Latest / Bloomberg Intelligence / Emerging Markets Beat U.S. Junk in Upside Down World, Gaffney Says

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Emerging Markets Beat U.S. Junk in Upside Down World, Gaffney Says · Bloomberg Intelligence

• 0:05
  Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm pim Fox.
• 0:08
  Speaker 1: Along with my co host Lisa Bramowitz. Each day we
• 0:11
  Speaker 1: bring you the most important, noteworthy, and useful interviews for
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  Speaker 1: you and your money, whether you're at the grocery store
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  Speaker 1: or the trading floor. Find the Bloomberg p m L
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  Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Well,
• 0:32
  Speaker 1: the world is turning on its head. That according to
• 0:35
  Speaker 1: Gathleen Kathleen Gaffney, co director of Diversified Fixed Income and
• 0:40
  Speaker 1: Eating Vans, who joins us here in our eleven three
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  Speaker 1: Oh studios. Kathleen, thank you so much for joining us.
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  Speaker 1: So I want to start with this idea that the
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  Speaker 1: developing markets are emerging much more quickly and faster than
• 0:54
  Speaker 1: growing faster than than developed world, which are kind of sinking.
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  Speaker 1: Does this mean that you like emerging markets highled debt
• 1:01
  Speaker 1: over US junk bonds. I do selectively. We're finding good
• 1:05
  Speaker 1: opportunities to invest in emerging market companies, and a handful
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  Speaker 1: of them are below investment grade, but rising stars likely
• 1:17
  Speaker 1: to make their way onto the global stage and become
• 1:20
  Speaker 1: investment grade down the road. Can you just give us
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  Speaker 1: some examples? So, that we understand exactly the kinds of
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  Speaker 1: companies you're talking about. Well, our focus has been primarily
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  Speaker 1: in Latin America. America Mobile, I know, is one of
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  Speaker 1: the holdings in your fund. It is so Mexican telecom,
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  Speaker 1: but high, higher quality. I'm talking about some of the
• 1:43
  Speaker 1: Brazilian companies and Susano is a good example. UH, paper
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  Speaker 1: and pulp company. UH, low cost producer number one. Uh.
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  Speaker 1: They came to market earlier this year very attractive spreads.
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  Speaker 1: That was right after the new administration and there was
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  Speaker 1: a lot of fear about protectionism. We saw a fair
• 2:08
  Speaker 1: amount of new issuance that had to come with a premium.
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  Speaker 1: And what's interesting in talking to management, what we saw
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  Speaker 1: was discipline and a drive to maintain that low cost status,
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  Speaker 1: but without levering up. So I'm wondering, you know a
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  Speaker 1: lot of people have been pouring money into emerging markets
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  Speaker 1: debt as well as currencies, and this could be what's
• 2:32
  Speaker 1: been happening with the dollar earlier this year, with the
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  Speaker 1: dollar weakening and emerging markets currencies really strengthening. Recently, it's
• 2:39
  Speaker 1: been the reverse. You've seen some dollar strength and UH
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  Speaker 1: do you think that that will continue? That the dollar
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  Speaker 1: will continue to strengthen as benchmark yields rise. And what's
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  Speaker 1: the potential consequence for emerging markets in the near term.
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  Speaker 1: I think you are going to see some dollar strength.
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  Speaker 1: The global economy is doing well, but the focus is
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  Speaker 1: on the US and the unwind of the balance sheet.
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  Speaker 1: So we've seen yields start to move up in the
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  Speaker 1: US is leading that is going to draw money into
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  Speaker 1: the US and push the dollar higher in the short term.
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  Speaker 1: That won't be so much of a problem for emerging
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  Speaker 1: markets if they have a fair amount of reserves. They
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  Speaker 1: got into a lot of trouble back in two thousand
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  Speaker 1: thirteen when they didn't have the dollar reserves. As the
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  Speaker 1: dollar strengthened, that's changed a lot. Yeah, there have been
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  Speaker 1: a pretty big build up in reserves. I have to wonder, though,
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  Speaker 1: you're talking about how yields should continue to rise or
• 3:38
  Speaker 1: are have been rising in the US and UH. Earlier
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  Speaker 1: this week, Jeffrey Gunlock of Double Line said that the
• 3:45
  Speaker 1: treasury market was facing its moment of truth as yields
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  Speaker 1: on the tenure treasury surpassed two point four percent. Do
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  Speaker 1: you agree? And how high could this yield go? I
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  Speaker 1: do agree? UH? And how high it os UH probably
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  Speaker 1: not too high in the near term, but the important
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  Speaker 1: part for the markets is that it started and we're
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  Speaker 1: seeing the impact of that today. UH. We're seeing it
• 4:15
  Speaker 1: with some equities on the retail side. Mattel cut their dividend. UH.
