Latest / Bloomberg Intelligence / Home Depot, Alt Investments, Retail Sales, and Amgen (Podcast)

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Home Depot, Alt Investments, Retail Sales, and Amgen (Podcast) · Bloomberg Intelligence

• 0:00
  Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside
• 0:04
  Speaker 1: my co host Matt Miller.
• 0:05
  Speaker 2: Every business day, we bring you interviews from CEOs, market pros,
• 0:09
  Speaker 2: and Bloomberg experts, along with essential market moving news.
• 0:14
  Speaker 1: Find the Bloomberg Markets Podcast on Apple Podcasts or wherever
• 0:17
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• 0:21
  Speaker 1: Home Depot reported last night some guidance that disappointed the street.
• 0:26
  Speaker 1: Let's put it that way. Their forward guidance came in.
• 0:28
  Speaker 1: They had the lower that and we're seeing that in
• 0:30
  Speaker 1: the stock today. It's off one and a half percent,
• 0:32
  Speaker 1: stocks off ten percent year to date. Home Depot HD
• 0:34
  Speaker 1: is your ticker, Drew Redding. He's a research channel to
• 0:36
  Speaker 1: Bloomberg Intelligence. He follows all this housing stuff. So Drew again.
• 0:41
  Speaker 1: You know Kritty Gupta, Tom Keene, you know Lisa Bromwitz.
• 0:45
  Speaker 1: During the pandemic, they were all rebuilding their apartments in
• 0:47
  Speaker 1: this city. They're going to Home Depot getting the lumber
• 0:49
  Speaker 1: and all that stuff. Now they're done. I guess, so
• 0:53
  Speaker 1: what's the outlook for Home Depot.
• 0:56
  Speaker 3: Yeah, that certainly has something to do with it. Home
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  Speaker 3: Depot had an incredible run and some of the tailwinds
• 1:01
  Speaker 3: that they've seen over the last couple of years are
• 1:03
  Speaker 3: starting to dissipate. But to your point, one of the
• 1:06
  Speaker 3: things that's worth pointing out is, and we expected to
• 1:08
  Speaker 3: hear this on the calls to slow down and bake
• 1:10
  Speaker 3: ticket spending. Big ticket spending was a down six and
• 1:13
  Speaker 3: a half percent this quarter. And what's interesting is that
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  Speaker 3: they highlighted one off discretionary items as having to slow down.
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  Speaker 3: So when you had demand pulled forward during the pandemic,
• 1:23
  Speaker 3: you think of things like grills, patios, appliances, lawmowers. Those
• 1:27
  Speaker 3: aren't things that you're going to continue to repurchase year
• 1:30
  Speaker 3: after year. So they're seeing slowdown in those categories. But
• 1:33
  Speaker 3: at the same time, they're starting to see a softening
• 1:35
  Speaker 3: of demand in larger scale projects like kitchens, baths, flooring,
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  Speaker 3: And the idea is that consumers are kind of trading
• 1:44
  Speaker 3: down and they're taking on smaller projects instead of those
• 1:47
  Speaker 3: large scale remodels.
• 1:49
  Speaker 4: Talk to us a little bit about something like the
• 1:51
  Speaker 4: contractor backlogs, for example, how does that factor into the
• 1:55
  Speaker 4: bottom line for home depot.
• 1:57
  Speaker 3: Yeah, so the professional market account for about forty five
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  Speaker 3: percent of sales for home depot it's about twenty five
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  Speaker 3: percent for lows. Now, contractors have been a key driver
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  Speaker 3: of big ticket spending. There's you know, a project based
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  Speaker 3: nature to the stuff they're buying. Now, contractor backlogs have
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  Speaker 3: been extremely elevated, you know, over the last several quarters,
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  Speaker 3: and that's because it's it's been so hard to get
• 2:21
  Speaker 3: labored to job site, so their backlogs have been extended.
• 2:23
  Speaker 3: And that's really what's kind of pushed this growth and
• 2:26
  Speaker 3: big ticket spending and kind of extended it over a
• 2:29
  Speaker 3: longer period of time. What we're starting to see now
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  Speaker 3: as contractors get through those jobs, they're not being replenished
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  Speaker 3: at the same rate as they were over the last
• 2:38
  Speaker 3: you know, couple of years. So we're starting to see
• 2:41
  Speaker 3: a moderation in those contractor backlogs. They're still elevated from
• 2:45
  Speaker 3: a historical spending, but the growth is starting to slow.
• 2:50
  Speaker 1: The company called out lumber, and I pulled up the
• 2:52
  Speaker 1: commodity lumber at boy. It is volatile. It is all
• 2:56
  Speaker 1: over the price, all over the place, the price of lumber.
• 2:59
  Speaker 1: Talk to us about lumber for home depot. Is it
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  Speaker 1: a big part of their sales?
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  Speaker 3: Yeah, so number is about ten percent of sales for
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  Speaker 3: home depot, similar number for lows, And if you look
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  Speaker 3: at the average price of lumber throughout their fiscal quarter,
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  Speaker 3: it's down about somewhere between sixty and sixty five percent.
• 3:16
  Speaker 3: So they called out a three hundred and thirty five
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  Speaker 3: basis point impact from commodity deflation in the quarter, and
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  Speaker 3: lumber specifically was about two hundred and twenty basis points.
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  Speaker 3: That headwind is going to persist through the remainder of
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  Speaker 3: the first half, and expectations are for about one hundred
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  Speaker 3: basis point intact next quarter. So lumber has certainly been volatile.
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  Speaker 3: They benefit obviously on the way up, and now they're
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  Speaker 3: starting to feel the pressure as prices come down pretty sharply.
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  Speaker 5: Drew.
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  Speaker 4: What kind of precedent does this set for the other
• 3:48
  Speaker 4: retailers that we still have yet to hear from. Is
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  Speaker 4: this a home depot story, ors is broader?
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  Speaker 3: Well? I think it's broader. I mean home depots. Certainly,
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  Speaker 3: it has been in a great category within retail because
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  Speaker 3: you've got homeowners who have typically have great jobs, incomes
• 4:04
  Speaker 3: are growing, but at the same time, the headwinds that
• 4:06
  Speaker 3: they're facing aren't specific to them. You've got inflation, which
• 4:10
  Speaker 3: is still high. That's going to impact consumers across the board.
• 4:13
  Speaker 3: Real wages have been under pressure for a couple of
• 4:16
  Speaker 3: years now, and we're seeing credit card balances starting to balloon.
• 4:19
  Speaker 3: They're actually above pre pandemic levels now, and that really
• 4:22
  Speaker 3: highlights the challenges the consumers facing now. So I do
• 4:26
  Speaker 3: think it's a broader issue across all of retail, the
• 4:30
  Speaker 3: stress the consumer's starting to feel.
• 4:33
  Speaker 1: Drew, thanks so much for joining us. Appreciate it as always,
• 4:35
  Speaker 1: Drew reading these research channels for Bloomberg Intelligence.
• 4:39
  Speaker 6: You're listening to the team Ken's are live program Bloomberg
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• 4:49
  Speaker 6: on demand wherever you get your podcast.
• 4:54
  Speaker 1: Michelle Noys joins us here in our Bloomberg Interactive Brokers studio.
• 4:57
  Speaker 1: She's a managing director for the Alternative Management Association. Shechell,
• 5:01
  Speaker 1: thanks so much for joining us into studio here. I
• 5:04
  Speaker 1: know you guys had a conference recently getting all the
• 5:07
  Speaker 1: alternative investment folks together. Talk to us about that conference
• 5:10
  Speaker 1: kind of what was a theme, what did you hear,
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  Speaker 1: what did you what were people talking about?
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  Speaker 5: Yeah, no, well, thrilled to be here on this beautiful
• 5:17
  Speaker 5: day in New York. But yes, last week we did
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  Speaker 5: host our Digital Assets conference in New York for about
• 5:24
  Speaker 5: three hundred of our members, and it's really interesting how
• 5:27
  Speaker 5: digital assets is now becoming an established part of that
• 5:30
  Speaker 5: alternative investment landscape, and we're seeing more and more of
• 5:34
  Speaker 5: our traditional finance alternatives, which is a real oxingmoron when
• 5:37
  Speaker 5: you think about it, think about how to integrate this
• 5:40
  Speaker 5: new asset class into their diversified portfolios. So I think
• 5:44
  Speaker 5: the real takeaway for me was the number of suits
• 5:46
  Speaker 5: in the audience. Normally you go to cryptoconferences, you see
• 5:50
  Speaker 5: a lot of technologists and T shirts and hoodies. But
• 5:53
  Speaker 5: really the institutions were out in force last week, dedicated
• 5:57
  Speaker 5: to this asset class and figuring out how to make
• 6:00
  Speaker 5: it work through this uncertain regulatory regime we have in
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  Speaker 5: the US.
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  Speaker 4: And what kind of appetite is there actually for alternative
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  Speaker 4: assets right now? It feels like maybe a year ago,
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  Speaker 4: a year and a half ago, it was all the rage.
• 6:11
  Speaker 4: Now can we still say that people want that?
• 6:14
  Speaker 5: Yeah? I mean I think alternatives zooming out more broadly
• 6:16
  Speaker 5: if you look at that whole landscape of private markets.
