hurricane
• 15:46
  Speaker 2: Ian worsened already rising homeowners rates, and they call that
• 15:48
  Speaker 2: like Naples Sarasota Cape Coral.
• 15:50
  Speaker 3: I noticed you guys own some exposure here.
• 15:53
  Speaker 2: HCI Group is a homeowner's insurance company based in Florida.
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  Speaker 3: Uhh yes, what's that?
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  Speaker 9: Yeah, So it's been a great stock because of the
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  Speaker 9: dislocation in this particular geography. And what's happened is the
• 16:10
  Speaker 9: lawyers had the upper hand, not a big surprise for
• 16:12
  Speaker 9: an extended period here. A lot of insurers pulled out
• 16:16
  Speaker 9: because of that because they were having massive losses. The
• 16:19
  Speaker 9: state legislature came in made it so that it was
• 16:22
  Speaker 9: more reasonable and favorable to insurers. Each CI was set
• 16:26
  Speaker 9: up well to write new premiums profitably, as well as
• 16:29
  Speaker 9: takeover existing premiums from the state entity, which is called citizens,
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  Speaker 9: which allowed them to dramatically apperform expectations and earnings. Growth
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  Speaker 9: is significant. So it's trading eleven times zarniings. We have
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  Speaker 9: to think there's upside of that number. And they're just
• 16:42
  Speaker 9: set up well because the supply demand in the area,
• 16:44
  Speaker 9: and as you know, the area is really growing, so
• 16:46
  Speaker 9: you have a lot of people moving here, so demand
• 16:48
  Speaker 9: is strong.
• 16:49
  Speaker 4: As Paul talks about all the time, you do want
• 16:51
  Speaker 4: to move here?
• 16:52
  Speaker 3: No, no, he doesn't that's a hard note.
• 16:54
  Speaker 4: Okay, it's a hard no, but it does get jealous
• 16:55
  Speaker 4: of the pond trees.
• 16:56
  Speaker 3: Yes.
• 16:57
  Speaker 7: What I find interesting though, when you talk about insures
• 16:59
  Speaker 7: is that you know Florida is going to get hit
• 17:01
  Speaker 7: with storm after storm, and it is a bit worse now,
• 17:03
  Speaker 7: and I just wonder how the risk premium got to
• 17:05
  Speaker 7: bake into these docks.
• 17:08
  Speaker 9: So whether it's a big issue obviously during hurricane season,
• 17:14
  Speaker 9: HCI has been here forever and they did a good
• 17:16
  Speaker 9: job pricing for that risk. So you just got to
• 17:20
  Speaker 9: assume over extended period of time that when you take
• 17:22
  Speaker 9: your lumps, you're going to more than make up for
• 17:24
  Speaker 9: it based on pricing, And as you've noted from that article,
• 17:27
  Speaker 9: pricing is up huge and there are a lot of
• 17:28
  Speaker 9: different reasons for that. In condos, for example, there was
• 17:32
  Speaker 9: that condo that went down in Miami and that jacked
• 17:36
  Speaker 9: up premiums all over the area, and an insurance companies
• 17:40
  Speaker 9: were able to capitalize because now condos realized they just
• 17:45
  Speaker 9: had to become conforming with state codes. So to me,
• 17:51
  Speaker 9: hurricanes are a manageable risk here. There's actually been less
• 17:54
  Speaker 9: direct hurricane impacts on Southeast Florida than in the up
• 17:58
  Speaker 9: to the northeast where you guys are so but you
• 18:00
  Speaker 9: do have a fair amount happening happening in the golf,
• 18:03
  Speaker 9: but there's less population in Florida and the golf and
• 18:05
  Speaker 9: on the southeast side.
• 18:07
  Speaker 2: Hi, Rian, thank you so much for joining us. As always,
• 18:09
  Speaker 2: Brian Smallock. He's a principal and portfolio manager of the
• 18:13
  Speaker 2: Hood River Small Cap Growth Fund. Not in Bend, Oregon,
• 18:16
  Speaker 2: but in Palm Beach Gardens, Florida.
• 18:21
  Speaker 1: You're listening to the Bloomberg Intelligence podcast. Catch us live
• 18:24
  Speaker 1: weekdays at ten am Eastern on Apple car Play and
• 18:27
  Speaker 1: then broud Otto with the Bloomberg Business app. Listen on
• 18:30
  Speaker 1: demand wherever you get your podcasts, or watch us live
• 18:33
  Speaker 1: on YouTube.
• 18:35
  Speaker 4: I want to know what's up with Craft?