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  Speaker 1: One of the trends during the period after the global
• 4:24
  Speaker 1: financial crisis is companies haven't invested. What they've done is
• 4:28
  Speaker 1: they is they have borrowed and they've been buying back
• 4:31
  Speaker 1: their stocks. A dividend cut and we're seeing lots of
• 4:36
  Speaker 1: interesting things. Is earning cycle UH could indicate that they're
• 4:40
  Speaker 1: concerned about where their cash is and the amount of
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  Speaker 1: debt relative UH two revenues or their interest expense. I
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  Speaker 1: should say, Um, that's a warning sign. That's a signal.
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  Speaker 1: Do you think that there's a warning sign when it
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  Speaker 1: comes to high yield debt in general? Well, credit spreads
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  Speaker 1: are very tight. Um. You could argue that on a
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  Speaker 1: relative basis they could get tighter, but it's that absolute
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  Speaker 1: level of risk. At four percent, you're not getting compensated
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  Speaker 1: for a highly levered company. So if you are invested
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  Speaker 1: in that particular kind of company and situation, what would
• 5:15
  Speaker 1: you suggest to people, I really think you have to
• 5:18
  Speaker 1: define credit risk high yield more broadly. That's why we
• 5:25
  Speaker 1: found value in emerging markets because you're able to pick
• 5:28
  Speaker 1: up some additional yield to compensate you for the credit
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  Speaker 1: risk UH. You can also look at the bank loan market,
• 5:36
  Speaker 1: convertible market. There are other ways to get that credit
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  Speaker 1: exposure other than just US high yield and European high yield.
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  Speaker 1: The yields are even worse than in the US, so
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  Speaker 1: it's a struggle. Our Our high yield exposure UH is
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  Speaker 1: fairly modest right now, Kathleen, do you think that there
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  Speaker 1: are certain industries within the high US hi yield universe
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  Speaker 1: that are on the precipice of a pretty big fall.
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  Speaker 1: We're seeing pressure today, that's for sure, But we which
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  Speaker 1: which do you think is real? Which do you think
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  Speaker 1: has legs. I do think that the pressure on the
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  Speaker 1: retail sector is real and it's going to continue because
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  Speaker 1: there's already been a lot of pain there. There has
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  Speaker 1: been a lot of pain. What's interesting is we're seeing
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  Speaker 1: how companies are reacting. So at the higher quality end
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  Speaker 1: you see CVS and Etna. But all of it is
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  Speaker 1: a result of the world is changing. We've got a
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  Speaker 1: new economy tech is really driving it and it's uh,
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  Speaker 1: it's going to make for some necessary decisions across industries.
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  Speaker 1: Thank you for coming in and spending time with us.
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  Speaker 1: Kathleen Gaffney is the co director of Diversified Fixed Income
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  Speaker 1: for Eaton Vents and helps to manage over three hundred
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  Speaker 1: billion dollars of assets. Based in Boston, of course, home
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  Speaker 1: to Bloomberg one oh six one Boston, Newburyport and Metro
• 6:55
  Speaker 1: West and the South Shore. Well, it is a huge
• 7:09
  Speaker 1: day in tech shares today. The Nasdaq one hundred indexes
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  Speaker 1: up two and a half percent, but Alphabet and Amazon
• 7:17
  Speaker 1: are experiencing much bigger share price pops after beating analyst
• 7:22
  Speaker 1: estimates when they were ported earnings after the bell yesterday.
• 7:25
  Speaker 1: Shara o Vda, Bloomberg Gadfly columnist joins us here now
• 7:29
  Speaker 1: and Shia. We were joking this morning that the expectation
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  Speaker 1: on the street was for three cents per share for Amazon,
• 7:36
  Speaker 1: and they beat that. Yeah, I mean, how good is this? Yeah?
• 7:40
  Speaker 1: Profit doesn't matter at Amazon. Basically, it defies all the
• 7:44
  Speaker 1: logic of typical investing. Um, my favorite statistic is looking
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  Speaker 1: at Amazon's operating profit, which they seem to try to
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  Speaker 1: make as as low as possible. So the profit margin
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  Speaker 1: in this quarter was zero row point seven nine, which
• 8:02
  Speaker 1: is as almost as close to zero as possible. Um,
• 8:06
  Speaker 1: what's the cash flow? Like, the cash flow is better,
• 8:10
  Speaker 1: but it's actually um that's actually shrinking too. I mean
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  Speaker 1: Amazon has been in this period of intense spending. There's
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  Speaker 1: still like cash loves more than seven and a half
• 8:22
  Speaker 1: billion last year, that is correct, although those yes, okay,
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  Speaker 1: And I'm assuming that many people see brown boxes show
• 8:31
  Speaker 1: up at their homes every day. Many people see brown
• 8:33
  Speaker 1: boxes show I mean they look and they might actually
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  Speaker 1: include medication, prescription medication in the future, plus your order
• 8:39
  Speaker 1: from Whole Food. It is possible that Amazon, I mean
• 8:43
  Speaker 1: Amazon already delivers groceries um through Amazon Fresh, but it's
• 8:48
  Speaker 1: likely they're getting more seriously into that business now that
• 8:51
  Speaker 1: they bought Okay, So to just step back for a second.
