This is Bloomberg Business. Wait inside from the reporters and editors who bring you America's most trusted business magazine, plus global business finance and tech news. The Bloomberg Business Week Podcast with Carol Messer and Tim Stenebeck from Bloomberg Radio.
We'll talk about the Walt Disney Company, my company in a Stockmere and dear to my heart, I've covered the stock over thirty years. It is at a place in time that that they'd never found themselves in. They're really trying to figure out they and all the media industry trying to figure out how they manage just pivot the streaming and away from the traditional media distribution bundle that was so lucrative. And then I got some changes at
the top. Here Chris Palmery joins us. He's entertainment editor for Bloomberg News. He joins us on Zoom from our LA bureau. And it is a awesome office out there.
Yeah.
The last one they had was not great, I have to tell you, but this one is smoking. It's in What's so great about it? Oh, it's just it's in a great part of town, Century City, right, Chris, And you got smoking office. I think you overlook the bel Air Country Club or something correct.
Yeah, it's just a Los Angeles Country.
Los Angeles Country, major upgrade. So when I went out there the first time, I kind of talked to somebody back here in New York. I said, we need to upgrade our friends out in LA. Yeah, and then they did.
And it sounds like a missed opportunity that I did not get there when I was there for forty eight hours.
Last week, Chris talked to us about Walt Disney here. They're getting themselves a new CFO.
What do we know, very experienced executive in three decades at Pepsi, where he's done a lot of businesses, run their e commerce business, ran the Quaker Roads business in North America's obviously been the CEO as the CFO for since twenty ten, done mergers and acquisitions, been the face of the company to the finance community. Is known for being sort of conservative guidance and over delivering on the financial targets. So just a real experienced hand at a time of great turmoil.
She mentioned that Disney.
Yeah, you know, I'd love for you to tell us a little bit more about that. And this is Hugh Johnston, who we were talking about. If you didn't get his name, that's who the CFO is at PEPSI right now, who's coming into Disney. So Chris tell us a little bit about the board right now at Disney at the c suite level, that we have the CFO who vacated due to a medical absence I believe it was. And what's going on with Bob Iger. How much longer is he going to stick around at the top.
Well, of course, brought back now one year ago after the tumultuous reign of Bob J. Peck and Bob Iger, known historically as the steady hand, has had his own shaky first year back. There's been There's really so many things in the air, and I think that's one of the things he'll have to address on Wednesday when they do the earnings call. We've reported they're potentially selling their
India media business. They've announced they're going to buy back the one third of or buy the one third of Hulu the Comcast owns, so potentially ten billion dollar deal. He's talked I talked about selling their traditional DV channels like ABC. He's looking for a strategic partner at ESPN. There's so much going on outside of the normal course of business there. So you know, they obviously need somebody who can talk to the financial community and help raise money and all that.
Hey, so, christ you've covered the Walt Disney Company probably as long as I have. You're right out there in La You're you're in right the right where the entertainment industry really lives here. Talk to us about kind of where are they are on the actors strike. That seems like something that should be a quick fix relative to everything else that this industry is facing.
It certainly seems like we're very close on settling the actors strike. But we've been hearing that for a couple of weeks now. Bob Iger's been personally involved in both with the actors and the writers.
He's one of the quote Big four studio.
Executives that's been in the room or at least on Zoo during these negotiations. It seems like the actors are going to get a pretty good deal, not everything they wanted.
But sizeable increases in pay.
And so we're all just sort of waiting when that news comes and if there can now sort of pivot to salvage the TV season, which was supposed to start in September, and now is earliest maybe in February.
So tell us then, Chris, given all of these things that you just mentioned, we've got the the actors strike, We've got the new CFO coming in. There's also you know, the potential sales of certain units or buying back some other ones. How are how's the analyst community sizing up Disney's earnings? You said we've got that coming on Wednesday.
I believe surprisingly given all we talked about, I think it's actually supposed to be a good report.
That is surprising.
Yeah, there's been a lot of cost cutting at Disney this year, remember seven thousand, you know, layoffs all of these media companies have been surprising, both because of cost cutting and the fact that there's no production going on. They're saving a lot of money on those TV shows and movies they would otherwise be spending money on. And of course everyone will be looking at the streaming business and how big the losses are. If making any progress
and reducing that. Disney has had said they're going to break even by next year in that business, which has just lost billions of dollars over the recent years.