• 6:19
  Speaker 5: Hedge funds really proved their worth over the last couple
• 6:23
  Speaker 5: of years when sixty to forty had some of their
• 6:26
  Speaker 5: under largest underperformance of the markets. So investors have realized
• 6:32
  Speaker 5: the potential. I mean, institutions were always there, and now
• 6:34
  Speaker 5: again their toolkit is expanding as we get things like
• 6:38
  Speaker 5: cryptot into that mix. But then also we've seen over
• 6:43
  Speaker 5: the years more retail and wealth channels coming online into
• 6:47
  Speaker 5: alternatives as well, so it's grown quite a bit, but
• 6:50
  Speaker 5: there's still a lot of scope for that, and it
• 6:52
  Speaker 5: feels like the world is waking.
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  Speaker 1: Up to it well on the crypto space. You know,
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  Speaker 1: one of the concerns I hear from market participants is
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  Speaker 1: we need some regulatory certainty or the US is going
• 7:02
  Speaker 1: to lose its position here to other countries around the world.
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  Speaker 1: What was how was regulation dealt with at your conference,
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  Speaker 1: and what's the feeling right now?
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  Speaker 5: Yeah, no, it's interesting. As a trade association, regulation is
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  Speaker 5: always at the forefront of what AMA does. However, it's
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  Speaker 5: kind of weird how much people care about it these days.
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  Speaker 5: I'm not used to it being the center of attention.
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  Speaker 5: And certainly that US regulatory uncertainty really was the core
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  Speaker 5: theme throughout the conference. You know, really there was an
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  Speaker 5: expectation that we're not really going to see anything any
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  Speaker 5: clarity coming out of this administration, so we're really looking
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  Speaker 5: into twenty twenty five. And the result is that for
• 7:45
  Speaker 5: smaller firms that you know, can't run their business in
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  Speaker 5: that uncertain nature, there are a lot of folks who
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  Speaker 5: are looking to relocate outside of the US, people who
• 7:55
  Speaker 5: never thought they would This is not you know, they
• 7:57
  Speaker 5: want to build this business locally and domestic, but they
• 8:01
  Speaker 5: end up having to find somebody or find another jurisdiction
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  Speaker 5: so that they can really operate over the next couple
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  Speaker 5: of years and maybe eventually come back to the US.
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  Speaker 4: Is regulation a deterrent at all here?
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  Speaker 5: Yeah, I mean there's just a lot of certainty. I mean,
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  Speaker 5: I should say our members are very much in favor
• 8:18
  Speaker 5: of regulation. They just want to know what that's going
• 8:21
  Speaker 5: to look like. We need an effective model that they
• 8:24
  Speaker 5: can really future proof their business, you know, especially because
• 8:28
  Speaker 5: our members are the ones dealing with institutions. Crypto is
• 8:32
  Speaker 5: always going to exist around the world and in the US,
• 8:36
  Speaker 5: but if you're doing this at an institutional scale, you
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  Speaker 5: really need to know what those rules are going to
• 8:41
  Speaker 5: look like all right.
• 8:42
  Speaker 1: So in the crypto space, there's a lot still a
• 8:44
  Speaker 1: lot of doubters, including maybe even J. P. Morgan's James
• 8:48
  Speaker 1: Jamie Diamond. But it can't be good for credibility when
• 8:51
  Speaker 1: one of your major exchanges goes to put FTX. So
• 8:55
  Speaker 1: how's the thinking there in terms of how damaging was
• 8:59
  Speaker 1: that to the crypto space?
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  Speaker 5: Do you think, Yeah, there's no way to sugarcoat that.
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  Speaker 5: That was a major loss of trust, breach of trust
• 9:06
  Speaker 5: in the markets. It certainly, you know, was an element
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  Speaker 5: of fraud rather than crypto specifically, but it shows what
• 9:15
  Speaker 5: happens when you have centralization and a lack of regulation.
• 9:19
  Speaker 5: That's where fraud can flourish, you know, relative to some
• 9:23
  Speaker 5: of the decentralized exchanges where you do have full transparency,
• 9:26
  Speaker 5: still have risks, but a different value proposition. And in
• 9:29
  Speaker 5: December it was dire, you know, the atmosphere, the mood
• 9:34
  Speaker 5: super super bearish. So it is interesting to see, you know,
• 9:38
  Speaker 5: on a relative basis, you know, kind of how optimistic
• 9:43
  Speaker 5: it was. For sure, still challenges and I think there's
• 9:46
  Speaker 5: actually there's been some silver linings. Right, Certainly, nobody's going
• 9:50
  Speaker 5: to question the need for due diligence, and you know,
• 9:53
  Speaker 5: AIMA published a very intensive due diligence questionnaire template for
• 9:57
  Speaker 5: investment managers focused on digital assets back in February, and
• 10:02
  Speaker 5: if that were published at the height of the bull market,
• 10:04
  Speaker 5: you know, maybe the managers would feel less inclined to
• 10:08
  Speaker 5: have to provide that level of transparency. Now they're going
• 10:11
  Speaker 5: to the exchanges themselves, have to really focus on that
• 10:14
  Speaker 5: counterparty risk, and there's both been transparency as well as
• 10:17
  Speaker 5: some technological and infrastructure developments to reduce that counterparty risk
• 10:23
  Speaker 5: and settlement risk as well. So we've seen a crystallization
• 10:27
  Speaker 5: of that and really some market developments and some market
• 10:30
  Speaker 5: practices to end us in a better space.
• 10:33
  Speaker 1: But again, yep, so in the crypto space, I hear
• 10:36
  Speaker 1: term tokenization. I don't really know what that is. Can
• 10:39
  Speaker 1: you define what that is and kind of what are
• 10:41
  Speaker 1: the opportunities there?
• 10:43
  Speaker 5: Yeah, so tokenization seems to be the new buzzword of
• 10:47
  Speaker 5: the day. It's you know, you sort of look at
• 10:50
  Speaker 5: some earlier cycles of crypto and you know, folks who
• 10:53
  Speaker 5: are thinking about I recognize the potential benefits of the
• 10:57
  Speaker 5: blockchain technology, but maybe I don't want that speculative magic
• 11:01
  Speaker 5: Internet money, So what can how can I find this
• 11:04
  Speaker 5: How can we build in some of the benefits of
• 11:07
  Speaker 5: a decentralized exchange, reducing all of the intermediaries that are
• 11:11
  Speaker 5: needed in a financial business like this, but actually have
• 11:16
  Speaker 5: the value derived from real world assets which I can
• 11:19
  Speaker 5: you know, model and find flows. So this is sort
• 11:23
  Speaker 5: of where it fits where it fits in. There's been
• 11:25
  Speaker 5: some early innovation we've seen last year. There are a
• 11:28
  Speaker 5: number of private equity funds that tokenized their private vehicles
• 11:34
  Speaker 5: and offer them on the blockchain to end investors, you know,
• 11:38
  Speaker 5: very early experimentation. There's also a lot of work being
• 11:41
  Speaker 5: done around private assets writ large, so rather than funds
• 11:45
  Speaker 5: the actual loans, there's real estate that can be brought
• 11:49
  Speaker 5: on chain and just really thinking through in an ecosystem,
• 11:52
  Speaker 5: how can you make this all more efficient?
• 11:54
  Speaker 1: All right, Michelle, thank you so much for joining us.
• 11:56
  Speaker 1: Really appreciate you coming in, Shelle Noise as a managing director,
• 11:59
  Speaker 1: I'll turn Investment Management Association joining us here in the
• 12:03
  Speaker 1: Bloomberg Interactor Brokers studio.
• 12:05
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• 12:18
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• 12:24
  Speaker 1: Get great to our next guest and Dryden Pence. He's
• 12:27
  Speaker 1: the CIO of Pence Capital Management. They are based in
• 12:30
  Speaker 1: Newport Peach, California. You can't. It's just such a scam,
• 12:34
  Speaker 1: that whole Newport Beach thing. I'm not buying it, not
• 12:37
  Speaker 1: at all. I'm not buying You got to be into
• 12:39
  Speaker 1: Bowsman that and is what I say. But Dryden joints
• 12:41
  Speaker 1: us here in our Bloomberg Interactive Broker Studio. We appreciate that.
• 12:44
  Speaker 1: We point that mister Pence is an Army veteran, so
• 12:47
  Speaker 1: we thank him for his service. I appreciate that, Dryden,
• 12:50
  Speaker 1: you make your way all the way to New York City.
• 12:52
  Speaker 1: We got the good weather for you. We also had
• 12:55
  Speaker 1: some retail sales come out this morning. I don't know,
• 12:58
  Speaker 1: I kind of feel like I look at the consumer.
• 12:59
  Speaker 1: The consumer doing pretty well. The consumer has a job
• 13:03
  Speaker 1: buying large. But I know there's some you know, there's
• 13:06
  Speaker 1: some food insecurity out there. There's some big issues out there,
• 13:08
  Speaker 1: but some of the macro data suggest that the consumer's
• 13:11
  Speaker 1: doing okay. How do you think about the consumer? How
• 13:13
  Speaker 1: does that impact how you guys, you know, go out
• 13:15
  Speaker 1: there and pickstocks and allocate capital. Absolutely.