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  Speaker 1: It's all about a story, right, I mean, when you've
• 8:57
  Speaker 1: invest in a company, particularly stock, it's about the story
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  Speaker 1: that you can tell investors to get them excited about
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  Speaker 1: the future. And that may be why the stock is
• 9:07
  Speaker 1: up twelve percent today. Amazon is, i would argue, the
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  Speaker 1: most ambitious company, certainly in the technology industry right now.
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  Speaker 1: You can make an argument that they're the most ambitious
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  Speaker 1: company in the world right now. And the fact is
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  Speaker 1: they are dominating two huge categories of spending, both retail
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  Speaker 1: electronic commerce, where they're basically all the growth in in
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  Speaker 1: retail spending right now, and also cloud computing, where they've
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  Speaker 1: turned this Amazon web business company from zero to eighteen
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  Speaker 1: billion and annual revenue and it's really a disruptive force.
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  Speaker 1: And and groceries, you know, it's eight hundred billion a
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  Speaker 1: year and spending in the US alone. Well, let's talk
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  Speaker 1: about groceries, because they purchased whole foods, and whole foods
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  Speaker 1: sort of is in the industry that typically has low margins,
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  Speaker 1: which is grocery stores, and yet it has higher margin.
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  Speaker 1: And then most of Amazon's businesses, including their core business,
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  Speaker 1: and meanwhile their margins went down for whole foods as
• 10:08
  Speaker 1: Amazon cut prices. At what point does this matter that
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  Speaker 1: they've gained market share by cutting prices to the point
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  Speaker 1: where their margins are razor thin. Is that enough of
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  Speaker 1: a strategy to get them, uh to fit their capital
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  Speaker 1: structure later on? Yeah, I mean, I think two Pim's point,
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  Speaker 1: it's not really about where the margins are today. It's
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  Speaker 1: whether Amazon can leverage its acquisition of Whole Foods to
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  Speaker 1: grab a bigger slice of one of the largest spending
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  Speaker 1: categories in the world, which is food shopping. And look,
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  Speaker 1: if Amazon can become a major player in um in groceries,
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  Speaker 1: that again, it opens another multi billion dollar annual revenue
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  Speaker 1: opportunity for this company. It's a big question whether they
• 10:53
  Speaker 1: can succeed. They haven't been very successful in groceries for
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  Speaker 1: ten years, but they now have kind of this pretty small,
• 11:00
  Speaker 1: aren't asset to help them get there. I just keep
• 11:03
  Speaker 1: thinking of one word, borders. Remember borders books. Amazon has
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  Speaker 1: a way of competing that really has changed the landscape
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  Speaker 1: for a variety of industries. That's not news. I think
• 11:15
  Speaker 1: the big question now that people have is should they
• 11:17
  Speaker 1: add to their holdings? In other words, you described it.
• 11:21
  Speaker 1: The numbers don't really add up in the way that
• 11:25
  Speaker 1: many investors are taught. Yet the stock keeps moving higher.
• 11:30
  Speaker 1: So is it is it a trap? Or is this
• 11:33
  Speaker 1: as long as Jeff Bezos is in charge. I mean,
• 11:36
  Speaker 1: they're buying aircraft, they're they're launching rockets. I mean, this
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  Speaker 1: is an amazing As you said, this could be the
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  Speaker 1: most ambitious company around. Yeah. I mean, look, this company
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  Speaker 1: has a track record of investing in things that seem
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  Speaker 1: insane for a long time and then making them into successes.
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  Speaker 1: So that's why you're seeing the stock price shoot up,
• 11:57
  Speaker 1: um even though they turned in you know, kind of
• 12:00
  Speaker 1: any profits. I want to bring in David Garritty he
• 12:02
  Speaker 1: chief executive officer of g v A Research, which is
• 12:05
  Speaker 1: based in Brooklyn, and David, I want to get your
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  Speaker 1: take about whether you would recommend that people buy at
• 12:11
  Speaker 1: this point given the fact that valuations are already pretty high. Uh,
• 12:16
  Speaker 1: and it's sort of unclear where they go from here.