Yeah, Chris, I mean again, you're right out there in La you go to all the Cocktait parties with the power players, they've got to be really scared, I mean, because they just don't know how their business is going to evolve. It was such a good business where everybody made money. The cable companies made money, the programmers made money,
the advertisers made money. Now this streaming model has really upended all the economics that a whole couple of generations of people have kind of grown accustomed.
To out there.
What's the feeling out there in terms of angst?
H It is anxious? You know, it's funny he mentioned got two part as.
I went to an event the La County Museum on Saturday night and and Bob Auger's wife Will Bays on the board, and we kind of expected. It's literally right next door to the SAG. The screen actors build building too to put it all in contact. So we just assumed he's been there, he was gonna be there, he's been there in the past. Did not show up, So whether I shouldn't read anything into that, but but but
definitely everyone was Everyone was talking about the strike. It's a big deal, uh, And everybody just really wanting to return to work. There are shows that are just you know, waiting to get restarted, and uh and and and we're seeing it in what we watched too. I mean there's uh, there's reruns that are now the hottest shows on Netflix.
Uh.
Movies are getting postponed in some cases by years. Uh So it's just it's really your beginning to see the impact.
Chris, I wanted to come back to Hugh Johnston here for a minute, the incoming CFO, a longtime executive at PEPSI. You know, my first thought, and maybe this is a bit elementary, but maybe if I'm thinking it, someone else's too. This is a guy who's working out a company who's famous for soda and snack food and you know, more like consumer discretionary goods of that nature, like what does
consumer staples rather? But I mean, how does that then work for him coming into a company that is so vastly different than that obviously still in the consumer space, but on the media side of the business. And if he could be potentially a CEO candidate down the line, does he really have the background that Disney might be looking for.
It's an issue I'm old enough to remember John Scully coming from Pepsi Cattle and it was not a great run he had there, And you know, there are some interesting echoes here at Pepsi. They also faced a sort of proxy fight with Nelson Peltz, activist who's now also active in trying to get board seats at Disney. So that may come in handy.
If you do some.
Research, you'll find it. When Hugh Johnson joined the Twitter board a few years ago, there was a lot of commotion because it was the first time he actually signed up for a Twitter account. So, yeah, does he have the media experience to lead one of the largest media companies in the world. No, it doesn't seem that way, but as we were talking about earlier, he is a very seasoned corporate executive with a lot of experience in consumer products.
All right, Chris, thanks so much for taking the time. Appreciated as always, Chris Palmary. He's the entertainment editor for Bloomberg News, joining us on Zoom from our La bureau in Century City. Again a great office there, but again Disney, it'd be really interesting for their earnings because they have
so many questions. As Chris was just talking about, so many challenges ahead of them, as do most media companies and investors are just like, I can't really own your stock in size until I get a better sense of where your industry is going.
I mean, you've got to feel for this, Paul, you said you covered it for yeah, you know, more than years, and maybe you'd want to sail out.
But I'm glad that I'm not covering it or having to come up because I just don't see it. I don't see a clear path through this industry, at least not right now, so I have to see how it plays.
App you're listening to the Bloomberg Business Week podcast. Catch us live weekday afternoons from three to six Eastern Listen on Bloomberg dot com, the iHeartRadio app, and the Bloomberg Business app, or watch us live on YouTube.
All right, said, who is that band? I know that band? Steve Miller band, Thank you very much, A great band from back in the day. All Right, who releases earnings on a Saturday? You know who releases earnings on a Saturday? Somebody who can? Yeah, and that's Warren Buffett. He can, I mean, and so he does it. And all these insurance people Warren Buffett followers that say set it up their day to follow it. One of those people is
Matt Palizola. He covers all the insurance stuff for Bloomberg Intelligence. He joins his life here in our Bloomberg Interactive Broker studio. We appreciate that he got the memo about four days a week. What do we learn from Berkshire Hathaway from the earnings announcement maybe kind of what we heard from mister Buffett.
Yeah, so.
Headline big gap loss. Okay, that is because that's accounting convention. They run the changes in their equity portfolio through the income statement. So Apple had a bad quarter. So you see this top line number come through as I think it was like twelve billion dollar.
If I look at the A or the be stock watch, I look.
Either are they move They moved tandem. Okay, so headline loss there, but the operating company earnings up like sixty percent, and that was mostly on the insurance segments. The insurance segment rebounds. It had a beadquarter in the year ago because of Hurricane Ian. This quartery saw reinsurance underwriting booming. Interesting come booming. You guys were just talking about the consumer.