• 13:18
  Speaker 7: I think the point of the matter is is nobody
• 13:20
  Speaker 7: told the American consumer don't fight the Fed. They're still
• 13:24
  Speaker 7: they have jobs. As you said, you also see people
• 13:28
  Speaker 7: on Social Security got an eight percent increase and inflation's
• 13:31
  Speaker 7: now below that. So you have twenty five percent of
• 13:33
  Speaker 7: the American economies on so old Security has gotten a
• 13:36
  Speaker 7: pay raise, and so consumers are doing pretty darn well,
• 13:39
  Speaker 7: and they have larger savings than they had prior to
• 13:43
  Speaker 7: the pandemic. And so this continued consumer strength is really
• 13:47
  Speaker 7: kind of powering through things. I think it's made the
• 13:49
  Speaker 7: Fed's job a little tougher. You know, folks are out
• 13:52
  Speaker 7: there spending money and they don't seem to be backing
• 13:55
  Speaker 7: off dramatically some but not dramatically.
• 13:59
  Speaker 8: I do wonder how much that will last because there's
• 14:01
  Speaker 8: sort of two things here. One is, yes, they've gotten
• 14:03
  Speaker 8: a pay rise, but their dollars don't go as far
• 14:05
  Speaker 8: as they used to. And the second thing is, you know,
• 14:08
  Speaker 8: have we really seen the full impact of all the
• 14:10
  Speaker 8: previous FED hikes. I mean, is that or is that
• 14:13
  Speaker 8: you know, a squeeze that's coming down the road.
• 14:15
  Speaker 7: Well, I think you are right in that. I think
• 14:17
  Speaker 7: that we probably have yet to see about one hundred
• 14:20
  Speaker 7: to one hundred and twenty five basis points of the
• 14:22
  Speaker 7: hikes that you know, the FED can change their decision
• 14:25
  Speaker 7: in over two days. The market reacts in five minutes,
• 14:28
  Speaker 7: but American households and businesses take six to nine months,
• 14:31
  Speaker 7: and so we've yet to see about one hundred and
• 14:34
  Speaker 7: twenty five basis points of these hikes come into the market.
• 14:37
  Speaker 7: And I think that's what what is really kind of
• 14:39
  Speaker 7: causing this movement towards a pause coming up in the
• 14:42
  Speaker 7: next meeting.
• 14:42
  Speaker 1: We've got to give it time.
• 14:43
  Speaker 7: We got to give the American consumer time to catch
• 14:47
  Speaker 7: up with the FED, otherwise they could overreach a little bit.
• 14:50
  Speaker 1: All right, So what do I do? I got to
• 14:52
  Speaker 1: put money to work here. I got a lot of
• 14:54
  Speaker 1: cross currents out there. I got the FED, I got
• 14:55
  Speaker 1: a debt ceiling. I don't know if those knuckleheads in
• 14:58
  Speaker 1: DC can get anything done. So what's an investor to
• 15:00
  Speaker 1: do here? Well, I think there's a couple things.
• 15:02
  Speaker 7: The first one is stay short on your fixed income,
• 15:04
  Speaker 7: stay short duration on space to them absolutely, because I
• 15:07
  Speaker 7: think I think the pause goes longer. We don't get
• 15:09
  Speaker 7: a pivot until sometime in twenty twenty four, so you
• 15:11
  Speaker 7: might as well stay short and not stretch it out.
• 15:14
  Speaker 7: Stretch it out. So that's the first thing. And the
• 15:16
  Speaker 7: other thing is is pay close attention to investing in
• 15:19
  Speaker 7: the no matter what, we like defense sectors because we
• 15:22
  Speaker 7: think that we're not going to have peace spontaneously break
• 15:25
  Speaker 7: out all over the world. And NATO's got increase or
• 15:28
  Speaker 7: spending by two percent, so that's you know, defense sector
• 15:31
  Speaker 7: is good. We think China's coming back, as you know,
• 15:34
  Speaker 7: oils come down, but I think back half of the
• 15:36
  Speaker 7: year we see that go back up. So and then payments.
• 15:40
  Speaker 7: Payments are an area where we like American Express because
• 15:43
  Speaker 7: it's both luxury and it's also payments, and which in
• 15:46
  Speaker 7: and of itself is kind of stands through the inflation thing.
• 15:50
  Speaker 1: You hear, you know, testimony like that, the pressure and
• 15:53
  Speaker 1: that just kind of brings to the forefront, you know,
• 15:56
  Speaker 1: the banking challenges or the stress in the marketplace from
• 16:00
  Speaker 1: the regional banks. How do you guys at Pence Capital
• 16:03
  Speaker 1: Management think about that risk as you allocate capital. Did
• 16:06
  Speaker 1: you were you ever in banks? If you were, did
• 16:08
  Speaker 1: you sell your banks? What's going on?
• 16:10
  Speaker 7: We had very very small positions and banks and the
• 16:14
  Speaker 7: issue here when you talk about the three or four
• 16:17
  Speaker 7: banks have been a problem. All of them had some
• 16:18
  Speaker 7: commonality of poor management. And it wasn't necessarily the regional
• 16:22
  Speaker 7: banking sector entirely, but those banks had some unique issues. However,
• 16:27
  Speaker 7: you can only invert yield curve for so long, and
• 16:31
  Speaker 7: I think that's one of the challenges that we have.
• 16:33
  Speaker 1: To look at.
• 16:33
  Speaker 7: If the yield curve stays inverted this high for a
• 16:37
  Speaker 7: very long period of time, you could continue to see
• 16:39
  Speaker 7: some weakness in the banking sector. And I think that
• 16:42
  Speaker 7: that's one reason why we've kind of stayed at it.
• 16:44
  Speaker 7: We had a very small position in it, and we
• 16:46
  Speaker 7: still maintained almost we'll probably like one percent.
• 16:51
  Speaker 8: But now looking across at other sectors, I mean, do
• 16:53
  Speaker 8: you feel like the pressure on credit conditions that followed
• 16:57
  Speaker 8: the run on those banks is that easy enough? Are
• 17:00
  Speaker 8: there still issues to be worked through or what's your
• 17:03
  Speaker 8: sense there?
• 17:03
  Speaker 7: Well, I think that the tightening of credit across system
• 17:06
  Speaker 7: is doing some of the fed's job for it, just
• 17:08
  Speaker 7: like early on oil prices did some of the fed's
• 17:11
  Speaker 7: job for it and then they went down. Now tightening
• 17:14
  Speaker 7: credit is doing some of the fed's job for which
• 17:15
  Speaker 7: again is why we think we've got a pause coming up.
• 17:18
  Speaker 7: And I think that, you know, transitions create turbulence. We're
• 17:22
  Speaker 7: transitioning to a new kind of regulatory environment. We're having
• 17:25
  Speaker 7: to transition to an environment where you're going to have
• 17:28
  Speaker 7: to understand the consequences of an inverted you'll curve for
• 17:31
  Speaker 7: a long time. And so I think that this has
• 17:35
  Speaker 7: added to the fed's activities in terms of slowing down
• 17:39
  Speaker 7: the economy and making credit a little more difficult. I mean,
• 17:43
  Speaker 7: at the beginning of last year, we had more money
• 17:45
  Speaker 7: going out wherever it needed to be and way way
• 17:48
  Speaker 7: too loose. The FED was too late, and so now
• 17:51
  Speaker 7: they're having to play catchup.
• 17:52
  Speaker 1: And this is all part of it, all right, given
• 17:54
  Speaker 1: that background fresh capital coming in. Are there some sectors
• 17:57
  Speaker 1: that you guys like right now? Are there some sector
• 18:00
  Speaker 1: as you're staying away from.
• 18:01
  Speaker 7: Sectors we like or what we call the no what
• 18:04
  Speaker 7: matter what sectors I mentioned defense earlier, we like those
• 18:07
  Speaker 7: and we like payments a lot, because you know, a
• 18:11
  Speaker 7: defense appropriations bill usually gets paid and people pay their
• 18:16
  Speaker 7: credit cards. In general, there's consume American consumers spending. So
• 18:19
  Speaker 7: even though inflation is going up, payment sectors or companies
• 18:23
  Speaker 7: like American Express are seeing a higher ticket charge. Well,
• 18:26
  Speaker 7: that is a creative to their earnings, and so I
• 18:28
  Speaker 7: think that this trend will continue. So we like those
• 18:31
  Speaker 7: sectors a lot. I think the fact that interest rates
• 18:35
  Speaker 7: are going to maybe stay higher for longer and we're
• 18:37
  Speaker 7: not going to see this pivot that people are expecting
• 18:39
  Speaker 7: near the end of the year could put some weakness
• 18:42
  Speaker 7: on tech companies that are interest rate sensitive. You know,
• 18:44
  Speaker 7: people betting on interest rates going down a lot this
• 18:48
  Speaker 7: year are probably going to find themselves on the wrong
• 18:49
  Speaker 7: side of the trade.
• 18:50
  Speaker 8: Now, let me ask you internationally, is there an area
• 18:53
  Speaker 8: that you like sect a region that you like, or
• 18:56
  Speaker 8: a sector that you like abroad that you don't like
• 18:58
  Speaker 8: so much here.
• 19:00
  Speaker 7: I think you see China opening back up and fits
• 19:04
  Speaker 7: and starts, but I think it's not necessarily China that
• 19:07
  Speaker 7: we would have an interest in. But you know, Indonesia
• 19:10
  Speaker 7: and those areas around that, and we think that eventually
• 19:14
  Speaker 7: that Europe is going to begin to, you know, come
• 19:17
  Speaker 7: out of this thing reasonably well. So in looking at that,
• 19:20
  Speaker 7: we're still looking at the fundamentals of the consumer. Where
• 19:24
  Speaker 7: are there consumers that have a lot of money, uh,
• 19:26
  Speaker 7: and they're going to spend it? So those are the
• 19:28
  Speaker 7: kind of the sectors that were that we're looking at.