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  Speaker 1: I think the thing coming off of the results yesterday
• 12:21
  Speaker 1: for Amazon probably were most impressed investors on the margin
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  Speaker 1: is the fact that the integration of Whole Foods was
• 12:28
  Speaker 1: actually profitable in the quarter. Company actually made twenty one
• 12:31
  Speaker 1: million dollars on the revenues that Whole Foods contributed, to
• 12:35
  Speaker 1: the extent that Amazon, by extrapolation, can do an effective
• 12:40
  Speaker 1: job integrating acquisitions onto its platform. We look at the
• 12:45
  Speaker 1: valuation on Amazon stock and we all recoil and shock,
• 12:49
  Speaker 1: But what we have here is a very high priced
• 12:50
  Speaker 1: currency which could be used for acquisitions to the extent
• 12:54
  Speaker 1: that Amazon decides to accelerate and take a buy versus
• 12:59
  Speaker 1: build approach in going into new areas. Obviously, we've seen
• 13:03
  Speaker 1: concerns or possible speculation raised yesterday that Amazon was going
• 13:09
  Speaker 1: to get more significantly involved in the distribution of pharmaceuticals.
• 13:13
  Speaker 1: Drugs UH certainly a very high margin, certainly attractive area.
• 13:17
  Speaker 1: And if we're now looking at Amazon as being a
• 13:20
  Speaker 1: company that not only offers very high organic growth, but
• 13:24
  Speaker 1: it's an effective acquirer, then we see a possible path
• 13:29
  Speaker 1: here where growth could perhaps even accelerate. Echo. Tell me
• 13:34
  Speaker 1: about Echo and Alexa well, to the extent that we
• 13:38
  Speaker 1: saw prime subscriber revenues or subscription revenues rise by fifty
• 13:43
  Speaker 1: year over a year, typically prime buyers tend to have Alexa,
• 13:47
  Speaker 1: they tend to have Echo, and to that extent, there
• 13:50
  Speaker 1: tends to be more data capture of those higher income
• 13:53
  Speaker 1: households on margin, which certainly means that if we're looking
• 13:58
  Speaker 1: at a world where there is monetization of data as
• 14:03
  Speaker 1: a way to drive shareholder value, it certainly seems that
• 14:06
  Speaker 1: Amazon is clearly in the vanguard in the forefront in
• 14:10
  Speaker 1: that area. We may not necessarily be comfortable with it
• 14:14
  Speaker 1: from the standpoint of personal privacy, but investors are obviously
• 14:20
  Speaker 1: very interested in what this says about the company's ability
• 14:23
  Speaker 1: to tailor offerings in the future. Two consumers, real quick. Uh,
• 14:30
  Speaker 1: we didn't really get into Google too much, But does
• 14:32
  Speaker 1: this get give you a sense sure that they are
• 14:34
  Speaker 1: successful at selling ads and have that pressure, Uh, that
• 14:37
  Speaker 1: that sort of monopoly At this point, I mean, Google
• 14:41
  Speaker 1: is both growing insanely quickly and has very fat profit margins,
• 14:46
  Speaker 1: and it seems like an impossible combination. They keep hitting
• 14:49
  Speaker 1: it out of the park. Well, shares of Google are
• 14:53
  Speaker 1: up more than six and a half percent right now.
• 14:56
  Speaker 1: Thanks very much here over there, our Gadfly columnists when
• 14:58
  Speaker 1: it comes to all things technology. Our thanks also to
• 15:00
  Speaker 1: David Garretty, the chief executive of g v A Research. Well,
• 15:17
  Speaker 1: everyone may be getting ready for Halloween, and in order
• 15:19
  Speaker 1: to have Halloween you need costumes and party supplies. And
• 15:22
  Speaker 1: here to help us tell us about the industry is
• 15:24
  Speaker 1: Jim Harrison. He's the chief executive of Party City. They're
• 15:28
  Speaker 1: based in New Jersey, and Jim is in our studio
• 15:30
  Speaker 1: in New York. Jim, thanks very much for being here.
• 15:33
  Speaker 1: I noticed you're wearing your orange tie and the black suit.
• 15:35
  Speaker 1: Is that already because you're getting into the holiday spirit
• 15:38
  Speaker 1: here for Halloween. I've been in the holiday spirit for
• 15:40
  Speaker 1: at least thirty days as we've been building our stores
• 15:42
  Speaker 1: an inventory, and right now is it's getting really hot
• 15:45
  Speaker 1: in the stores. Over the next six days, seven percent
• 15:49
  Speaker 1: of our retail sales will occur. Annual sales wi occur
• 15:52
  Speaker 1: in the next six days. The interesting thing about our business,
• 15:55
  Speaker 1: that's about half our business is retail. The only half
• 15:57
  Speaker 1: is consumer products. The consumer products business is a lotless
• 15:59
  Speaker 1: long be It's fair to me in birthdays in America
• 16:02
  Speaker 1: every year, nice and smooth, and a season or a
• 16:04
  Speaker 1: celebration every month. So what does your house look like?