• 18:37
  Speaker 7: So that' stock is moving a wopping six percent, it's
• 18:40
  Speaker 7: down six percent. Organic sales decline wasn't so great. It
• 18:44
  Speaker 7: was a lackluster end of the year and that's really
• 18:46
  Speaker 7: dragging on sales.
• 18:47
  Speaker 4: So what's up with that?
• 18:48
  Speaker 7: Let's go to Jim Bartash's she has Boomberg Intelligence Senior analyst,
• 18:51
  Speaker 7: retail Staples and packaged foods. Jen what was just so
• 18:55
  Speaker 7: bad about Craft?
• 18:58
  Speaker 8: Well, the big surprise for Craft that volume was down,
• 19:01
  Speaker 8: which was not a surprise, but it was down more
• 19:04
  Speaker 8: than prices rose, and that really put pressure on the
• 19:07
  Speaker 8: ability to generate sales growth, and so organic sales were
• 19:12
  Speaker 8: negative for the first time since twenty twenty. And although
• 19:17
  Speaker 8: there's some momentum in the business, it's got people concerned.
• 19:20
  Speaker 2: So, Jen, as I understand the package food business from
• 19:23
  Speaker 2: reading your research and talking to you, you know, I
• 19:25
  Speaker 2: guess post pandemic volumes are down, but then they've been
• 19:28
  Speaker 2: able to make up for it by raising prices. More so,
• 19:31
  Speaker 2: is that game kind of played out now?
• 19:34
  Speaker 8: Yeah. Basically a lot of these companies have run out
• 19:37
  Speaker 8: of their pricing power. And what that means is, you know,
• 19:40
  Speaker 8: they were able to raise prices because their input costs
• 19:42
  Speaker 8: were hire, whether it was ingredients or transportation or packaging.
• 19:46
  Speaker 8: But as inflation is coming down, they're losing the ability
• 19:49
  Speaker 8: to pass through additional price increases, which means that if
• 19:53
  Speaker 8: you want to have top line growth or organic sales growth,
• 19:57
  Speaker 8: you have to have positive volume growth because you're not
• 20:00
  Speaker 8: getting it from just higher price anymore. And the problem
• 20:04
  Speaker 8: for Craft Hends has right now is that volume is
• 20:06
  Speaker 8: still down, price is lower than it's been and they're
• 20:10
  Speaker 8: not seeing that bounce back in volume that typically lower
• 20:13
  Speaker 8: pricing would encourage.
• 20:14
  Speaker 7: Okay, so a couple things to focus on. Let's go
• 20:17
  Speaker 7: to the product side then, because you mentioned that a
• 20:19
  Speaker 7: few times so volumes are down, it doesn't seem like
• 20:21
  Speaker 7: that's just a pricing power thing. Do they not have
• 20:24
  Speaker 7: the right products right now?
• 20:26
  Speaker 8: Well, I think their portfolio is actually pretty good. It's
• 20:28
  Speaker 8: just that the consumer is not buying as much as
• 20:31
  Speaker 8: they were before. So if you think back to pre pandemic,
• 20:34
  Speaker 8: people had huge pantries and everything was stocked. They had
• 20:37
  Speaker 8: lots of boxed goods in there. And now people are
• 20:40
  Speaker 8: still a little bit more conservative and buying more on
• 20:42
  Speaker 8: a need basis rather than a stockpiling basis. And so
• 20:47
  Speaker 8: until people start to bulk up those pantries again, it's
• 20:50
  Speaker 8: hard to entice them to buy more than what they
• 20:53
  Speaker 8: just need for this week.
• 20:54
  Speaker 2: So as I look at the analyst forecast, jen, I
• 20:57
  Speaker 2: kind of see the one and a half to two
• 20:59
  Speaker 2: to two and a half percent revenue growth in the
• 21:01
  Speaker 2: next several years. That really is the story for most
• 21:05
  Speaker 2: of these consumer package goods companies, isn't it.
• 21:08
  Speaker 8: It really is, especially for companies where the bulk of
• 21:12
  Speaker 8: their portfolio are what you would call center of the
• 21:14
  Speaker 8: store items, so that's the candy items, the boxed items.
• 21:19
  Speaker 8: You know, that type of outlook for top line growth
• 21:23
  Speaker 8: is pretty much in line with where you would expect
• 21:25
  Speaker 8: normal inflation rates to be, and so that in and
• 21:30
  Speaker 8: of itself is probably a reasonable expectation for where these
• 21:34
  Speaker 8: where these companies can go over the next few years.