• 19:30
  Speaker 7: I still would stay out of uh at this point.
• 19:33
  Speaker 7: I would stay out of the really deep emerging markets
• 19:36
  Speaker 7: of somewhere in central South America and Africa.
• 19:39
  Speaker 1: At this point. Yeah, it's kind of it so dread
• 19:41
  Speaker 1: in the army. You earned three Meritorious Service medals from
• 19:44
  Speaker 1: the US Africa Command, so you were stationed in Africa.
• 19:48
  Speaker 7: So the what I had was the command of what
• 19:52
  Speaker 7: they called the both Joint Transformation Command for Intelligence and
• 19:56
  Speaker 7: then Africa ARIS. It was our intelligence operations. I wasn't
• 19:59
  Speaker 7: stationed in Africa, uh per se that actually actually the
• 20:03
  Speaker 7: US Africa Command was in Stuttgart, Germany. Nobody, nobody in
• 20:07
  Speaker 7: Africa wanted us to have a base there, so it
• 20:09
  Speaker 7: was so we so you just tried to get.
• 20:11
  Speaker 1: The same time zone. So it's kind of awkward. So
• 20:13
  Speaker 1: what's that Because a lot of folks will come in
• 20:14
  Speaker 1: here and they'll talk about emerging markets, and they'll talk
• 20:17
  Speaker 1: about Africa. What what's kind of your view having kind
• 20:19
  Speaker 1: of studied it from a different angle. Of course, there's
• 20:22
  Speaker 1: there's two big things.
• 20:23
  Speaker 7: Most people have no clue how absolutely large Africa is.
• 20:27
  Speaker 7: You could take you could take you know, almost North
• 20:30
  Speaker 7: America and a couple of other places and squeeze it
• 20:32
  Speaker 7: in there, and it's just it's just dramatically huge.
• 20:35
  Speaker 1: The thing that they that they do is they have
• 20:37
  Speaker 1: a real.
• 20:38
  Speaker 7: Hard time around capital formation.
• 20:40
  Speaker 3: Uh.
• 20:41
  Speaker 7: And they also are kind of skipping generations of everybody's
• 20:44
  Speaker 7: bank is their phone, right, so they're skipping generations of
• 20:47
  Speaker 7: capital formation. Uh. And they're very creative people, but they
• 20:51
  Speaker 7: also have very different governance problems. And they're also getting
• 20:55
  Speaker 7: themselves in trouble with their infrastructure because they spend and
• 20:59
  Speaker 7: borrowed from this amount of money from China. China is
• 21:02
  Speaker 7: we're China's so far ahead of us in Africa, it's laughable.
• 21:07
  Speaker 7: But the problem is is these countries now have a
• 21:09
  Speaker 7: tremendous amount of debt that higher interestrates are going to
• 21:12
  Speaker 7: prevent them from being able.
• 21:13
  Speaker 1: To So is that a strategic mistake for the US
• 21:16
  Speaker 1: not to have more investment there and more of a
• 21:19
  Speaker 1: presence or do you think I would say so, Yeah.
• 21:21
  Speaker 7: I would say so we're behind. We're just you know,
• 21:24
  Speaker 7: you have an area of tremendous natural resources. You have
• 21:27
  Speaker 7: you know, one hundreds of millions of people, you have
• 21:29
  Speaker 7: a very rapid population growth. You have an area that
• 21:33
  Speaker 7: really is kind of the next two hundred years of
• 21:36
  Speaker 7: what we can look for. And the United States is
• 21:39
  Speaker 7: clearly both from an investment standpoint and from a strategic
• 21:41
  Speaker 7: security standpoint. Probably you know we're twenty five years late.
• 21:45
  Speaker 1: All Right, Dredan, thanks so much for joining us. Really
• 21:47
  Speaker 1: appreciate getting your perspective, which is unique to say the
• 21:49
  Speaker 1: least dried and Pence ceio of Pence Capital Management.
• 21:53
  Speaker 6: You're listening to the team Ken's are Live program Bloomberg
• 21:57
  Speaker 6: Markets weekdays at ten am Eastern on Bloomberg Dot, the
• 22:00
  Speaker 6: iHeartRadio app, and the Blowberg Business app, or listen on
• 22:03
  Speaker 6: demand wherever you get your podcasts.
• 22:07
  Speaker 1: All right, let's go check for some stocks and maybe
• 22:10
  Speaker 1: are working, some investments that are working, and we do
• 22:12
  Speaker 1: that with Alex mars c CIO of f M Investments.
• 22:16
  Speaker 1: He joins the center Bloomberg Interactive Brooker Studio. We appreciate
• 22:18
  Speaker 1: that you get a gold star for coming in and
• 22:21
  Speaker 1: not phoning it in. Alex talk to us about FM Investments.
• 22:24
  Speaker 1: What do you guys do there? How do you approach
• 22:26
  Speaker 1: the market? What's your view? Sure?
• 22:28
  Speaker 9: So FM's a multi boutique. We really specialize in finding
• 22:30
  Speaker 9: great portfolio managers who have a lot of great and
• 22:34
  Speaker 9: diversified ideas and allow them to do what they're good at.
• 22:37
  Speaker 1: So are you guys equities, fixed income? What asset class
• 22:40
  Speaker 1: do you we spend the traffic the entire risk spectrum.
• 22:44
  Speaker 1: We've got all sorts of equity managers from small capital,
• 22:46
  Speaker 1: large cap, value, growth, all flavors in between. Assets under management,
• 22:50
  Speaker 1: what do you guys have these days?
• 22:51
  Speaker 9: So with our originally merged into a company called Diffractive
• 22:54
  Speaker 9: Managers Groups, about twenty five billion of AUA. About fifteen
• 22:57
  Speaker 9: million of that is true AUM eight.
• 22:59
  Speaker 1: What's AUA? Assets under advisement?
• 23:01
  Speaker 9: Some accounts that you know we don't fully control, but
• 23:03
  Speaker 9: we give advice to or firms that we don't own
• 23:07
  Speaker 9: a majority of that the SEC won't let us claim as.
• 23:10
  Speaker 1: A So what are some of the strategies that you
• 23:11
  Speaker 1: guys like now that you know in some of the
• 23:14
  Speaker 1: you know, the guys you're pursuing.
• 23:16
  Speaker 9: So on the equity side, I really like gross strategies.
• 23:18
  Speaker 9: I know, whis a little counterintuitive given the way markets
• 23:21
  Speaker 9: have been at least last year and beginning part of
• 23:23
  Speaker 9: this year, a little bit of a rebound in our favor.
• 23:26
  Speaker 9: We've got we like small cap growth, got a strategy
• 23:28
  Speaker 9: there that's been doing superlatively well, and we still like
• 23:31
  Speaker 9: large cap growth. You know, in the long run, there's
• 23:33
  Speaker 9: only so many houses we can build, there's only so
• 23:36
  Speaker 9: much paint you can buy. But technology still evolves. The
• 23:39
  Speaker 9: AI movement is clearly here. It's here to stay. We've
• 23:42
  Speaker 9: been big into in media for a long time, and
• 23:44
  Speaker 9: you know, every day we hear how it's going to
• 23:46
  Speaker 9: be its last day, and then it seems to keep
• 23:48
  Speaker 9: keep pushing forward.
• 23:49
  Speaker 8: On the rally, let me ask you a couple of
• 23:51
  Speaker 8: follow up questions there about your comments on AI, because
• 23:54
  Speaker 8: as a tech editor, I'm very, very interested in what
• 23:56
  Speaker 8: people make of the vast dreams of comments we on
• 24:00
  Speaker 8: earnings calls about artificial intelligence. I mean, do you feel
• 24:03
  Speaker 8: like this is really the moment for a change in
• 24:07
  Speaker 8: tech that of this sort that we you know, we
• 24:09
  Speaker 8: saw with the introduction of the mobile phone, for example.
• 24:12
  Speaker 9: This feels like it's if not this, it's going to
• 24:15
  Speaker 9: be very soon. I mean, once you get it to
• 24:17
  Speaker 9: the point where my mom can go on to chat
• 24:19
  Speaker 9: GPT know things that I didn't know she could know,
• 24:23
  Speaker 9: but with such clarity and copy and past them to
• 24:25
  Speaker 9: a text message that I think that's that moment. So
• 24:28
  Speaker 9: this is that Steve Jobs moment of sitting down on
• 24:30
  Speaker 9: the couch and taking out an iPhone, an iPod and
• 24:33
  Speaker 9: a mobile device.
• 24:35
  Speaker 1: Right, this is kind of it.
• 24:36
  Speaker 8: But then how do you play that as an investor? Well,
• 24:39
  Speaker 8: I think you mentioned Nvidia, of course, but I mean
• 24:41
  Speaker 8: looking at you know, Microsoft versus Google versus I Amazon
• 24:45
  Speaker 8: or any of the other smaller companies that even some
• 24:48
  Speaker 8: of them have AI in their names, telling you what
• 24:50
  Speaker 8: they're all.
• 24:50
  Speaker 9: About, that may be the first indicator not to buy them.
• 24:54
  Speaker 9: The dot Com bust kind of proved if you had
• 24:55
  Speaker 9: to put dot com in the name was a sort
• 24:57
  Speaker 9: of a negative indicator for long.
