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We mentioned some breaking news has been listening just in the last few minutes regarding the media deal that we just can't stop talking about.
Yeah, and that just can't seem to get done because it goes back and forth. One of brothers Discovery planning to reject Paramount Skuidances hostile takeover bid due to concerns about financing and other terms. Let's see what our Felix Jellette has to say about this. He covers the media space for us so closely here at Bloomberg. So I do feel like that back and forth, back and forth the time to really kind of read the tea leaves.
What do you make about this latest reporting.
I mean, I think it's not entirely surprising, right, Paramount lost the initial round of bids and to Netflix and then came out with the public hostal offer.
But it was the same offer that the.
Board had already rejected, essentially, so we're all essentially waiting for them to review it again, you know, and then essentially say, oh, you know what we actually did, like the Netflix a bid more, and that'll toss the ball back into Paramount's court, and I think they're going to have to come back with a better offer, more money, something way of addressing the concerns about financing that Warner Brothers board has had all long.
Does Paramounts Guidance have that money? I mean Larry Ellison's worth two hundred and forty billion dollars, Yeah, two hundred and nineteen billion dollars of that is tied up in Oracle stock.
Yeah.
Well, I think there's questions that have not been addressed, even though the Ellisons have said one way or another, oh, we actually did address all these concerns about the financing. You know, initially there was money from ten Cents which
caused some concern that was taken out or whatever. So there were there have been adjustments made, but you know, I think at this point it's officially going to go back to them again and they'll probably have to come up with something more, whether it's more money or whatever, addressing those concerns that remain.
You know, I lost track in terms of feel like the Paramount Skydance deal because it was Jared Kushner's investment firm and there was I think some Saudi investors and like, do you help me understand because it feels like I thought that was a lot of the financial offer.
Like it was diversified at I felt like the rather of money to come in, well they were ponying up.
It felt like a lot of money. But I'm not quite so sure because if Larry Ellison is still so important to this offer, yeah, like is it a much smaller portion it was.
I mean, they've made adjustments.
So it's like, I think what probably what the Warner Brothers Discovery board is saying, they want more assurance that it's from Larry Ellison, that that money feels, you know, better from a regulatory perspective if you can get the money from Ellison, the Ellison family versus these other sources that have been part of financing deal from the beginning, such as the Middle East you know Middle East money, you know money that from Tencent, Like I said that
was taken out Jared Kushner, which again might help with the White House, but might raise other concerns.
Yeah, I'm glad you brought that up, because Carol brought up just a few weeks ago what happened when Rupert Murdoch wanted to buy Fox and what a challenge it was for him to do that because of foreign ownership of a broadcast network and the hoops that he had to jump through in order to do that. Okay, so we I still have a lot of questions and unanswerable at this point about what this deal looks like. Let's just say, for the sake of simplicity, Netflix wins out. Yeah,
Netflix actually gets these assets. Netflix gets HBO. You wrote the book on HBO. This is a wild world that we're living in. If Netflix actually gets this, what does it mean for consumers? I mean, is this is this good for us?
Well?
Netflix would say, oh, it's going to be great because ultimately, with lower prices, you know, we'll have you know, we'll be able to be more flexible in terms of bundling.
Just consolidation, usually lower prices. That's very nice.
I'm just asking I'm just asking a rhetorical question.
I think you've seen a lot of voices in Hollywood raising concern immediately about Netflix taking winning this deal because it's going to be so much consolidation of power.
Now Netflix has said.
Well, you know, really you have to look at the broader universe of people's attention. And now people are on TikTok and they're on YouTube and all these other things. But really, in this subscription video on demand world, Netflix is already the market leader. If you add in all of these assets from HBO Max, they're going to be you know, more than four hundred million uh subscribers around
the world. They're going to absolutely, so utterly dominate the subscription video business that I think people are going to be like, yeah, who are There's going to be no one else to sell to, and that's going to be for the business overall. Ultimately, it'll cost consumers more money down the lone.
Yeah, that feels about right. Hey, why is this so difficult to get this done? Why is this one so difficult?
Well, I mean people trying to you know, make these assets you know, more valuable from Warner Brothers Discovery for twenty years. I mean, you're going back to AOL time Warner, which again was around what the two thousands, so, you know, and then AT and T made a run at trying to make these assets work for them.
Then you had Discovery come in.
It's a you know, a challenge that has enticed so many different people and yet has always proven more difficult in reality than on paper for you know, decades.
Now, what's the risk that somebody overpays ultimately, Like, I feel like there's there's been so much in terms of media assets, and we know the media landscape, you know better than most how it continues to change and evolved.