Their consumer businesses actually did a little bit better. I'm an insurance guy, so you know, it's not exactly my forte it was. The top line was down like twenty percent for that business in the second quarter, so I expected that it to be down again, but it actually wasn't, So I was kind of a positive surprise. But maybe it might not look so good going into the fourth quarter.
And just tell us mac because Bruce Year is such a massive congloborate of god knows how many businesses. What exactly is the consumer business?
So they manufacture consumer products I don't have them all in my head, and then they sell consumer products the retail and sales. So you know, one interestingly they just acquired with the Allegheny business was Jazzwares, which is a toy maker.
I know that. You know.
When I told my kids that this company makes squish mellows, they were over the moon, like it was the best thing ever. So you know, perhaps that'll do bode well going into the holiday season.
All right, cash, they got one hundred and fifty seven billion in cash. What are they going to buy? I mean, this is we've been asking.
This question for a long time a while, so.
But now the indust rates are up, I'm not that I'm sure shareholders is like, not as concerned.
That's exactly right, Paul. So you know they have a problem I wish I had. As they generate more money they can actually spend.
It's a good problem.
Yeah, my wife might test it out on Amazon Prime if we did. But yeah, they're just generating more money than they than they know what to do with. The great thing is the rise in interest rates, especially in the short end, has helped them a ton. They were earning about fifty million a year an interest income. Now they're earning over five billion, wow, just on just on interest on their cash.
So that's that's a model.
That's great.
I mean, why is the stock not ripping on rates?
Then it doesn't, it doesn't last forever.
I think it was.
I was honestly a little bit of surprise to me that they benefited that much from it. I guess it could have seen it. Maybe people expecting them to do something with that cash, but you know, they keep it liquid and that's been okay, won't be you know if we start going the other way obviously yep.
Have there been whispers of what Burgs Year could possibly buy, like what deals might be out there? I mean, like we just said, this is a massive company, so many businesses they're already involved in, Like, what more do they possibly need?
So my big thing is I really thought they were going to buy Occidental. They it was seemed out of their playbook the way they were approaching it, taking kind of little snips. Buffett was very positive on the management publicly, which is things he had done before. Then at the annual meeting, they came out and said, we have no interest in owning this entire company. Then Chevron became one of their biggest holdings, and I thought, okay, so they're
big energy players. Maybe maybe it's an energy business. They've paired their holdings in Chevron. You know, I don't know. I think it's going to be something we never heard of that they end up buying.
Did they buy non US companies inside?
They haven't.
You know, Buffett made some investments in the Japanese trading houses and that was I forget the exact number, but it was in the billions of dollars. They didn't acquire them, they just put the stocks of them.
Uh.
And they have some businesses with foreign operations, but because they usually stick to the USA.
You know, with Tim craik Head, a Bloomberg intelligence you know, explained to me years ago about the European stock index doesn't have a lot of tech. Okay, what they have is like they make stuff over there in your German like Semens, and they make big stuff equipment and everything. That seems like a play for a warn Buffett, go buy a big machine company here.
I wouldn't be surprised. I mean, one of their biggest companies is Precision Cast Parts, which makes precision parts for airplanes, right, and it's just not something you know that much about or hear about. That actually did pretty well in the quarter too, but it's got a monopoly on these kind of unique parts that no one else can make. And I think those are the companies that they look for.
So if I'm a stockholder right now in Berkshire, do I want to see the company buying backstock or giving me a bigger dividend? Like, what do you think when you see all this cash?
I think the market would love a dividends. I don't think they're going to do that. As long as Warren Buffet's around.
They were they so just go back. That's a great question. Why don't they do a dividend.
I think, but they the Buffett likes getting dividends. He doesn't like paying dividends. He I think he always assumes he can do something better with the cash.
They okay, but that's now been proven beyond a doubt that they can't because theres one hundred and fifty seven bellion cash. Did they buy backstock?
So they buy backstock. Historically they were not big repurchasers either. What happened in COVID the stock dipped and they really started buying, and massive buying, like six billion a quarter at one point. There's some limitations with the A and B shares, they can only be so much of the volume, but the share of purchase has gone down. It was like a billion for the past two quarters, which obviously has a lot of money, but not for them, and
it was honestly disappointing. I would have loved to see them buy back more.
All right, let's have a broader insurance conversation. Shadows who doesn't want to do that?
Please do?
What What are the big drivers A Howard insurance stocks doing these days? And B what's kind of driving? What's the driving thing that you guys need to get smart on?