• 24:58
  Speaker 1: Term easy on that dot Com. It was a very
• 25:00
  Speaker 1: fine era. Thank you, it's there.
• 25:02
  Speaker 9: There were great moments, for sure, But I think those
• 25:05
  Speaker 9: big names are just given how much cash they have,
• 25:08
  Speaker 9: they're going to hoover up all the small names who
• 25:10
  Speaker 9: are particularly good, and they spend all day studying them,
• 25:12
  Speaker 9: so it's going to be hard to really differentiate. If
• 25:15
  Speaker 9: you're a small cat manager and you spend a lot
• 25:17
  Speaker 9: of time in that space, you can do really well,
• 25:18
  Speaker 9: but you have to spend a lot of time with
• 25:20
  Speaker 9: fundamental research. But the big guys will buy up those
• 25:23
  Speaker 9: the really good ones that are up and coming, and
• 25:26
  Speaker 9: then it's like most plays, you want to sell picks
• 25:28
  Speaker 9: and access more so than you want to try to
• 25:30
  Speaker 9: own the mind.
• 25:31
  Speaker 1: It isn't AI being way way over using Jennifer. You
• 25:34
  Speaker 1: may have an opinion on this, but every single company
• 25:38
  Speaker 1: that comes through here and every confident, I don't care
• 25:40
  Speaker 1: if it's dog food, it's their leading with AI. This
• 25:44
  Speaker 1: is a scam to me. This is I mean, I
• 25:46
  Speaker 1: think a lot of people are using AI or confusing AI,
• 25:50
  Speaker 1: which just you know, digitizing their business or bringing some
• 25:53
  Speaker 1: technology into their business. So instead of having you know,
• 25:55
  Speaker 1: a checkout counter, I can just kind of go scan
• 25:57
  Speaker 1: it or making investments in AI. How do you guys
• 26:01
  Speaker 1: define the real stuff?
• 26:03
  Speaker 9: So I think you're right like this, AI is a
• 26:05
  Speaker 9: very convenient way to get budget right, we're doing something
• 26:08
  Speaker 9: in AI. So now the board's going to give me
• 26:10
  Speaker 9: money to do something. We look at it more on
• 26:12
  Speaker 9: the true cutting edge of what you see coming in
• 26:15
  Speaker 9: the chat GPT. The large language models things that are
• 26:18
  Speaker 9: really evolving within the machine beyond what the programming was.
• 26:22
  Speaker 9: And that's not just how do we do Like in DC,
• 26:25
  Speaker 9: where there's an Whole Foods run by Amazon, where I
• 26:29
  Speaker 9: don't see a till anymore.
• 26:30
  Speaker 1: I just walk in. It feels like I stole it.
• 26:32
  Speaker 9: That's a really clever assembly of all sorts of stuff,
• 26:35
  Speaker 9: But it's not AI. The AI might be in the
• 26:37
  Speaker 9: algorithm that actually decides did I take one or two
• 26:40
  Speaker 9: pieces of fruit?
• 26:42
  Speaker 8: But then you raise an interesting point about your experience
• 26:45
  Speaker 8: in that store. I mean, once you get over the
• 26:46
  Speaker 8: idea that no, I did not steal, that this is
• 26:48
  Speaker 8: the way things are supposed to go. But what it
• 26:50
  Speaker 8: speaks to is the idea of an efficiency that we're
• 26:53
  Speaker 8: all meant to be appreciating as one of the benefits
• 26:56
  Speaker 8: of AI. You don't have somebody working the till. I mean,
• 26:59
  Speaker 8: do you have sense that the efficiencies that are the
• 27:02
  Speaker 8: much flagged sort of benefit are really coming down the
• 27:05
  Speaker 8: pike anytime soon? Because there has to be a lot
• 27:07
  Speaker 8: of investment. There has to be a lot of confidence
• 27:10
  Speaker 8: in the safety of the technology, and there's going to
• 27:12
  Speaker 8: be regulation that says how we're going to be able
• 27:14
  Speaker 8: to use it, So it could be a long time coming.
• 27:17
  Speaker 1: I think it's well.
• 27:17
  Speaker 9: I think it's starting right, and certainly there's the investment,
• 27:20
  Speaker 9: there's no question about that. The real question is ultimately
• 27:22
  Speaker 9: the safety of this and that's the reason why we've
• 27:25
  Speaker 9: been hearing about driverless cars for what a decade, and
• 27:28
  Speaker 9: they're still not particularly good. If you've ever driven in one,
• 27:31
  Speaker 9: they sometimes will scare you a great deal. But that
• 27:33
  Speaker 9: has certainly started. And what most of these things need
• 27:36
  Speaker 9: to work is just mass adoption, even when it's not great,
• 27:39
  Speaker 9: to make it great enough that folks can actually mass
• 27:42
  Speaker 9: adopt it. So it's like the chicken in the egg,
• 27:44
  Speaker 9: and investment is just growing both and eventually one will
• 27:47
  Speaker 9: give way to the other.
• 27:50
  Speaker 1: All right, we're looking at and we talked. We heard
• 27:52
  Speaker 1: Elizabeth Warren from the Senate Banking Committee earlier just grilling
• 27:55
  Speaker 1: some of these bank CEOs. How do you guys think
• 27:58
  Speaker 1: about the banking challenges stress or crisis. I'm not sure
• 28:02
  Speaker 1: how you guys are characterizing it.
• 28:04
  Speaker 9: You know, it seems like we go from crisis to crisis,
• 28:06
  Speaker 9: so we need a different word because crisis is supposed
• 28:08
  Speaker 9: to be one of those special things that happens once
• 28:10
  Speaker 9: in a while, not every other week. I mean, obviously
• 28:12
  Speaker 9: the debt ceiling seems to be their most important one,
• 28:14
  Speaker 9: and we're of the view there will be a solution
• 28:17
  Speaker 9: whether we raise the debt ceiling or we eliminate it.
• 28:19
  Speaker 9: It's just how much damage are we going to do
• 28:21
  Speaker 9: between now and when that happens, And every day we
• 28:24
  Speaker 9: don't fix it, we do some.
• 28:25
  Speaker 1: Amount of damage.
• 28:26
  Speaker 9: The bank's long term those seem like some of the
• 28:29
  Speaker 9: reforms from two thousand and eight mostly work. They are capitalized,
• 28:32
  Speaker 9: they are relatively safe. There are a lot of banks
• 28:34
  Speaker 9: in America, four thousand banks, I mean, versus the much
• 28:38
  Speaker 9: smaller number you see across all of Europe, giving its
• 28:40
  Speaker 9: different political divisions. So I suspect you see some of
• 28:43
  Speaker 9: them not by crisis full together, but just by reality
• 28:47
  Speaker 9: of realizing does every town really need five independent banks
• 28:51
  Speaker 9: when they have one post office?
• 28:52
  Speaker 1: Right right? Alex great stuff really appreciated, Alex mars cio
• 28:56
  Speaker 1: of FM Investments, just giving us lots of kind of
• 29:00
  Speaker 1: on these markets here and we look into the markets.
• 29:02
  Speaker 5: Here.
• 29:02
  Speaker 6: You're listening to the tape cansur live program Bloomberg Markets
• 29:06
  Speaker 6: weekdays at ten am Eastern on Bloomberg Radio, the tune
• 29:09
  Speaker 6: in app, Bloomberg dot Com, and the Bloomberg Business App.
• 29:12
  Speaker 6: You can also listen live on Amazon Alexa from our
• 29:15
  Speaker 6: flagship New York station. Just say Alexa play Bloomberg eleven thirty.
• 29:21
  Speaker 1: I want to have a little bit to talk about
• 29:23
  Speaker 1: a couple of key sectors that are in the news,
• 29:25
  Speaker 1: a couple of players that are always in the news.
• 29:27
  Speaker 1: Let's talk insurance business. Most notably are good friends of
• 29:30
  Speaker 1: Berkshire Hathaway, what's warned buying? What's his selling? Matt Polozola,
• 29:34
  Speaker 1: He's a senior analyst covering the insurance business for Bloomberg Intelligence,
• 29:37
  Speaker 1: and they're also joining Herman Chan he covers the regional
• 29:41
  Speaker 1: banks here at Bloomberg Intelligence. Always in the news. We
• 29:44
  Speaker 1: need to get the latest there, both of them joining
• 29:46
  Speaker 1: us here in a Bloomberg Interactive Brokers studio. Neither of
• 29:49
  Speaker 1: them phoning it in. They're in the office, unlike some
• 29:53
  Speaker 1: of BI management, I note, but in any case, these
• 29:56
  Speaker 1: folks are here. We appreciate it. Matt, let's start with
• 29:59
  Speaker 1: you here. What's Worn buying these days? What's he selling anything?
• 30:04
  Speaker 1: Kind of surprised you with some of the disclosures.
• 30:06
  Speaker 10: So a little bit. So we knew coming into the quarter,
• 30:09
  Speaker 10: it's coming into the thirteen a half yesterday that they
• 30:11
  Speaker 10: were a net seller of about ten billion of stock
• 30:14
  Speaker 10: in the first quarter, but we didn't know all the details.
• 30:16
  Speaker 1: Now being a net seller or netbuyer. Is that ten
• 30:19
  Speaker 1: billion a number that jumps out of you or is
• 30:21
  Speaker 1: this is just normal course of business for Berkshire Hathaway.
• 30:23
  Speaker 10: It's a decent amount, but they've done that much before.