So I'm just curious.
Well, I think the idea is like, you know, you have the biggest library, you have the most selection for your viewers. It's going to drive subscribers. People are going to engage with it. You're going to you know, have more subscribers coming in. But the problem is always how do you arrange those assets? How do you arrange those shows and movies on a small app in a way
that's enticing and available. I mean, I think the problem that Discovery has had with Warner Brothers Discovery is that you know, piling and all these reality shows into these into HBO, Max didn't actually increase engagement at all. In fact, it just kind of like a lot of those shows and programs just get lost in the mix and no one, no one watches them. So that's the problem is you end up paying for a bunch of things that don't actually drive engagement.
Well, here's this Jared Kushner's affinity withdrawing from the Warner Brothers Takeover Battle.
Yeah, okay, I mean again, that would make sense.
It would lower some of the concerns from state attorney generals, anyone that like is worried about what paramount and Nellison's would do with things like CNN.
If so, that makes Paramounts Guidances offer more attractive to Warner Brothers Discovery.
I think it makes it simpler, and that's a little bit more attractive in terms of again, if you're willing to just if Larry Ellison will just put up the money and backs up this whole thing, that that's the easiest way.
For any historical share price.
So much of his wealth is tied up or he only has twenty billion rights only, but he is basically eighteen according to the Bloomberg Billionaire indecks, basically eighteen billion dollars worth of net worth that is not tied up.
Wait to go back to this headline that just crossed Jared Kushner's affinity withdrawing from the Warner Brothers takeover battle.
That you say makes.
The paramount's guidance potentially more attractive.
From the Warner Brothers Discovery Boards perspective potentially also, Yeah, although at the same time, you know, it's a two edged sword because then it's also you know, will that make it harder for the regulatory approval down the line in terms of getting approval from you know, the Department of Justice and Trump's White House. You know, will they without the sun and law involved, does that make it harder?
I mean, I think there's a lot of questions on both sides of this, and it's going to continue to play out in the week's ahead.
Okay, So one question that we have is about the global linear networks, because Netflix's deal does not include CNN, TNT, Cartoon Network. I mean, the list certainly goes on when it comes to these assets that not that many people really want right now. What's the fate of those If Netflix wins this bid.
Well, it'll be spun off into a separate company before the bid, before the acquisition takes place.
Like a publicly traded company, a separate.
Publicly traded company discovered, probably called Discovery Global.
That's the plant at this point.
And yeah, those assets are still throwing off profits, but the viewership is the client across the board. There's a lot of other cable networks out there right Comcast is in the process of just spinning off a bunch of bits additional cable assets. So you know, at some point, does somebody come along and roll all of those assets into one company. There's probably some you know, synergies if you combine them in one place. But yeah, it's managing the declining asset over time.
I just want to mention because a Bloomberg story just crossing. So Jared Kushner's Afinity partners exiting from the takeover battle for Warner Brothers Discovery. A representative for the firm said, Affinity there they say they now believe the dynamics of an investment have changed since it became involved in the process.
In October.
Here's a quote with two strong competitors vying to secure the future this unique American asset, Affinity has decided no longer to pursue the opportunity. We continue to believe there is a strong strategic rationale for Paramount's offer.
Right, Well, I mean that's the thing is. I think when you put Jared Kushner in the mix. On the one head again, you think, oh, maybe they'll improve their ability to get it through regular Tory concerns faster under Trump's administration. On the other hand, it raises all these other political objections from progressive states, including California and New York, where a lot of entertainment assets are located. So yeah, there's there's definitely problems of bolt.
Well, even without Affinity Partners, Paramount's offer is being bankrolled by a list of influential Middle Eastern investors, Saudi Arabia's public Investment Fund, Qatar Investment Authority, as well as a little known group from Abu Dhabi called Limad Holding Company. Kushner had does have strong ties to at least he founded Affinity in twenty twenty one with funding from sovereign wealth funds from the region. Carol, as you say, it's complicated.
It's complicated this one is, which means it will be coming because it ain't over yet either, not Felix Jillette.
Thank you so much, So appreciated.
Felix, of course covering the media space for us, as we said, wrote the book on HBO.
Yeah, the book It's Not TV The Spectacular, Rise, Revolution and Future of HBO. Get that book now if you haven't read.
Felix is media and entertainment editor. So thank you so much.
Stay with us. More from Bloomberg Business Week Daily coming up after this.
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We're going to stay on the macro with a financial sector emphasis and great to have back with us.
Chris Whale and chairman of Whale and Global Advisors. He worked at the New.