• 16:06
  Speaker 1: Describe how you've decorated it. Uh, we've got tombstones, We've
• 16:11
  Speaker 1: got pumpkins, We've got skeleton saying from trees. We've got
• 16:15
  Speaker 1: lights to go on at night and a doorbell that
• 16:18
  Speaker 1: plays creeping music. Wow, you're that family. Are the guy
• 16:23
  Speaker 1: you don't live next to? Right? All right? But having
• 16:26
  Speaker 1: said that, let's talk a little bit about the business
• 16:28
  Speaker 1: right now. I mean, the stock has not been doing
• 16:30
  Speaker 1: real well. It's down about so far this year. What
• 16:33
  Speaker 1: have been the challenges and what are you doing. The
• 16:36
  Speaker 1: biggest challenge we have is really getting our story out.
• 16:38
  Speaker 1: I mean, with our name being Party City, folks put
• 16:41
  Speaker 1: us in a retail box and they think of us
• 16:44
  Speaker 1: as solelyer retailer. And as a result, that retail prism
• 16:46
  Speaker 1: has really created a pallor if we would over our stock,
• 16:50
  Speaker 1: only of our four di million dollars of b d
• 16:52
  Speaker 1: A comes solely from our retail business on a standalone
• 16:56
  Speaker 1: basis comes from our wholesale business. And then the remainder
• 16:59
  Speaker 1: is the vertical model because we UH provide a roughly
• 17:03
  Speaker 1: what's in our own stores. In that world, we have
• 17:06
  Speaker 1: the ability to make a manufacturing profit, a wholesale profit,
• 17:08
  Speaker 1: and a retail profit. So is what we called either
• 17:12
  Speaker 1: a double or a triple. I mean we have two
• 17:15
  Speaker 1: layers in origin and of the triple is only of
• 17:19
  Speaker 1: the eighty is actually triples. Where we manufacture, we have
• 17:22
  Speaker 1: nine manufacturing plants around the globe. We make costumes. We
• 17:26
  Speaker 1: make our own uh Latex balloons in Waysia, but we
• 17:29
  Speaker 1: also domestically manufactured lots of product. We have a sixty
• 17:33
  Speaker 1: worldwide marketshare and metallic balloons we make those Minneapolis. We
• 17:36
  Speaker 1: manufactured plates, cups, and napkins here in the United States,
• 17:39
  Speaker 1: the extrude plate cups and bowls up in Rhode Island.
• 17:42
  Speaker 1: We do injection mold to plastics down in New Mexico.
• 17:45
  Speaker 1: So we do a lot of manufacturing. So our products
• 17:46
  Speaker 1: go not just to the party industry, but the movie theaters,
• 17:49
  Speaker 1: to supporting your arenas, to restaurants and bars and stuff
• 17:53
  Speaker 1: like that. I'm wonder and does Party City sell goods
• 17:56
  Speaker 1: through Amazon? And uh, you know, at some point could
• 18:00
  Speaker 1: you imagine not having a physical brick and mortar store
• 18:04
  Speaker 1: and just focus in the manufacturing. So that's really two questions.
• 18:07
  Speaker 1: Let me start with the first question in terms of
• 18:08
  Speaker 1: Amazon on the party side of the business. Uh, our
• 18:12
  Speaker 1: products is so generally available on marketplace. Amazon does not
• 18:15
  Speaker 1: bring in their the party goods per se, and if
• 18:17
  Speaker 1: they did, they would be from us because we basically
• 18:20
  Speaker 1: held all the i p as well as the broadest
• 18:22
  Speaker 1: selection of anybody in the marketplace in terms of our
• 18:26
  Speaker 1: stores and opening stores. We Uh. Recent surveys have shown
• 18:30
  Speaker 1: this this recent season on a number of surveys, anywhere
• 18:33
  Speaker 1: from six consumers want to go to a store to
• 18:37
  Speaker 1: buy their Halloween goods thirty five will look online for inspiration,
• 18:41
  Speaker 1: but sixty plus percent anywhere from sixty five want to
• 18:45
  Speaker 1: actually go into stores. And if you think about even
• 18:47
  Speaker 1: Halloween and our business, we're a collection business on party side.