• 30:26
  Speaker 10: They've been Buffett's been kind of in this post COVID era.
• 30:30
  Speaker 10: He's been bearish overall, so it's been a net seller
• 30:33
  Speaker 10: for most of the quarters. The biggest sale was about
• 30:36
  Speaker 10: five point six billion of Chevron. But and why we're
• 30:40
  Speaker 10: here with Herman is they added Capital one stock, so
• 30:43
  Speaker 10: about a billion dollars of Capital one, and they sold
• 30:45
  Speaker 10: off some other regionals.
• 30:47
  Speaker 8: So what's the story there, selling capital or buying Capital
• 30:50
  Speaker 8: one selling some of the regional ones.
• 30:52
  Speaker 10: So they've they've held some of these regionals for a while,
• 30:55
  Speaker 10: and Buffett's been in and out of the banks, but
• 30:57
  Speaker 10: maybe Herman could add a little bit more and why
• 30:58
  Speaker 10: that's important.
• 30:59
  Speaker 11: Yep, Just it seems like it dove stales with what's
• 31:02
  Speaker 11: going on with Buffett's work with Ally, which they bought recently,
• 31:09
  Speaker 11: and Capital One. These are all more consumer oriented, Allies
• 31:12
  Speaker 11: more auto, capital One's more card business. But it just
• 31:17
  Speaker 11: shows I think the relative strength of the consumer. With
• 31:21
  Speaker 11: unemployment still low, savings rate increasing, it seems like the
• 31:24
  Speaker 11: credit quality for these two institutions could held up, could
• 31:28
  Speaker 11: hold up despite potential recessionary headwinds coming. And then with
• 31:33
  Speaker 11: US Bank potentially exiting out of US Bank, that's another
• 31:38
  Speaker 11: one that we covers a large regional having some potential
• 31:43
  Speaker 11: adjusted capital issues because they just bought a bank in California,
• 31:48
  Speaker 11: MUFG Union, so they're a bit under capitalized and are
• 31:51
  Speaker 11: going to be working in a period of rebuilding that
• 31:53
  Speaker 11: capital ratio.
• 31:54
  Speaker 1: I don't know, Herman, I mean for those out there
• 31:56
  Speaker 1: that are still skittish about the regional banks, Boy, when
• 31:59
  Speaker 1: I see Warren Buffett buying in, I'm like, all right,
• 32:02
  Speaker 1: it can't It's got to be okay, right, Yeah, it
• 32:05
  Speaker 1: seems that way.
• 32:07
  Speaker 11: Based on what we've seen from macro industry indicators, the deposits,
• 32:15
  Speaker 11: and the issue with deposits that hasn't really been something
• 32:18
  Speaker 11: that's in the news these days outside of what happened
• 32:22
  Speaker 11: in March with SBB. Deposit for the industry have been
• 32:25
  Speaker 11: really stable over the past several weeks, so the initial
• 32:29
  Speaker 11: fear after the first Republic failure hasn't really resonated across
• 32:33
  Speaker 11: the industry. Despite some of the fears with banks like
• 32:37
  Speaker 11: pack West and Western Alliance, these fears do seem overblown
• 32:41
  Speaker 11: in our view.
• 32:42
  Speaker 8: But we were just watching Elizabeth Warren on TV absolutely
• 32:46
  Speaker 8: grilling the CEO of SVB, really going at them about
• 32:53
  Speaker 8: their you know, all of those issues, the app run
• 32:55
  Speaker 8: all of it. I mean, the risk surely is that
• 32:59
  Speaker 8: the regulator story is not yet over.
• 33:02
  Speaker 11: We actually just finished a webinar with Randy Quarrel's the
• 33:06
  Speaker 11: former vice chairman Vision for the Federal Reserve, and the
• 33:09
  Speaker 11: key takeaway was that the issue is really is about
• 33:13
  Speaker 11: liquidity and nobody could have predicted forty two billion dollars
• 33:17
  Speaker 11: of deposits leaving a single institution in one day and
• 33:21
  Speaker 11: one hundred forty two billion dollars over the course of
• 33:25
  Speaker 11: a two day span that would have felt any sort
• 33:28
  Speaker 11: of bank within the regional bank space. So really the
• 33:32
  Speaker 11: regulators need to rethink the stability of deposits, particularly uninsured deposits,
• 33:38
  Speaker 11: and that's something that needs to be more scrutinized going forward.
• 33:42
  Speaker 1: So you know, I'm thinking here, matt I Warren Buffett.
• 33:47
  Speaker 1: He bought some occidental shares, but he says Birks's not
• 33:51
  Speaker 1: interested buying the whole company. Did we take him at
• 33:54
  Speaker 1: his word here or is.
• 33:55
  Speaker 10: He just so? I think so. Paul kind of broke
• 33:57
  Speaker 10: my heart a little because I thought he was gonna
• 33:58
  Speaker 10: do it. I was sitting there and he threw cold
• 34:00
  Speaker 10: water on it. I think he's not He will just
• 34:05
  Speaker 10: say I'm not going to talk about it. He won't
• 34:07
  Speaker 10: kind of outright lie. So at the meeting he had
• 34:09
  Speaker 10: said we're just not interested in buying the whole company.
• 34:12
  Speaker 10: So I don't think he would say that and then
• 34:13
  Speaker 10: not mean it. I think he would probably have said,
• 34:16
  Speaker 10: you know, maybe there's more to see or something like that.
• 34:18
  Speaker 10: So I don't think he's in.
• 34:20
  Speaker 1: Half a trillion of cash on the balance sheet. He's
• 34:24
  Speaker 1: got some debt, but let's call it four hundred million
• 34:26
  Speaker 1: net cash. Realistically, what does he do with this thing?
• 34:30
  Speaker 10: So I think that's I think it's a little too
• 34:32
  Speaker 10: much cash. I think they have about one hundred and
• 34:34
  Speaker 10: thirty billion.
• 34:35
  Speaker 1: I think I'm talking fa So I'm just going cash
• 34:37
  Speaker 1: in the quiva.
• 34:37
  Speaker 10: I'm not sure what we got out, okay, but let's
• 34:39
  Speaker 10: just say it's a hundred say a hundred thirty billion, okay,
• 34:42
  Speaker 10: Still a lot they keep. They keep a reserve for
• 34:45
  Speaker 10: large insurance losses, which would still leave them over one
• 34:48
  Speaker 10: hundred billion dollars of cash. You know, it's tough occidental
• 34:53
  Speaker 10: falls off. I don't know what else they do. They
• 34:55
  Speaker 10: bought Alleghany for twelve billion dollars, closed last year, and
• 34:58
  Speaker 10: it barely moves the needle for him the companies. So yeah,
• 35:01
  Speaker 10: they have the curse of too much cash that they
• 35:04
  Speaker 10: can't even move the needle, and sorry, they are going
• 35:07
  Speaker 10: to keep building it up. It was Buffett. Basically, it said,
• 35:10
  Speaker 10: we want to build up cash even more at.
• 35:12
  Speaker 8: The meeting, the curse of too much cash.
• 35:14
  Speaker 10: I don't have that curse.
• 35:15
  Speaker 8: Yeah, so I should have such problems.
• 35:17
  Speaker 1: Oh I see, yep.
• 35:19
  Speaker 8: But I mean, what if you're gonna put all your
• 35:21
  Speaker 8: money in cash and sort of what's the point.
• 35:23
  Speaker 10: Well, you know, the interesting thing was the yield on
• 35:26
  Speaker 10: the cash went up so much that they were generating
• 35:28
  Speaker 10: fifty million dollars before the dries and interest rates. Now
• 35:32
  Speaker 10: they're generating five billion dollars a year on that cash
• 35:36
  Speaker 10: pre tax. But I mean that meaningfully adds to their earning.
• 35:39
  Speaker 10: So I actually think they come out of you know,
• 35:41
  Speaker 10: the first quarter actually more comfortable holding cash.
• 35:45
  Speaker 1: All right, let me just know for Tom from the
• 35:47
  Speaker 1: sixth floor, FA is correct. It was cash of one
• 35:50
  Speaker 1: hundred and twenty nine million, short term investments three hundred
• 35:54
  Speaker 1: and sixty one backs, So you put it all together.
• 35:56
  Speaker 1: That's it. So once again global data comes through for Bloomberg.
• 36:00
  Speaker 1: That data is correct. That's important, Herman. I don't know.
• 36:06
  Speaker 1: Have we had that portfolio manager that you and I
• 36:09
  Speaker 1: have talked about in the past that's just stepped up
• 36:11
  Speaker 1: and said, I'm buying these regional banks.
• 36:14
  Speaker 11: It seems like there have been some news reports recently
• 36:16
  Speaker 11: about folks coming in. Michael Burry was one of them.
• 36:19
  Speaker 11: So folks are nibbling and you've seen Green lay Capital
• 36:23
  Speaker 11: buy some of the banks like New Your Community and
• 36:26
  Speaker 11: for Citizens, the banks that won the bidding process for
• 36:30
  Speaker 11: the failed banks and SBB and signature so there is
• 36:34
  Speaker 11: some optimism there if I had the margins. So that's
• 36:39
  Speaker 11: really something that we really like to see.
• 36:41
  Speaker 8: Can I bring it over to the debt ceiling talks? Sure,
• 36:44
  Speaker 8: because nibbling ahead of a resolution seems a little punchy.
• 36:50
  Speaker 1: Yeah.