So investors, So I mean interest rates are big things that covered the P and C names, specifically, the life names are very much interest rate plays and move a lot with interest rates. The P and C ones property and casualty, as we say in the biz. They they were in a play on inflation, so the cost of repairing things went up, so that increased their loss costs. But their prices having going up as well, that's really on the commercial side. It's hurting the personal side as well.
The thing is, these six Han's done that well this year. They did their their defensive plays. The beginning of the year, they all took a dive on the regional banking disaster, which for no reason, there was absolutely no reason they should fell in sympathy with them. We talked about it at the time. So they spent all year recovering from that just to bring into Berkshire a little bit. Berksher's outperformed all of them, so they haven't really moved like
an insurance company this year. But so you want to get small on insurance companies, it its rates, it's loss costs. We just came out of the third quarter. Things were actually better than I expected, and the stocks underperformed. I think they have maybe another year of peak ros evaluations can peak before the ROEZ, so there actually is probably room in those stocks.
We haven't had any like big does it the hurricanes and stuff?
That question next, Yeah, because you mentioned the imknock.
On wood here.
So we had a bunch of weird stuff happen in the quarter, right. We had the Maui wildfires, we had the we had the tropical storm hitting California, and these were kind of they were odd events. The Mali fires were very bad in humanitarian aspect, and the insured losses were small for the industry. We haven't had a big event. We haven't had like a hurricane e in this year,
and it's allowed these companies to build capital. But things have been worrisome even this There was a big hurricane in Mexico Otis, and I looked at it and my just kind of very initial blush was, Okay, it's not going to be big for the reinsurance community, might be big for the domestic market. It's coming out. Maybe it's six billion dollars, which is a modest industry loss. Again, it's probably going to hit a lot of the Mexican companies, but if you look at the damage there, it was
some of the strongest wins literally ever recorded. So we're kind of on the precipice of maybe something big happening.
All right, Matt Patlozola, thanks so much. We appreciate property and Casualty insurance senior analysts for Bloomberg Intelligence joining us live here in our Bloomberg Interactive Brokers studio here talking about insurance's business, Warren Buffett one hundred and fifty seven billion dollars of cash on the balance sheet. What is he to do with that? That's kind of the big question that investors been asking. A lot more coming up. This is Bloomberg.
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Bromarco a journal. Now bet you let me drive? Oh no, no, no, no, who's going to drive? Honey?
Please, I'll do the travels.
Listen. I want to drive. It's good question.
This is the drive to the clothes dot punk music. Well, drive up to jog Dawn on Bloomberg Radio.
Hi Mai Smith, Paul Sweeney live here on our Bloomberg Interactive Brokers studio streaming live on YouTube as well. Don't I don't know about you, Molly, but last week felt like peak rates to me. And I know nothing about that, but I just felt like peak rates to me when I saw it.
Yeah, the Powell pivot, that's what we're talking about.
I don't know.
I don't know.
It could be the end.
Let's talk to somebody who actually gets paid to do this. Liz Young, head of Investment Strategy, it's so far, She joins us on Zoom from New York City. Hey, Liz, what did you think of last week's action in the markets? Again? Just to me, it kind of felt like peak rates, both in the bond market, and I looked at how the stocks were moving, and how did you get How did you view it?
Well, first of all, it's difficult to call a peak really in anything, so I won't do that because it's a really easy.
Smart I did for a living.
It certainly does feel like we went down very quickly, and it would be difficult to pop all the way back up that quickly. So last week's action I would take. You know, obviously it was a strong week in the markets. Last week's action I would take as a bit more of a relief rally. I know now we're in this debate of whether or not it's a bear market rally or new durable upside, but I would take it as
a relief rally. And I think the market interpreted what Powell has said and what went on in the jobs market on Friday as an indication that the Fed does not have to go any further, and interpreting that so far as reasonably positive. The problem with that interpretation is, as Powell has pointed out, and as I think all of us do know, that there are still some effects that are in the pipeline waiting to come through the rest of the economy and certainly come through the capital market.
So I don't think we're in the clear yet, but I do think that there's been some relief in the market and the expectation that we may actually be done with the hiking cycle.
Not in the clear yet, Liz as in there maybe another hike.