• 21:36
  Speaker 7: Do you think that prices then will come down or
• 21:39
  Speaker 7: do you think that they stay sticky?
• 21:42
  Speaker 8: Prices will slowly come down. Retailers are looking to pass
• 21:47
  Speaker 8: through cost savings to their customers, so there will be
• 21:49
  Speaker 8: higher pressure on package food companies to lower prices as well.
• 21:54
  Speaker 8: And as their input costs or their packaging packaging costs
• 21:58
  Speaker 8: come down, it's harder for them to just tofy holding
• 22:01
  Speaker 8: prices at a higher level and not passing through some
• 22:04
  Speaker 8: of those savings. So while prices may never come back
• 22:07
  Speaker 8: down to where they were pre pandemic, they should come
• 22:09
  Speaker 8: down a little bit from where they were in terms
• 22:11
  Speaker 8: of peak pricing in the last eighteen month.
• 22:13
  Speaker 4: A little bit, I don't know if we like a
• 22:15
  Speaker 4: little bit.
• 22:15
  Speaker 3: No, we don't. And that's and that's what that's the problem.
• 22:18
  Speaker 3: That's a problem.
• 22:19
  Speaker 2: That's a problem for a lot of people, and it's
• 22:21
  Speaker 2: a problem for the politicians who are saying inflation is still.
• 22:25
  Speaker 3: A bad story here.
• 22:26
  Speaker 2: So all right, So Jen, with these names like Craft
• 22:28
  Speaker 2: Hinds and General Mills and Kellogg's, I got a you know,
• 22:31
  Speaker 2: low single digit revenue growth.
• 22:33
  Speaker 3: I'm looking.
• 22:33
  Speaker 2: I got dividend yields for Craft Highs about four point
• 22:37
  Speaker 2: seven percent. I mean, what am I owning this thing for?
• 22:40
  Speaker 2: Am I owning it for single digit kind of maybe
• 22:43
  Speaker 2: stock prece return plus some dividend yield.
• 22:45
  Speaker 3: And that's and that's my game.
• 22:48
  Speaker 8: That's that's that's probably the value play at the moment, right,
• 22:51
  Speaker 8: meaning you've got steady kind of slow and steady growth,
• 22:54
  Speaker 8: you've got a reasonable dividend. They do do share buybacks,
• 22:59
  Speaker 8: you know, so there's some some shareholder benefit there, and
• 23:03
  Speaker 8: you know, as consumers start to pick up their spending,
• 23:06
  Speaker 8: then we may see a better outlook for these companies
• 23:08
  Speaker 8: as well.
• 23:09
  Speaker 4: Who does Craft This is a really dumb question. Who
• 23:11
  Speaker 4: does Craft compete with?
• 23:13
  Speaker 7: Like the Coke and PEPSI I know that PEPs was
• 23:15
  Speaker 7: all like snack snack snacks, but they have the soft
• 23:16
  Speaker 7: drink business. Who's like a straight up Craft competitor.
• 23:20
  Speaker 8: Someone like Caniagra would be, you know, or Campbell Soup.
• 23:24
  Speaker 8: You know, those would be kind of those center type
• 23:27
  Speaker 8: store companies that would compete most directly with the Craft Times.
• 23:31
  Speaker 2: Hey, Jen, I look at the at the holder's list
• 23:33
  Speaker 2: here and I forgot about this. Berkshire Hathway Warren Buffett
• 23:36
  Speaker 2: by far the biggest shareholder of this company with about
• 23:39
  Speaker 2: twenty six twenty seven percent ownership.
• 23:42
  Speaker 3: What what?
• 23:43
  Speaker 2: What is Berkshire Hathway publicly said about this investment? How
• 23:45
  Speaker 2: long have they owned it? What do they say about
• 23:47
  Speaker 2: their stake here?
• 23:49
  Speaker 8: They've been involved for a very very long time. Haven't
• 23:52
  Speaker 8: made a lot of public comments lately. But when Kraft
• 23:56
  Speaker 8: Times began its transformation plan, which was now a little
• 24:00
  Speaker 8: or three years ago, Berkshire Halfway was very pro They
• 24:06
  Speaker 8: were very positive on that transformation story. And to be fair,
• 24:10
  Speaker 8: Craft Times has executed on that transformation plan and generally
• 24:13
  Speaker 8: ahead of schedule when it comes to cost savings initiatives,
• 24:17
  Speaker 8: streamlining things, rebalancing their portfolio. So they really have been
• 24:22
  Speaker 8: sticking to that plan and delivering ahead of schedule. It's
• 24:25
  Speaker 8: just that it's a multi year process.