• 36:51
  Speaker 11: I mean, you look at the regional banks, and they're
• 36:54
  Speaker 11: trading at less than tangible book value on an adjusted basis.
• 36:58
  Speaker 11: So all of the bank news, I feel like, is
• 37:01
  Speaker 11: already priced in in terms of weaker earnings, lower loan growth,
• 37:05
  Speaker 11: unstable deposits, higher capital ratios, FDIC assessments rising, So everything
• 37:11
  Speaker 11: seems to be baked in at this point, and it's
• 37:14
  Speaker 11: it's we're near trough levels historically for regional big valuations.
• 37:19
  Speaker 1: I'll put up that. All right. We got Pazzola here,
• 37:21
  Speaker 1: so we got to talk natural disasters. He's our natural
• 37:24
  Speaker 1: disaster guy, not a walking natural disaster. He just covers
• 37:27
  Speaker 1: the insurance companies. So, Matt, we're either in or very
• 37:31
  Speaker 1: close to hurricane season. What are your companies telling you?
• 37:34
  Speaker 1: Are they bracing for a tough year.
• 37:36
  Speaker 10: We're always bracing for a tough year. I think I
• 37:38
  Speaker 10: think the early forecaster are slightly above average season, but
• 37:41
  Speaker 10: I don't know how how worthwhile those forecasts are capital
• 37:45
  Speaker 10: position good reinsurance, your favorite sub sector, insurance for insurance
• 37:50
  Speaker 10: companies is kind of near all time high prices. So
• 37:55
  Speaker 10: it's gonna be a tough market in Florida. If we
• 37:57
  Speaker 10: have a lot of activity in Florida, it's gonna be
• 37:59
  Speaker 10: real interesting from a pricing perspective. So I think that's
• 38:03
  Speaker 10: probably a thing to keep an eye on going into
• 38:04
  Speaker 10: Hurricane So, I.
• 38:05
  Speaker 1: Mean, all these people moving down to Florida, don't they
• 38:07
  Speaker 1: know they can't get insured? Or can they get insured?
• 38:09
  Speaker 10: They can, It's going to be very expensive. It's pricey
• 38:14
  Speaker 10: to get insurance there. The state is ensuring a lot
• 38:18
  Speaker 10: of these people now, so it's falling on the taxpayer,
• 38:20
  Speaker 10: so they're actually paying for it themselves.
• 38:22
  Speaker 1: I mean, I don't know, go ahead, I can't take it.
• 38:26
  Speaker 8: I've got more disaster questions.
• 38:27
  Speaker 1: Actually, no, we got forty seconds.
• 38:29
  Speaker 8: Not so much a disaster, but a drought. I mean,
• 38:31
  Speaker 8: we're seeing a lot of impact on food prices from
• 38:34
  Speaker 8: tough growing conditions. Is that something that you're seeing reflected
• 38:38
  Speaker 8: and reinsurance valuations.
• 38:40
  Speaker 10: Not sincessarily in valuations. I think crop insurances is backstop
• 38:44
  Speaker 10: by the federal government so there's a little volatility in
• 38:46
  Speaker 10: those results for companies, but that probably would be the
• 38:49
  Speaker 10: way we see it. And sorry, wildfires in California, so yep,
• 38:52
  Speaker 10: keep an eye on.
• 38:53
  Speaker 1: There's wild fires in Canada now is blowing smoke to
• 38:55
  Speaker 1: the east coast. That kind of got my attention last
• 38:58
  Speaker 1: weekend they were saying that. So interesting to all right,
• 39:00
  Speaker 1: Matt Paalazola, our disasters guy senior analy's covering all the
• 39:03
  Speaker 1: insurance stuff in Herman chan I tell you his sector
• 39:06
  Speaker 1: has been a disaster recently, but he covers the regional banks.
• 39:08
  Speaker 1: Hopefully the worst has passed for the regional banks. We
• 39:11
  Speaker 1: appreciate those gentlemen coming in.
• 39:13
  Speaker 6: You're listening to the tape Cats are live program Bloomberg
• 39:16
  Speaker 6: Markets weekdays at ten am Eastern on Bloomberg Radio, the
• 39:20
  Speaker 6: tune in app, Bloomberg dot Com, and the Bloomberg Business App.
• 39:23
  Speaker 6: You can also listen live on Amazon Alexa from our
• 39:26
  Speaker 6: flagship New York station. Just say Alexa play Bloomberg eleven thirty.
• 39:32
  Speaker 1: All right, here we go. The Federal Trade Commission suit
• 39:34
  Speaker 1: to block am Jen's twenty seven point eight billion dollars
• 39:37
  Speaker 1: deal to buy Horizon Therapeutics. Tuesday arguing that the tie
• 39:40
  Speaker 1: up would stifle competition for the developments of treatments for
• 39:44
  Speaker 1: serious illnesses. Horizon Therapeutic stock is down about fifteen percent
• 39:49
  Speaker 1: on the news. Amgens down just slightly. Let's break down
• 39:53
  Speaker 1: what's going on here, both from the you know, the
• 39:55
  Speaker 1: stock perspective and from the antitrust perspective. And guess what,
• 39:58
  Speaker 1: We've got people that do that here at Intelligence. Jenry,
• 40:01
  Speaker 1: senior litigation analyst for Bloomberg Intelligence, joined us on. Mark
• 40:04
  Speaker 1: englischert He's a senior equity research analyst with Bloomberg Intelligence
• 40:08
  Speaker 1: covering that space there. So Jen, let's start with you here.
• 40:12
  Speaker 1: I mean, this was a nice deal. Everybody was making money.
• 40:15
  Speaker 1: Bankers are getting paid, lawyers are getting paid. But the
• 40:18
  Speaker 1: FTC said, no, what's going on?
• 40:20
  Speaker 3: You know?
• 40:21
  Speaker 12: I think Mark and I have been talking about this
• 40:23
  Speaker 12: and I kept saying to him, one of these days,
• 40:25
  Speaker 12: the FTC is going to come after one of these
• 40:27
  Speaker 12: farm deals with a new and novel theory and nobody's
• 40:29
  Speaker 12: going to be expecting it. And I thought it would
• 40:31
  Speaker 12: be Pfeiser Siegen, but they were ahead of me. And
• 40:33
  Speaker 12: here it is with Amgen Horizon. They have been signaling
• 40:36
  Speaker 12: now actually for years that they don't like the way
• 40:39
  Speaker 12: for the consolidation in the pharm industry generally, and the
• 40:43
  Speaker 12: way the FTC has traditionally assessed these deals, and that
• 40:46
  Speaker 12: it needs to think more holistically and in a broader
• 40:49
  Speaker 12: fashion about that total competitive impact these deals could have.
• 40:52
  Speaker 12: And it looks like that's what they've done here. You know,
• 40:54
  Speaker 12: they don't like apparently the way Amgen has bundled some
• 40:58
  Speaker 12: of its products off in huge rebates to the pharmacy
• 41:01
  Speaker 12: benefit managers to list those products which are perhaps more
• 41:04
  Speaker 12: expensive than rivals. And they think that it will do
• 41:07
  Speaker 12: that with two of Horizon's drugs. That is a very
• 41:09
  Speaker 12: new and novel theory we've never seen before in a
• 41:11
  Speaker 12: pharma deal.
• 41:13
  Speaker 8: What do you make of that argument, though? Do you
• 41:15
  Speaker 8: think it makes some sense? Can you sort of see
• 41:17
  Speaker 8: the rationale?
• 41:18
  Speaker 12: You know, I think that it's going to be a
• 41:19
  Speaker 12: difficult argument to win in court. Let me put it
• 41:22
  Speaker 12: that way. Sure it makes rationale if they have we
• 41:25
  Speaker 12: don't know yet what evidence they have from Amgen, right,
• 41:28
  Speaker 12: we haven't seen the complaint. It's still sealed, so we've
• 41:30
  Speaker 12: only seen the press release. What I'd like to see
• 41:33
  Speaker 12: is whether they have some evidence some documents that they
• 41:36
  Speaker 12: got through the investigation for Amgen saying this is our strategy.
• 41:39
  Speaker 12: You know, we think we can do this and we
• 41:41
  Speaker 12: can push out these other rivals by bundling these Horizon
• 41:44
  Speaker 12: products with our own blockbuster products.
• 41:47
  Speaker 1: It does.
• 41:48
  Speaker 12: But on the other hand, when you take this sort
• 41:50
  Speaker 12: of about face, this kind of right turn in the
• 41:52
  Speaker 12: traditional way in which you assess a deal, you really
• 41:55
  Speaker 12: have a harder time in court because the judges aren't
• 41:57
  Speaker 12: in the same place that the FTC is, thinking we
• 42:00
  Speaker 12: need a newer, more holistic approach, and Amgen may be
• 42:04
  Speaker 12: willing to enter into a behavioral remedy saying we won't
• 42:07
  Speaker 12: bundle these drugs and we'll keep them separate.
• 42:09
  Speaker 1: Hey, Mark, how big of an issue is this for Amgen?
• 42:12
  Speaker 1: If they were not to get this deal? How much
• 42:14
  Speaker 1: did they do they need Horizon? What do you think
• 42:16
  Speaker 1: their fallback position is if they don't get Horizon on
• 42:20
  Speaker 1: this deal.