York FED in the eighties. He's testified before Congress and the SEC. Worked on Wall Street. I forgot that you worked at bear Stearns.
And some other.
Written many books and also served on the Economic Advisory Committee of FINRA for over a decade.
And you also ward consultants of billions.
Was that right?
Yes? It was great fun they were buying a bank.
They were buying a bank, and they wanted to know.
Yeah, they were trying to you know, finagle regulators. It was a typical billions kind of script.
Well, out of the entire resume that Carol just mentioned, was that the most fun working on Billions?
No, I think the most fun was early days working at bear Stearns in London, you know, selling bonds. That was a lot of fun. We had a blast.
Well tell us about like it's funny.
You know, I love talking with someone like you because you have seen just kind of how the financial sector has changed a lot, Chris right, and the stress points that we've seen, certainly the financial crisis and elsewhere when you look at We just talked with Mike about some of the macro backdrop, and we've talked with you about specific risks.
But does it feel comfortable today.
Kind of the environment in your view compared to what we've seen in the past.
No.
I was going through the third quarter numbers for the big bank holding companies, which the FED just released. Yeah, day seventy five after the quarter closed. That's the best that they can do, and it's eerie. The credit costs are trending down the asset returns, thank god, or getting back to normal about one point five percent. But there's a lot we don't see, and that's what's worrying people.
Whether you talk about oracle, where you talk about private credit, what people are worried about today is what they don't see in the data because they know that a lot of this is being fudged. And that's what worries me as well. What do you think is being fudged things like loan losses. There's a lot of forbearance here in New York City for multi family apartments. Our new mayor is threatening to start taking over buildings the landlords are
not keeping up to his standards. Well, the city in New York can't afford to take care of them either, and so we have this accumulation of pressures, mostly caused by inflation, mostly caused by our friends at the FED. But in their defense, why did they do that? Because we told everybody they didn't have to pay their loans and their rent for two years during COVID. People forget that. In the mortgage industry. In March of twenty twenty, we were all looking at one another going, what are we
going to do. This is after President Trump the player of the emergency and said you don't have to pay your bills. Yeah, well, the FED came to to rescue by dropping raised to zero because of a surge of home lending activity record volumes, and that float was borrowed to help everybody pay their bills.
So why aren't we seeing more stress in the credit markets and why are we seeing records on Wall Street?
And like it sounds like then some disconnect.
I think part of the reason that the Street has been doing well listed stocks is because you have a lot of liquidity coming out of private markets. Going back into more liquid markets makes sense, right. Private equity, private credit is a mess, and we all know this. Something like fifteen percent of private equity companies in the US are paying in cond rather than in cash.
So you notice waiting for the year to like the exits and for things to move on.
There's a lack of demand from banks for loans except in one category, non depository financial companies, which is another way of saying private equity funds, credit shops like Areas and Apollo. They're the ones that have been aggressively expanding their business using money in part from banks. So the banks are now the facilitators. And what does this remind us of Carol the two thousands? Right right, it's the
same thing. You have non bank intermediation, relying on the bond market, equity markets, and bank credit, and the thing is eventually they're going to stumble, and that's what everybody's worried about it.
So what does that stumble look like?
What is the shoe that drops?
It looks like First Brands, Hello, we're defaulting. And most people had never focused on that company. It was a private, totally institutional play. The same thing with Tricolor auto lender that you know half of their customers were illegal aliens. Nobody had ever focused on this. It was an institutional story that suddenly surged.
So you think those two instances are canaries in the coal mine.
I think they are typical of what we're going to see more in the future, which is you're going to see more of the missteps in the institutional, non public market, which was supposedly better. Remember everybody was selling us the idea that private was better than public. No, we have public markets because they were open and relatively liquid.
Chris, you know, after the Jamie Diamond cockroach comment that there were many members in the private world that came out or a few, I should say that came on our air, and that seemed to say, hey, listen, things are fine, and I understand many would say they're talking their book, But you know, are.
They systemic risks?
Like what's the exposure with the traditional financial sector when it comes to the private markets, Because I think that's what we care most about right now.
I think the private players can fail tomorrow. It will cause a bit of kurfluffle and volatility in the markets. But are they systemic like a big bank. No, But the big banks will take their lumps too, because they are lending indirectly into these structures. They tend to take the most senior positions, but that may not save them. You see the assumption that Okay, I'm senior and three quarters of the stack is below me, and therefore I'm okay.
That may not work this time around because you have leverage on leverage on leverage in some of these deals.
So when so when like the big banks report again, we're getting ready for another earning.
Cycle, right, you know, we'll get that, you know, in early early January.