• 24:27
  Speaker 7: Right, And like it's a tough time, and I get it,
• 24:28
  Speaker 7: and there's inflation and then there's the demand. Do you
• 24:30
  Speaker 7: think that the stock move I mean, I'm just looking
• 24:32
  Speaker 7: at the chart here is it overdone?
• 24:36
  Speaker 8: Well? Part of it, you know, part of it is
• 24:37
  Speaker 8: the concern about the volume. And when they gave their
• 24:42
  Speaker 8: guidance for twenty twenty four, the company actually said that
• 24:45
  Speaker 8: they think volume is going to shift to positive growth
• 24:47
  Speaker 8: in the second half of the year. That seems like
• 24:50
  Speaker 8: it might be overly optimistic and is probably part of
• 24:52
  Speaker 8: what's contributing to that stock decline today.
• 24:55
  Speaker 2: So Jen, in your coverage area, you know, you got
• 24:57
  Speaker 2: to Staples, the package food companies. What's the kind of
• 25:00
  Speaker 2: the best idea? What do you talk to clients about
• 25:02
  Speaker 2: most often?
• 25:04
  Speaker 8: Well, right now we're talking to people about, you know,
• 25:07
  Speaker 8: who is it that has taken the least amount of
• 25:10
  Speaker 8: price increases over the last say, eighteen months, and where
• 25:13
  Speaker 8: are volumes holding up? Because to be successful over twenty
• 25:17
  Speaker 8: twenty four and into twenty twenty five, it really is
• 25:20
  Speaker 8: that question of how are you going to actually drive
• 25:23
  Speaker 8: overall growth and profitability. And so the companies that have
• 25:27
  Speaker 8: been more conservative and been more prudent in that approach
• 25:32
  Speaker 8: are the ones who are positioned right now to maybe
• 25:34
  Speaker 8: benefit from.
• 25:34
  Speaker 3: That, So you haven't benefit from those. Actually, what's a
• 25:37
  Speaker 3: representative name there?
• 25:39
  Speaker 8: So a good example there would be Mandolies where they
• 25:42
  Speaker 8: took a lot less price than and actually the spinoff
• 25:46
  Speaker 8: from Kraft Times career. Yeah, but they've been very They've
• 25:52
  Speaker 8: been a little bit more prudent in terms of their
• 25:54
  Speaker 8: price increases. And what we've also seen is that their
• 25:57
  Speaker 8: volume has held up better Hershey, is another one where
• 26:00
  Speaker 8: their volumes have held up, and part of that is
• 26:02
  Speaker 8: that people love their chocolate.
• 26:04
  Speaker 4: That's true. I don't care about the Flowers examples. I'll
• 26:09
  Speaker 4: definitely take.
• 26:09
  Speaker 2: We're learning a lot about Jen, we're learning a lot
• 26:12
  Speaker 2: about Alex and her Valentine's Day preferences.
• 26:15
  Speaker 3: So flowers know, but chocolate, well.
• 26:17
  Speaker 4: I don't want anything.
• 26:18
  Speaker 3: Don't stupid but stupid.
• 26:20
  Speaker 10: If one tray herself as like this, simple girl, no demands,
• 26:27
  Speaker 10: I don't buy it for a.
• 26:28
  Speaker 4: Minute, simple girl?
• 26:29
  Speaker 7: What No do I like Valentine's No, it's done. But
• 26:33
  Speaker 7: will I eat chocolate? Absolutely as long as it's high
• 26:36
  Speaker 7: end dark chocolate. Hey, Jen, what what's something you really
• 26:41
  Speaker 7: don't like right now?
• 26:42
  Speaker 8: Like?
• 26:42
  Speaker 7: What sort of a negative trend because I'm also trying
• 26:45
  Speaker 7: to understand for some of these names, the normalization that
• 26:48
  Speaker 7: we've seen sort of backtrack the last four years and
• 26:52
  Speaker 7: erase that, and that's where you have to kind of
• 26:53
  Speaker 7: pick up and go from there.