• 42:22
  Speaker 13: Yeah, I mean, in the old FTC world, my snap
• 42:26
  Speaker 13: answer would be they would just go look for another deal,
• 42:29
  Speaker 13: right because they do. They do need some more revenue
• 42:33
  Speaker 13: and they need it quickly. You know, as Jen just
• 42:37
  Speaker 13: laid out. However, we could be entering into a new
• 42:41
  Speaker 13: sort of reality perhaps for the biopharma you know, deal
• 42:46
  Speaker 13: making space. But I think, you know, bigger picture, Amgen
• 42:49
  Speaker 13: is this by every metric, largest most successful US biotech company.
• 42:55
  Speaker 13: But they do have a growth problem. You know, there's
• 42:58
  Speaker 13: some attribute attributes that's sort of they share with some
• 43:01
  Speaker 13: of their large pharma brethren in that regard. They're trying
• 43:04
  Speaker 13: to grow off a massive base of you know, call
• 43:08
  Speaker 13: it twenty five billion dollars of revenue they have. They're
• 43:13
  Speaker 13: looking at some patent expertise out through the end of
• 43:17
  Speaker 13: the decade. My colleague Michael Shaw and I did an
• 43:21
  Speaker 13: analysis looking at biotech and pharma, and for US biotech,
• 43:24
  Speaker 13: Amgen is clearly the most exposed there potential for seven
• 43:29
  Speaker 13: and a half billion of erosion for some key drugs
• 43:32
  Speaker 13: like prolia o, tesla Emberl, et cetera. The other thing
• 43:37
  Speaker 13: I would just say is that Amgen about a year
• 43:40
  Speaker 13: a little over a year ago, laid out some fairly
• 43:44
  Speaker 13: ambitious top line revenue growth goals. They weren't guidanced, but
• 43:50
  Speaker 13: you know, they talked about mid single digit keeger for
• 43:54
  Speaker 13: the revenue, you know, for the twenty twenty two to
• 43:57
  Speaker 13: twenty thirty time period, and that's a So that's a
• 44:00
  Speaker 13: fairly ambitious sort of stake that they put in the ground.
• 44:05
  Speaker 13: Seeing how you know, they managed two percent annual growth
• 44:09
  Speaker 13: in twenty twenty one, a little over one percent in
• 44:13
  Speaker 13: twenty twenty two, and if you look at their twenty
• 44:16
  Speaker 13: twenty three guidance, which excludes Horizon, it's implying only about
• 44:21
  Speaker 13: a percent and a half of growth. So they have
• 44:24
  Speaker 13: some work to do.
• 44:28
  Speaker 1: So, Jenny, if you were advising the players in this deal,
• 44:32
  Speaker 1: would you tell them to fight the FTC here?
• 44:35
  Speaker 6: You know, I.
• 44:36
  Speaker 12: Probably would because this is new. This is a new
• 44:38
  Speaker 12: approach by the FTC, and to some extent, the FTC
• 44:42
  Speaker 12: is hoping when it takes some of these novel approaches
• 44:45
  Speaker 12: to file a suit that they're just going to outlast
• 44:47
  Speaker 12: the parties and they're going to force an abandonment because
• 44:49
  Speaker 12: they also know they have a challenge in court. But
• 44:51
  Speaker 12: they have actually been very successful in the last two
• 44:54
  Speaker 12: years in pushing abandonments after they've sued. So if I
• 44:58
  Speaker 12: were the companies, I would probably fight it. But then again,
• 45:00
  Speaker 12: they have other deal considerations about which I might not
• 45:03
  Speaker 12: be aware, in which they just don't have that kind
• 45:06
  Speaker 12: of time because it can take a year.
• 45:09
  Speaker 8: One question I'm wondering about is, you know, you mentioned
• 45:11
  Speaker 8: the Pfizer deal earlier, and then there's also Mark Prometheus Biosciences.
• 45:15
  Speaker 8: What does this FTC action tell you about those deals?
• 45:20
  Speaker 12: Well, it suggests they're going to get scrutinized very carefully,
• 45:23
  Speaker 12: and if there is any hint of any kind of
• 45:27
  Speaker 12: competition problem, whether it be an overlap in marketed drugs,
• 45:30
  Speaker 12: or an overlap in their pipelines, or a pipeline overlapping
• 45:33
  Speaker 12: with a marketed drug, or even something like this where
• 45:36
  Speaker 12: they haven't liked past conduct and they think it'll extend
• 45:39
  Speaker 12: to the target company, that they should expect a challenge
• 45:41
  Speaker 12: because this FTC is just simply not settling cases right now.
• 45:45
  Speaker 1: Hey, Mark, as we think about your space, big pharma biotech,
• 45:50
  Speaker 1: you know, I've always joked that my next life I
• 45:52
  Speaker 1: want to come back as an M and a banker
• 45:53
  Speaker 1: in healthcare because there's this deal after deal after deal
• 45:57
  Speaker 1: and mega deals, big size, and it never seems to end.
• 46:01
  Speaker 1: Do you think when you're talking to your companies that
• 46:02
  Speaker 1: maybe they're concerned here that as general suggesting maybe there's
• 46:06
  Speaker 1: kind of a new regulatory outlook for this space.
• 46:10
  Speaker 13: I think that's definitely something that I'm assuming is being
• 46:15
  Speaker 13: discussed today. I mean, this is clearly just you know,
• 46:19
  Speaker 13: this is the first tangible evidence of kind of this
• 46:24
  Speaker 13: tougher if you want to use that for a that
• 46:28
  Speaker 13: term FTC. We've heard a lot of rhetoric from FTC,
• 46:33
  Speaker 13: but I think that has largely on the part of
• 46:36
  Speaker 13: you know, I would say both large biopharma companies and
• 46:41
  Speaker 13: investors has been you know, sort of rationalized away as
• 46:47
  Speaker 13: being merely rhetoric, but that you know, this is the
• 46:50
  Speaker 13: first time that we've seen tangible evidence that FTC is
• 46:54
  Speaker 13: willing to kind of go beyond that and take action,
• 47:00
  Speaker 13: you know, So I think, you know, until this is resolved,
• 47:06
  Speaker 13: I think there is likely to be a bit of
• 47:08
  Speaker 13: a chilling effect on deal making across the sector, no question.
• 47:14
  Speaker 8: Just to follow up on that, how much of this
• 47:16
  Speaker 8: new approach do you think is a fallout from the
• 47:19
  Speaker 8: pandemic or is it just that there's a new sheriff
• 47:22
  Speaker 8: in town looking to make their mark.
• 47:25
  Speaker 12: I guess I can answer that one. You know, I
• 47:28
  Speaker 12: think it's not really about the pandemic. I think it's
• 47:30
  Speaker 12: a new sheriff in town with a new perspective and
• 47:32
  Speaker 12: a new view who believes that FTC and DJ have
• 47:36
  Speaker 12: been two lacks generally across many industries for many years
• 47:39
  Speaker 12: in allowing consolidation, and their role now is to try
• 47:42
  Speaker 12: to stem that tide, particularly in sensitive industries like pharmaceuticals, agriculture, airlines,
• 47:49
  Speaker 12: consumer facing, where people complaining about prices and quality and innovation.
• 47:55
  Speaker 1: Hey, Mark, just real quick, thirty seconds. Where's the real
• 47:58
  Speaker 1: weakness in Amgen here in terms of its offerings.
• 48:03
  Speaker 13: It's hard to point to one specific flaw. I mean,
• 48:07
  Speaker 13: they are rolling out some new products. They have a
• 48:09
  Speaker 13: very interesting one for a mutationally sort of directed set
• 48:14
  Speaker 13: of lung cancer. They have an asthma product. They haven't
• 48:17
  Speaker 13: exactly been rocketing to blockbuster status, and they just have
• 48:21
  Speaker 13: some you know, they have a core, a very solid
• 48:23
  Speaker 13: but core products that are suffering from some net price
• 48:28
  Speaker 13: erosion and have have patent you know, ticking patent clocks.
• 48:33
  Speaker 1: Yeah, it's yeah, that's the issue that we've heard that
• 48:37
  Speaker 1: before from some of these bigger companies, bigger farmer companies,
• 48:40
  Speaker 1: and that's why they need to grow the via acquisition
• 48:42
  Speaker 1: of some of these biotechs. So that's kind of been
• 48:44
  Speaker 1: a playbook. We'll see if that changes from a reguatory perspective.
• 48:47
  Speaker 1: Jennifer Reeve, senior litigation analyst, and you know, we appreciate
• 48:51
  Speaker 1: getting that background there. And Mark Engelsjerd senior equity research analysts,
• 48:55
  Speaker 1: both of them with Bloomberg Intelligence, appreciate getting the roundtable
• 48:58
  Speaker 1: opportunity there with you two lists as we break down
• 49:01
  Speaker 1: kind of Amgen's deal here with Horizon at risk to
• 49:04
  Speaker 1: say the least.
• 49:06
  Speaker 2: Thanks for listening to the Bloomberg Markets podcasts. You can
• 49:09
  Speaker 2: subscribe and listen to interviews at Apple Podcasts or whatever
• 49:13
  Speaker 2: podcast platform you prefer. I'm Matt Miller. I'm on Twitter
• 49:17
  Speaker 2: at Matt Miller nineteen seventy three.
• 49:19
  Speaker 1: And I'm Paul Sweeney. I'm on Twitter at pt Sweeney.
• 49:22
  Speaker 1: Before the podcast, you can always catch us worldwide at
• 49:24
  Speaker 1: Bloomberg Radio