• 18:51
  Speaker 1: So if having a brattle shower, you're gonna buy a
• 18:52
  Speaker 1: bunch of stuff, are you are in the two bucks
• 18:55
  Speaker 1: coordinated icon and imagery, and you're gonna make a house
• 18:58
  Speaker 1: festive and decorative. So it's a discutionary purchased lots excuse.
• 19:02
  Speaker 1: On the Halloween side, our point differentiations. We call it
• 19:05
  Speaker 1: mix it, match up, make it your own. So if
• 19:07
  Speaker 1: you wanted to be Spider Girl, for instance, you could
• 19:10
  Speaker 1: go to Party City and have twenty different Spider Girl
• 19:13
  Speaker 1: outfits that you could construct with all the accessories and
• 19:15
  Speaker 1: and separates that we provide Amazon. Other folks on the
• 19:19
  Speaker 1: web will Mark. They provide costume in a bag. We
• 19:22
  Speaker 1: do costumes a bag, but it's a relatively small part
• 19:24
  Speaker 1: of it. Whole home we're offering Spider Woman. You think
• 19:26
  Speaker 1: I should do that? Yes, by all means, I want
• 19:30
  Speaker 1: to know about a purchase that you did recently of
• 19:34
  Speaker 1: a company called grand Mark, and I just so that
• 19:37
  Speaker 1: may offer a way to expand the conversation A little
• 19:40
  Speaker 1: bit sure. So grand Mark is a company in Mexico.
• 19:42
  Speaker 1: They're a distributor. They're essentially very similar to our wholesale
• 19:46
  Speaker 1: business here in the US in terms of going to
• 19:47
  Speaker 1: the broader market. They also have a manufacturing footprint and
• 19:51
  Speaker 1: it's basically income papers. So a lot of products that
• 19:53
  Speaker 1: we currently sourced from China, lead of banners, stickers, gift bags,
• 19:56
  Speaker 1: gift wrap, we're actually starting to make ourselves and are
• 19:59
  Speaker 1: now our own fact tree in in Monterey. Okay, my
• 20:01
  Speaker 1: quick question there was then the whole trade issue. Are
• 20:04
  Speaker 1: you concerned about any of the issues related to trade,
• 20:07
  Speaker 1: NAFTA and so on. It's once again, we're dealing with
• 20:10
  Speaker 1: such a nominal price point that it's not really an issue.
• 20:13
  Speaker 1: What's the biggest challenge right now for Party City? The
• 20:15
  Speaker 1: biggest challenge for Party Sort Serria now is making sure
• 20:18
  Speaker 1: that we stay ahead of the curve in terms of
• 20:19
  Speaker 1: the consumer. The consumer today, especially the younger consumers, looking
• 20:22
  Speaker 1: for experiential and so having a house party is maybe
• 20:25
  Speaker 1: not number one on their list. They want to go
• 20:27
  Speaker 1: to a theater, they want to go to restaurant, they
• 20:29
  Speaker 1: want to go on a cruise, they want they want
• 20:31
  Speaker 1: to experience as part of that celebration. So we're building
• 20:34
  Speaker 1: out what we call our Alternative Markets Group to get
• 20:36
  Speaker 1: in front of that curve, so that we're going into
• 20:39
  Speaker 1: the cruise ships and into the restaurants and providing the
• 20:41
  Speaker 1: products that will make those celebrations special. So do you
• 20:44
  Speaker 1: also have people that kind of cultivate what that experience
• 20:48
  Speaker 1: would be for the cruise or for the restaurant or
• 20:51
  Speaker 1: whatever else. Right, So it comes comes into the numbers
• 20:54
  Speaker 1: different ways. One in terms of creating environmental decorations, that's kits.
• 20:58
  Speaker 1: In terms of creating for the celebrations themselves, creating a
• 21:02
  Speaker 1: suite of products and men use that consumers can go
• 21:05
  Speaker 1: on select, and then we use our e commerce capabilities
• 21:09
  Speaker 1: actually to ship directly to U two restaurants or wherever.