• 26:56
  Speaker 8: Well, I think one of the I think one of
• 26:57
  Speaker 8: the things that is an issue for the industry is
• 27:01
  Speaker 8: that everyone still believes that they can optimize their portfolio
• 27:04
  Speaker 8: and that they're going to find a buyer for the
• 27:06
  Speaker 8: products and the product lines that they don't want at
• 27:09
  Speaker 8: a good multiple. And you know, at the end of
• 27:12
  Speaker 8: the day, there aren't a lot of buyers out there
• 27:15
  Speaker 8: for you know, categories that are slow growth or declining,
• 27:20
  Speaker 8: and so there's maybe a little bit of a mismatch
• 27:22
  Speaker 8: in terms of the belief that they can streamline their portfolio,
• 27:26
  Speaker 8: get up you know, all the value that they think
• 27:28
  Speaker 8: they deserve out of it, and yet I don't see
• 27:32
  Speaker 8: a whole, you know, a whole suite of buyers lining
• 27:35
  Speaker 8: up to look at those products.
• 27:38
  Speaker 2: Hershey, this company went public in nineteen twenty seven. Oh boy,
• 27:43
  Speaker 2: they did one follow on offering, and then for about
• 27:46
  Speaker 2: a period about twelve months in nineteen ninety three or four,
• 27:51
  Speaker 2: we pitched them hard on doing another following. We actually
• 27:54
  Speaker 2: had a good analyst on the name in the company
• 27:56
  Speaker 2: like this, We went to Hershey probably six or seven
• 27:59
  Speaker 2: times in a space you're pitching a falling pitching. Nothing
• 28:03
  Speaker 2: didn't get paid, but the got the Hershey and got
• 28:05
  Speaker 2: a lot of Hershey chocolate.
• 28:07
  Speaker 3: There's that.
• 28:07
  Speaker 2: So, so, Jen, what does a company like Hershey do?
• 28:10
  Speaker 2: It's one of those things. I know they've gotten bigger
• 28:12
  Speaker 2: through some acquisitions, but there's still relatively a small player
• 28:16
  Speaker 2: relative to some of the.
• 28:16
  Speaker 3: Other big names.
• 28:17
  Speaker 2: But is there a brand so good that they can
• 28:20
  Speaker 2: kind of remain independent?
• 28:23
  Speaker 8: Yeah, I believe that the Hershey brand is really iconic.
• 28:26
  Speaker 8: And if you think about some of their uh some
• 28:28
  Speaker 8: of their biggest chocolate lines, there really aren't a lot
• 28:32
  Speaker 8: of uh, mass targeted competitors out there, so, you know,
• 28:38
  Speaker 8: people may prefer the higher end alex, you know, but
• 28:43
  Speaker 8: but when it comes to kind of that mass market,
• 28:46
  Speaker 8: it's hard for an external brand to come in and
• 28:49
  Speaker 8: get the kind of penetration that Hershey has. And in addition,
• 28:52
  Speaker 8: Hershey has really done a good job of diversifying into
• 28:55
  Speaker 8: the broader snacking, so they own you know, they own
• 28:58
  Speaker 8: popcorn brand they own, you know, Pretzel brand, so you
• 29:02
  Speaker 8: know they've they've done a good job of diversifying and
• 29:05
  Speaker 8: that'll help, you know, that'll help them with their long
• 29:07
  Speaker 8: term growth as well.
• 29:09
  Speaker 4: Really interesting.
• 29:09
  Speaker 7: I'm surprised that John Tucker didn't have some weird factoid
• 29:12
  Speaker 7: about Hershey, Pennsylvania.
• 29:13
  Speaker 3: We have the Hershey School and all that kind of stuff, and.
• 29:16
  Speaker 7: Yeah, but I mean like weird off the beaten track,
• 29:19
  Speaker 7: like here's where the cemetery.
• 29:20
  Speaker 10: I don't have any fun facts about Hershey, but I
• 29:23
  Speaker 10: suspect it's out in that region of the world because
• 29:27
  Speaker 10: there are lots of farms and milk cows that give
• 29:30
  Speaker 10: milk and stuff.
• 29:31
  Speaker 7: I could have told you that. All right, we really
• 29:35
  Speaker 7: appreciate it. It's so great to catch up with you.
• 29:37
  Speaker 7: Such wonderful analysis. Jen Bartasha's Consumer Staples Bloomberg Intelligence senior
• 29:42
  Speaker 7: industry analysts, and she covers everything everything, everything food related,
• 29:46
  Speaker 7: which is just such.
• 29:47
  Speaker 2: An years ago which still shocks me to this day.
• 29:51
  Speaker 2: The number one supermarket chain in the United States is Amazon.
• 29:55
  Speaker 3: What no, I mean Walmart. I'm sorry Walmart.
• 29:58
  Speaker 4: Oh, okay, okay, that makes more sense.