Is that what you're suggesting, not necessarily? I mean So first of all, I don't think the FED is going to declare the end of the hiking cycle. They really can't do that, especially with inflation still as far above target as it is. So they're going to leave the door open no matter what until we get closer to that two percent target. And they continue to reiterate that two percent means to two percent, and I think that we should listen to them until that changes, and I'm
not sure that it will change. So when I say not out of the clear yet, I mean that if you think back through this hiking cycle, we know that it's been fast and furious, we know that it went really, really far. But we even think back and forget that we had seventy five basis point hikes, we had four of those in a row, and then we had another one hundred and fifty basis point of hikes after that. I do not think that all of the effects of those have come through the system yet. So that's what
I mean by in the clear. I still think that we're going to see some credit tightening. We obviously have this tapering program that continues to go on, and we're waiting to find out if companies are going to be squeezed by borrowing costs as they try to roll over their bond. So I don't think all of those questions have been answered yet. And getting through you know, earning season that has been maybe a little better than average, but we have a market that's been punishing companies even
as they beat earning. So that's why I say I don't sentiment is quite all that positive.
Yet that's kind of where I wanted to go, Liz, just kind of earnings. As a former equity analyst, you know, I do pay attention to what these management teams say, particularly on their guidance. And while a lot of companies have I guess beaten on their quarterly numbers, almost to a company, they seem quite quite conservative on their outlook, and I guess that's prudent given where we are. But what level of concern is that race for you?
Well, I mean, I think it's good that companies are being prudent, and that's really been what's gone on throughout this earning season because the numbers, some of the numbers have disappointed, but the numbers have not been all that bad, and it's possible that we're going to have the first positive quarter of earnings growth, which would technically take us out of the earnings recession. The issue is that the guidance has been soft, and investors are now in a
place where I think the tone has shifted. So for the quarters before this, the bar was really low, and it was easy to jump over that bar, and companies got rewarded for jumping over that bar. Now we're in a place where the bar is higher, and the expectations for fourth quarter earnings and twenty twenty four earnings are pretty lofty, and investors are hoping that companies can prove
that those can come true. The guidance has been soft and probably a little disappointing versus what people wanted to hear from CEOs about the following twelve months. So I think it's good that companies are being prudent. I also think that we need to remember, yes, it's good that inflation has come down, but it also means that pricing power likely comes down as well, and that revenue comes down for some of these companies because they cannot pass that all through anymore.
Something I wanted to ask you about, Liz, is looking at financial conditions. Obviously, it's a wide, raging term of what the FED looks at and evaluating how effective its
policy is. And a story that we did last week going into the FED meeting was about the tightness of credit spreads, and I wonder if that's something that you've been looking at as well, because to me, when I look at high yield spreads now under four hundred basis points, and to think that the ED has been hiking rates, you know, for the past year and a half, I'm a bit confused here. I mean, you could, I'm hoping you can help explain this one to me.
Unfortunately I can't. You and me both a little confused by that.
What is going on here?
Well, it feels like it's like watching a pot that you're waiting for it to boil and it's not boiling. I honestly, I'm not sure yet. We've had a pretty big correction in the equity market since the end of July, and spreads didn't really respond to that a little bit, but not the way that you would have expected, particularly high yield spreads. So I think so far we've still got a decent amount of companies with attractive borrowing costs
because they haven't had to do much with it. But I do think again back to those legs and the things that are in the pipeline. I do think as we go forward into twenty twenty four, we're going to hear more about that. The other thing that I would say about, you know, spreads in general and just credit that's available. If you look at the equity action in
small cap stocks. The reason one of the reasons that small caps are getting hit so much harder is because they are generally come meanies that are still trying to grow, and they don't have enough capital to finance their own growth, so they have to go to debt and equity markets. Small caps continue to be under pressure and they can't find durable upside. I think that is a signal that
the market is sniffing out. Small caps are going to be under pressure because of this higher cost of capital over time as that affects companies in the debt market. I do think that you're going to see an increase in spreads on.
The equity side. Liz, what are the sectors that you're looking at these days?
This is going to be really boring, But because I am cautious, I think the sectors, particularly in the equity market, that investors can think about our consumer staples. I do think that utilities is an okay thing to have in the portfolio. I like energy, I like healthcare as in the large cap space, a defensive play, but also kind of a growth y defensive play that's not quite as connected to interest rate moves as things like technology and communication.
So those are the sectors that I would be looking at. I also think that there's still a decent opportunity in treasuries. I mean, yields have come down a lot in the last week or so, but there's still a pretty good opportunity. And these are yields that are higher than I've seen in my career, so you know, it's not necessarily too late either.
Very good, all right, Liz, thanks so much for taking the time. We really appreciate getting some of your insights. Liz Young, she's head of investment strategy at SOFI. Joining us on that zoom thing from New York City.
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