• 21:12
  Speaker 1: Thank you so much for joining us, and a picture
• 21:15
  Speaker 1: of your home. It's sound. Jim Harrison, chief executive officer
• 21:18
  Speaker 1: of Party City gearing up and has been gearing up
• 21:21
  Speaker 1: for the past thirty days for Halloween. Thank you so
• 21:24
  Speaker 1: much for joining us. Healthcare CVS Health Corp. Is reportedly
• 21:40
  Speaker 1: considering a blockbuster buyout of health Ensure Etna, and here
• 21:44
  Speaker 1: to talk about what this deal would mean for the
• 21:47
  Speaker 1: broader healthcare industry as well as how exactly CVS would
• 21:51
  Speaker 1: pay for. This is Max Neeson, Max Newson, Bloomberg gad Flight,
• 21:55
  Speaker 1: columnists covering all things health related. Uh Max, thank you
• 21:58
  Speaker 1: so much for joining us. So can you give us
• 22:00
  Speaker 1: the sense, first of all, of what the logic is
• 22:02
  Speaker 1: behind this tie up and how likely it is at
• 22:05
  Speaker 1: this point. Yeah. So there's kind of a two part
• 22:08
  Speaker 1: logic to this. The first is generally in healthcare UM
• 22:12
  Speaker 1: you know, vertical consolidation has benefits IF CVS, which in
• 22:16
  Speaker 1: addition to running pharmacies, is a pharmacy benefit manager, owns
• 22:20
  Speaker 1: and ensure UM you know, all those things that you're
• 22:22
  Speaker 1: Insure wants you to do to make to make your
• 22:25
  Speaker 1: healthcare cheaper. H use a mail order pharmacy, go to
• 22:29
  Speaker 1: a cheap clinic instead of the doctor. It can push
• 22:32
  Speaker 1: all of those ETNA enrollees to its businesses. So there's
• 22:37
  Speaker 1: that kind of direct benefit. And there's also the fact
• 22:39
  Speaker 1: that there aren't that many other places for CBS to expand,
• 22:43
  Speaker 1: uh it expressed scripts and United Health already control the
• 22:47
  Speaker 1: vast majority of the pharmacy benefit industry. There's not that
• 22:51
  Speaker 1: much expense. You could do there, and we saw with
• 22:52
  Speaker 1: Walgreens and right Aid you can't buy that many more
• 22:55
  Speaker 1: pharmacies without running into any trust issues. So I mean
• 22:58
  Speaker 1: it does make sense in that sense, all right, Max.
• 23:00
  Speaker 1: So I'm trying to get my head around this. But
• 23:02
  Speaker 1: at least right now I know that the investors and
• 23:04
  Speaker 1: CVS and not too thrilled about this deal because the
• 23:06
  Speaker 1: stock is down nearly four percent. CVS already has a
• 23:10
  Speaker 1: contract with another insurer, Anthem, correct, Yeah, so that that's
• 23:15
  Speaker 1: something they just signed. Anthem is starting a PBMs of
• 23:18
  Speaker 1: its own, but it's letting letting CVS run a substantial
• 23:22
  Speaker 1: portion of it. That was just a week ago that
• 23:25
  Speaker 1: they signed that, So that it's obviously going to be
• 23:26
  Speaker 1: a complicating factor right and right now. The leverage that
• 23:31
  Speaker 1: a CVS has in order to negotiate drug prices is
• 23:36
  Speaker 1: why because they have a lock on business directly tied
• 23:41
  Speaker 1: to whatever the insurance company is that we provider that
• 23:44
  Speaker 1: you have. Yeah, so they have a big set of clients,
• 23:48
  Speaker 1: both insurers also employers that contract with them to negotiate
• 23:53
  Speaker 1: their drug prices. That kind of amalgamation lets them um
• 23:57
  Speaker 1: push for lower prices. The way they do that is
• 24:00
  Speaker 1: by having a series of drug lists, they have a
• 24:02
  Speaker 1: what's called a preferred formulary where they can exclude certain drugs,
• 24:06
  Speaker 1: so they can say, if you don't give us a discount,
• 24:08
  Speaker 1: we're going to push people to your competitors drug. The
• 24:10
  Speaker 1: more people they have, the more leverage they have in
• 24:12
  Speaker 1: those kind of negotiations. So this is this would be
• 24:14
  Speaker 1: a tie up that would be incredible for their bargaining position.
• 24:18
  Speaker 1: How much is this a defensive move in anticipation of
• 24:22
  Speaker 1: Amazon dot Com plowing into healthcare as everybody suspects they will.
• 24:27
  Speaker 1: I mean, I think it's it's pretty clearly one because
• 24:29
  Speaker 1: Amazon is a threat to so many parts of CBS
• 24:32
  Speaker 1: is business. If it gets more directly into medicine. Um,
• 24:35
  Speaker 1: you know, there's the PBM part, if Amazon decides to
• 24:38
  Speaker 1: play a role there, Uh, there's retail pharmacies. Um. So
• 24:42
  Speaker 1: obviously moving to diversify and having kind of a captive
• 24:46
  Speaker 1: uh set of clients would really be a benefit for
• 24:49
  Speaker 1: the company because at the end of the day, Amazon
• 24:51
  Speaker 1: is bigger, better funded, and better at the Internet. So
• 24:55
  Speaker 1: they're a threat. Well, but let's talk a little bit
• 24:57
  Speaker 1: about the funding, right, because this is not a cheap
• 25:00
  Speaker 1: purchase which is probably why CBS shares have been falling.