• 30:00
  Speaker 3: Sorry, right, and I forgot about that. But when you
• 30:02
  Speaker 3: do go in there. They're just massive square footage.
• 30:05
  Speaker 4: It's huge. H I mean, isn't where they make the
• 30:07
  Speaker 4: majority of their money or.
• 30:08
  Speaker 2: I think I think it drives traffic and they make
• 30:12
  Speaker 2: it on it because it I think, you know, supermarkets,
• 30:15
  Speaker 2: I think the margins are really really, really really low,
• 30:17
  Speaker 2: so you make it up on buy them and you
• 30:18
  Speaker 2: bring them into the store and they buy other stuff.
• 30:21
  Speaker 1: You're listening to the Bloomberg Intelligence Podcast. Catch us live
• 30:25
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• 30:29
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• 30:32
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• 30:35
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• 30:39
  Speaker 7: Okay, let's get to the markets here at the SP's
• 30:40
  Speaker 7: up four tenth of one percent. You know, I kind
• 30:43
  Speaker 7: of felt like this was going to happen yesterday when
• 30:45
  Speaker 7: we had that big sell off, particularly as we closed
• 30:47
  Speaker 7: off the lows.
• 30:48
  Speaker 4: But the question is how sustainable is this? Sort of
• 30:50
  Speaker 4: by the dip narrative?
• 30:51
  Speaker 7: So let's ask Nancy Davis, founder and CEO of Quadratic
• 30:55
  Speaker 7: Capital Management. She joins us now from Greenwich, Connecticut. Nancy,
• 30:59
  Speaker 7: how do I own understand the price action right now
• 31:02
  Speaker 7: on the main index.
• 31:04
  Speaker 6: Well, Alex, I think you said it. Well, it's a
• 31:06
  Speaker 6: little confusing.
• 31:07
  Speaker 11: I mean, it's basically good data. Yesterday we had a
• 31:11
  Speaker 11: stronger inflation, less FED height or FED cuts, and that's
• 31:18
  Speaker 11: what's kind of fueling the market. The market's on hope
• 31:21
  Speaker 11: right now that the FED is going to ease rates
• 31:24
  Speaker 11: and save everything from being overly tight.
• 31:28
  Speaker 2: So you know, I'm looking at the bond market here
• 31:31
  Speaker 2: because boy, in twenty twenty two, the bond market just
• 31:34
  Speaker 2: got crushy. There's no place left to hide. The sixty
• 31:36
  Speaker 2: forty portfolio did nothing for you, a little bit of
• 31:39
  Speaker 2: a positive performance, and last year, thanks goodness to November December.
• 31:43
  Speaker 2: But here we are starting off the year again in
• 31:45
  Speaker 2: the red for fixed income.
• 31:47
  Speaker 3: What is what do we do in the fixed income space? Nancy?
• 31:52
  Speaker 11: Well, it's tricky because the US yield curve is so
• 31:55
  Speaker 11: incredibly inverted. So what that means is that longer dated
• 31:59
  Speaker 11: interest rates are anticipating the FED will aggressively cut rates,
• 32:04
  Speaker 11: and everybody in the bond market is kind of holding
• 32:06
  Speaker 11: out their hands saying okay, cut now. And the market
• 32:09
  Speaker 11: being inverted, you're getting paid less yield to take more
• 32:13
  Speaker 11: duration risk. And so the market has been rushing into credit,
• 32:17
  Speaker 11: private credit, public credit. So credit spreads are incredibly tight,
• 32:22
  Speaker 11: right along with their corporate cousin equities, So those financial
• 32:26
  Speaker 11: assets that are at all time highs. And then if
• 32:29
  Speaker 11: you look at the treasury market, you can buy a
• 32:32
  Speaker 11: one month T bill and get paid five point four percent,
• 32:36
  Speaker 11: or you can lend money to the US Treasury for
• 32:39
  Speaker 11: ten years and get over a percent less. So it's
• 32:43
  Speaker 11: a really crazy environment because the yield curve is not
• 32:46
  Speaker 11: normally this inverted for this long and it's really I
• 32:50
  Speaker 11: think a message to bond investors that you're not being
• 32:52
  Speaker 11: paid to take duration risks.
• 32:55
  Speaker 7: So it's funny you mentioned that because a week ago,
• 32:57
  Speaker 7: the conversation was, Okay, my three month T bill was up?
• 33:00
  Speaker 7: What do I do with the money? Do I do
• 33:02
  Speaker 7: I go into equities? Now do I do something else?
• 33:04
  Speaker 7: And now it's like whoof Nope, gotta stay, gotta stay,
• 33:06
  Speaker 7: because that the money market funds are just really too attractive.