So what do we look for for things like that, like what do you look for The.
New yors are going to be wonderful. That's what worries me, you know, just as an analyst. We were supposed to have a recession last year. Credit losses largely peaked last year third fourth quarter. Yeah, they've been coming down since then. So if you look at the picture, you say, God, everything is great. You don't see a lot of utilization. You don't see a lot of demand from the banks for credit. They've got a ton of unused credit out
there that they wish people would use. But so you don't see stress in the published numbers, where you see stresses when you talk to professionals, when you read the really interesting media like Bloomberg and others to cover some of these stories. There was a great piece in the Ft over the last week talking about Altus, a company that Jamie Dimond came to the rescue of paid off their most restrictive loans so that they go out and
borrow more money. So like and all of the credit guys that you're talking about looked at Jamie Dimond and they're going, hello, what are you doing. Yeah, so he's an enabler of bad behavior. Because Jamie has to go out and make money too, in a market where there isn't a lot of you know what I would call quality demand, Which reminds me of.
What would happen in the Great Financial Crisis.
Of people saying, I know it's getting messy and ugly, but there was it. The CEO of City at the time, I think who I came out and made some comment about I got to be in it.
Like, oh no, that's right, Yeah, that was the I can't think of the.
Temporary CEO Whoah, you know replaced John Reid.
But I'm just saying, like this idea of like feeling like you have to be in it the pressure of it, yes and no.
I think that some institutions have the common sense to pull back and say no, others don't. I'll give you an example P and C. P and C has the lowest loss rate in the top seven banks. They've always also got one of the lowest funding costs. That's a fairly well run half trillion dollar bank that has managed
to avoid risk. I think often by saying no, the street wanted them to get more involved in certain things like prime brokerage, dealing with private equity funds that sort of thing, and they said no. So I think there are institutions that are very well run in this market.
But again, the banks are underutilized because the non bank financial companies have stolen their march and they are going to the customer and they're using wholesale funding from the big banks, and they're in turn disintermediating them.
At the same time, christ we want to talk a little bit about AI too in the time that we have left. We've talked about it with you before circular financing. We're not sure how it all plays out in the economy and what it has to do with productivity and with economic growth. Weighing in on AI in its potential economic impact. Ken Griffin of Citadel speaking with Bloomberg's Danny Berger a little earlier today at a conference in Paris. Check out what he said.
I think there is some chance that we will see meaningful progress in this field that will change the calculation that i'm or calculus that I'm setting forth, Like there are so many bright people in their twenties and thirties trying to unlock trying to unlock true intelligence, that this does create the environment in which a breakthrough may happen. But I think that generit of AI as we know today will have a very pointed, but relatively limited impact on the broader economy.
Appointed but relatively limited impact on the broader economy. Ken Griffin of Citadel earlier today, What in your view is the impact of AI on this economy?
I think it's incremental better search tools. You know, we're writers, So is he right?
I think he?
And frankly I read a lot of the long haired stuff on AI. So of the people in the scientific community, and they tell you the same thing. Because this is a third or four fifth time that we have talked about AI. You go back to the seventies and the eighties. Remember Watson IBM, which was a fiasco, but it was their way of showing what new technology could do. But is it creating general intelligence?
Now?
So it was all this waste?
Is all this waste?
No, it's marketing, you know, never Yeah, but.
That's a lot of market to spend.
Yeah, but that's Look, everything in the US economy is about marketing, Okay, it doesn't matter what it is. And if it's attached to a stock, then you know it's marketing. In video, I've made a ton of money on in video. I'm very grateful to mister Wang, but is he going to have changed the world. No, what we're doing is building a lot of infrastructure. We're spending a ton of money, not so much on building AI, but preparing to have the capacity to do it, mostly by studying the past.
To me, that's not AI. AI is when a machine can start to observe what's around it and react and determine what to do next based on what it sees, not because of you know, it's studied our language for the last fifty years, so you're.
Understood, Like the whole idea of AI is all the data that's put in from the past.
You think that, Okay, that's your take, Well we have Are you still in on video?
No? I got out, I got out. I wrote it up. It's split. I wrote it up again. It's split. But it gets to be a third of my portfolio. I've got to take the money and run, you know. With all due respect to Jim Kramer, who I'm very grateful to for getting me into the stock, but.
It sounds like you're saying that this that we're in a bubble with, at least with the spat of course we are.