• 25:04
  Speaker 1: And they really don't have the cash to pay for this.
• 25:07
  Speaker 1: So this would be a pretty substantial leveraged buyout. Now,
• 25:11
  Speaker 1: it absolutely would be. I mean, it would definitely have
• 25:14
  Speaker 1: a stock component, but it's unclear how much of that
• 25:17
  Speaker 1: they'd build people to do. It's going to be a
• 25:19
  Speaker 1: significant cash outlet. C this doesn't have a ton of cash.
• 25:21
  Speaker 1: They already have more than twenty billion dollars in debt
• 25:24
  Speaker 1: and this deal, based on some of the figures being
• 25:27
  Speaker 1: thrown around, could cost seventy billion dollars. That's close to
• 25:32
  Speaker 1: CBS market cap. So it's obviously gonna be a really
• 25:35
  Speaker 1: big one. Hey, Max, what if you could just give
• 25:38
  Speaker 1: us an idea of what your thoughts are about the
• 25:40
  Speaker 1: very business model that says, if we can put as
• 25:43
  Speaker 1: many individuals and as many corporations in between you and
• 25:47
  Speaker 1: the service or the Uh No, seriously, the service or
• 25:51
  Speaker 1: the product that you're buying. Uh isn't I thought that
• 25:55
  Speaker 1: was going to be done away with because of technology,
• 25:57
  Speaker 1: you get rid of all the middlemen, you go direct
• 25:59
  Speaker 1: to con sumer. Why can't that happen? Why can't they
• 26:04
  Speaker 1: do it? Why are they're waiting for Amazon to give
• 26:05
  Speaker 1: them the kick. Um. I mean it's because being a
• 26:09
  Speaker 1: middleman is extraordinarily profitable. But when you have when you
• 26:14
  Speaker 1: have Amazon breathing down your neck, I mean we've already
• 26:17
  Speaker 1: been through that. In the financial industry, you had, you know,
• 26:19
  Speaker 1: broke a wide swath of brokers now their advisors because
• 26:23
  Speaker 1: you can't make money, you know, on pennies. So I
• 26:27
  Speaker 1: mean that's kind of the hope of what people that
• 26:30
  Speaker 1: if that's Amazon's hope, if they want to get into
• 26:32
  Speaker 1: this business, do you see that as viable? Do you
• 26:34
  Speaker 1: think that trend is going to happen? You know, the
• 26:37
  Speaker 1: question is whether Amazon wants another very complicated, low margin business. Um.
• 26:44
  Speaker 1: You know, they have sort of unlimited capacity for it, it
• 26:47
  Speaker 1: it seems so I wouldn't rule it out. The defense
• 26:50
  Speaker 1: that you know, the wholesalers and PBMs are are putting
• 26:53
  Speaker 1: out is that you know, this is complicated their regulatory issues.
• 26:57
  Speaker 1: But you know, in time, Amazon would be able to
• 26:59
  Speaker 1: figure that out, and its scale will always give it
• 27:01
  Speaker 1: a chance. I was just gonna say, you know, it's interesting.
• 27:04
  Speaker 1: Shares the Amazon today or up eight and a half percent,
• 27:07
  Speaker 1: shares of Etna down one point three shares, the CVS
• 27:11
  Speaker 1: down four percent. That kind of tells you something, Max,
• 27:13
  Speaker 1: really quick, how likely is this to get through? I'm
• 27:18
  Speaker 1: gonna say about fifty fifty, you know, just the divide
• 27:25
  Speaker 1: between CVS is obvious need and the potential regulatory and
• 27:30
  Speaker 1: funding issues on the other side. So we'll see and
• 27:33
  Speaker 1: you're gonna be following it. For this, I appreciate it.
• 27:36
  Speaker 1: Thank you very much, Max and Nisson Bloomberg. I have
• 27:39
  Speaker 1: some insurance claims. Maybe you can help me with two
• 27:41
  Speaker 1: Max and Neis and our gad Blight columns when it
• 27:44
  Speaker 1: come out healthcare. Indeed, thanks for listening to the Bloomberg
• 27:50
  Speaker 1: P and L podcast. You can subscribe and listen to
• 27:53
  Speaker 1: interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer.
• 27:58
  Speaker 1: I'm pim Fox. I'm on Twitter at pim Fox. I'm
• 28:02
  Speaker 1: on Twitter at Lisa abramowits one before the podcast. You
• 28:05
  Speaker 1: can always catch us worldwide on Blueberg Radio.