• 33:11
  Speaker 7: How do you then navigate an environment where we're going
• 33:14
  Speaker 7: to get three cuts maybe for normalization rather than something
• 33:17
  Speaker 7: more dramatic.
• 33:20
  Speaker 11: I mean, I think most people do have equities in
• 33:23
  Speaker 11: their portfolio, and the equity market is really hanging on
• 33:26
  Speaker 11: to this premise that the FED is going to cut rates.
• 33:28
  Speaker 11: So I think it's reasonable to have some short term treasuries.
• 33:32
  Speaker 11: And I don't think you're really getting paid for the
• 33:34
  Speaker 11: risk to take credit risk, because it's similar. You know,
• 33:37
  Speaker 11: if you think about owning a corporate bond and owning
• 33:39
  Speaker 11: a corporate stock, it's a similar corporate beta, and corporates
• 33:42
  Speaker 11: are really expensive right now, so I think it makes
• 33:45
  Speaker 11: more sense to just have treasury exposure and not add
• 33:48
  Speaker 11: that credit risk into your bond portfolio because you already
• 33:51
  Speaker 11: have it on the equity side.
• 33:54
  Speaker 2: You know, I was surprised last year when we did
• 33:56
  Speaker 2: get some decent performance out of fixed income, that high
• 33:58
  Speaker 2: yield was the real outperformer. And I would have thought
• 34:01
  Speaker 2: with all the discussion of everybody talking about a recession
• 34:04
  Speaker 2: right around the corner, that you wouldn't want to take
• 34:06
  Speaker 2: that level of risk.
• 34:07
  Speaker 3: What happened in the HYLD space.
• 34:08
  Speaker 2: And I assume, just by your previous comment that you're
• 34:11
  Speaker 2: not being enticed by the hyold space this year.
• 34:15
  Speaker 11: Yeah, I think high yield investment grade pretty much anything
• 34:18
  Speaker 11: with a credit spread. What you want is credit spreads tighter.
• 34:21
  Speaker 11: If you own bonds with credit risk, and credit spreads
• 34:24
  Speaker 11: are near you know, their tenth percentile of all time tightness.
• 34:29
  Speaker 11: So you know, especially I think I caution people it's
• 34:32
  Speaker 11: not just high yield, it's also short dated. A lot
• 34:35
  Speaker 11: of people have been going into short duration funds, and
• 34:37
  Speaker 11: if you look at your short duration funds that take
• 34:40
  Speaker 11: credit risk, you know, ig credit spreads are around thirty
• 34:43
  Speaker 11: basis points for the three year point. It's even tighter
• 34:46
  Speaker 11: when you go closer in and there you need a
• 34:49
  Speaker 11: company to amend or extend, right, they either have to
• 34:52
  Speaker 11: pay back the loan or they have to turn it out.
• 34:54
  Speaker 11: So it's really you know, it can only go to zero, right,
• 34:58
  Speaker 11: so there's very little. You know, you're taking a lot
• 35:00
  Speaker 11: of risk and not getting a ton of return. And
• 35:03
  Speaker 11: so going back to those tea bills, like, yeah, maybe
• 35:06
  Speaker 11: maybe the FED is going to cut rates, but then
• 35:09
  Speaker 11: you should be okay on your equity side of the portfolio.
• 35:12
  Speaker 11: And if they don't cut rates, you don't have that
• 35:14
  Speaker 11: reinvestment risk. So I don't I don't think T bills.
• 35:17
  Speaker 11: They're they're boring and they're not super exciting, but I
• 35:20
  Speaker 11: don't think they're bad.
• 35:22
  Speaker 7: You also mentioned here in your notes of the fiscal
• 35:25
  Speaker 7: situation and watching the deficit. I feel like, yes, except
• 35:29
  Speaker 7: no one seems to care, So like, what do you
• 35:31
  Speaker 7: do with that?
• 35:33
  Speaker 6: Yeah?
• 35:34
  Speaker 11: No, Alex, You're exactly right, nobody cares. But I think
• 35:38
  Speaker 11: that's also the time when nobody's talking about something, it's
• 35:41
  Speaker 11: important to be mindful of it because usually that risk
• 35:44
  Speaker 11: is not priced. You know, the Treasury Department does have
• 35:48
  Speaker 11: to refinance a tremendous amount of debt, we have a
• 35:51
  Speaker 11: ton of fiscal spending, we have an election year. There's
• 35:54
  Speaker 11: really even no election premium priced into the volatility markets.
• 35:58
  Speaker 11: I mean, talk about pulling my hair out. I want
• 36:00
  Speaker 11: to grab people and be like, what's wrong with you?
• 36:02
  Speaker 11: Do you realize what's around the corner and what we're
• 36:05
  Speaker 11: going to be facing. So I think that's the time
• 36:07
  Speaker 11: that investors. You know, in all markets, you want to
• 36:10
  Speaker 11: buy things that are low and sell things that are high.
• 36:13
  Speaker 11: And there's certain things in the fixed income markets that
• 36:16
  Speaker 11: are really inexpensively priced, and then there's ninety percent of
• 36:20
  Speaker 11: the market that's really expensive, so you want to kind
• 36:23
  Speaker 11: of avoid the expensive stuff and buy the cheaply priced things.
• 36:27
  Speaker 2: In my opinion, so what is the FED going to
• 36:30
  Speaker 2: do this year. I guess obviously the March cut is
• 36:32
  Speaker 2: off the table. I think people are now really debating
• 36:35
  Speaker 2: May and maybe even suggesting June might be the first,
• 36:38
  Speaker 2: might be the launching point.
• 36:40
  Speaker 3: What do you think?
• 36:42
  Speaker 11: I think it's really hard to predict what policy makers
• 36:45
  Speaker 11: are going to do, and then it's even harder to
• 36:47
  Speaker 11: predict what markets are going to do in response to
• 36:50
  Speaker 11: that policy, because it's all related to expectations. Right. You know,
• 36:54
  Speaker 11: if we if we rewind before the FED started hiking
• 36:57
  Speaker 11: rates and the dot plots started to come out higher,
• 37:00
  Speaker 11: I don't think any economist out there would have said, Okay,
• 37:03
  Speaker 11: the Fed's going to hike to five twenty five and
• 37:06
  Speaker 11: about a twelve month window. I think nobody was talking
• 37:09
  Speaker 11: about that, and now everybody is talking about rate cuts.
• 37:13
  Speaker 11: It's just a question of how many, how quickly, and
• 37:15
  Speaker 11: when is it going to happen. I think we also
• 37:18
  Speaker 11: have to be mindful of the Silicon Valley swap lines.
• 37:21
  Speaker 11: So the BTSP program is expiring in March. That's put
• 37:25
  Speaker 11: a ton of liquidity out there in the system that's
• 37:28
  Speaker 11: going to be coming out. So I think there are
• 37:30
  Speaker 11: a lot of things out there that are catalysts to
• 37:34
  Speaker 11: make markets more normal and fixed income, I think having
• 37:38
  Speaker 11: an upward sloping yield curve. You know that's not some
• 37:41
  Speaker 11: kind of tail event, right, that would just be normal.
• 37:44
  Speaker 11: Like in normal environments, when you lend somebody money longer,
• 37:49
  Speaker 11: whether it's a sovereign or a municipality or a corporate,
• 37:52
  Speaker 11: you typically get paid more interest to lend longer, right,
• 37:57
  Speaker 11: because it's more risks. Right now, we're not seeing that.
• 38:00
  Speaker 11: So I think there are a lot of ways to
• 38:01
  Speaker 11: kind of play for a more normal market, and it
• 38:04
  Speaker 11: doesn't necessarily have to be dependent on the FED just
• 38:09
  Speaker 11: cutting rates, because I think the longer the FED pushes
• 38:12
  Speaker 11: off the rate cuts, the more the economy, especially all
• 38:16
  Speaker 11: the corporates out there that have debt will have to refinance.
• 38:19
  Speaker 11: So it could potentially be higher for longer means more
• 38:22
  Speaker 11: cuts faster later because the economy is really slowing. So
• 38:27
  Speaker 11: I think it's tricky.
• 38:28
  Speaker 4: That, all right, Nancy, We appreciate it.
• 38:30
  Speaker 7: Nancy Davis, founder and CEO of Quadratic Capital Management talking
• 38:34
  Speaker 7: about fixed income, and then also you layer in the
• 38:36
  Speaker 7: election timetable and the idea that the closer you get
• 38:40
  Speaker 7: to the election and the more you cut the more it.
• 38:41
  Speaker 4: Looks political, and that kind of changes the framework to
• 38:43
  Speaker 4: a little bit.
• 38:44
  Speaker 2: Yeah, so I think if you start, maybe that takes
• 38:46
  Speaker 2: some of the political risk at you start.
• 38:48
  Speaker 3: Olentially see how play that.
• 38:49
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