That's what humans do. That's what marks what happens when they follow the shiny object. What happens when the bubble pops. We're going to see that a lot of the spend for AI will not be compensated with revenue growth that's going to help to pay it off. An oracle I think, unfortunately, a great company is the poster child for this. They were following the crowd. They decided to double down and do even more. And the truth of the matter is
one large language model. If all of the tech companies had gotten together and said, look, let's do this together, right, right. But the other problem I think is the metaphors that we use in this conversation is race with China. The Chinese don't use metaphors like that. When you listen to them talk about AI. It's part of a broader range of initiatives that they're trying to use to give them an advantage in the global economy. They don't see it as a race. This is all marketing hype, and we
have to differentiate between the technology and the sell. Okay, it's like we used to say about a IBM. Never mistake sales with delivery.
No all right, we gotta leave it there. Thank you, Billy, appreciate it my pleasure.
Chris Well and Chairman of Whale and Global Advisors, joining us here in studio.
Stay with us. More from Bloomberg Business Week Daily coming up after this.
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Hey, we talked about the market, the US jobs market earlier with Michael McKee. It's sluggish, not rapidly deteriorating. And we did see that data that came out saw traders refraining from boosting bets on your term fed rate cuts, setting stock slower and bonds wavering.
So we're not you know, it's not like.
All of a sudden traders are saying, Okay, we're going to get more rate cuts because of that labor data we got this morning.
Yeah, a reduction is fully priced ined by mid next year, you should not. But we're not seeing those bets go.
Up, no, exactly.
I'm curious to see what our next guest has to say, specifically about the US labor market. Let's head to the Bloomberg News Bureau in DC to someone well known to our Bloomberg audience. She was formerly chief economist over at ZIP Recruiter. She's Uliah Pollock and she's chief economists for the US Department of Labor. Julia, Good to have you back here on Bloomberg. How worried are you about rising unemployment?
I'm not so This report over states understates the strength of the labor market right now because there are two huge temporary distortions at play in the data here. The first is one hundred thousand or more federal workers who took the fork and came off payrolls and some of them have gone into temporary frictional unemployment. And the second big distortion in this report is the Schumer shutdown, which
forced nine hundred thousand federal workers off the job. But it also led to weakness in the private sector because it forced work stoppages for federal contractors and led to temporary layoffs there. So I expect the unemployment rate to jump back down very soon.
What about the youth unemployment right the rising and rising youth unemployment. Are you concerned about that?
So you know the unemployment rate is exactly where it was when President Trump first took office in his first term, and he has a track record of bringing it all the way down to three point five percent. We have a bigger challenge this time because of the Biden inflation hangover, which forced the Fed to slam the brakes on the economy,
and that has hurt marginal workers the most. But we are setting the stage for a huge comeback in twenty twenty six and beyond with the One Big Beautiful Bill Act, which has hugely stimulative policies, and you'll see those macro stimulative effects build into twenty twenty six. They are things like like expensing fast and accelerated, full and accelerating expensing for business investments, no tax on tips, no tax on overtime, no tax on social security.
So, Julie, if I may just jump in, just because we only have about five minutes left here. So it sounds to you like that there's and we've heard this certainly from guests here on Bloomberg, more liquidity coming into
the market, things to support economic growth. It sounds like you said that the labor picture is actually better than what the data showed, So it sounds to me then that the FED is correct, Jay Powell is correct and being are you know, actually forgive me what your sounding like you're saying is that maybe the FED doesn't need then ultimately to be cutting rates. That things actually look pretty rosy for twenty twenty six.
So I think the reason that UH employment growth, the job growth slowed so dramatically between mid twenty twenty two and mid twenty twenty four is that rates were high. And the longer rates stay restrictive, the more of the economy gets hurt, the more businesses have to refinance, the double the rate, the more families go out there and try to buy a home and find that it's just unaffordable. So rates right now are still restrictive, and they are still a problem for much of the economy.
But you said were you said you weren't concerned about rising unemployment. So I'm a little confused.
Well, the FED has a duel mandate full employment on the one hand, and price stability, and this president has shown that his policies delivered both. In the first Trump administration, we had non inflationary growth, and you can do that with policies that don't throw fuel on the fire of demand and restrict supply, but do the exact opposite. So through deregulation, through reshoring incentives, we're going to see this labor market take off again and in a non inflationary way.
Well, on the resharing part of this motivation for resharing on sharing, imposing tariffs to bring back the Midwest, to revitalize what many consider the American dream. Secretary Bessett has said it's been harmed by global trade. The manufacturing industry, though it keeps shedding workers, when can we expect the data to reflect progress that the administration is trying to make in restoring that American dream.
So the economy shed manufacturing jobs for about two years before President Trump took office. Again, this latest report shows the largest increase in construction jobs in over a year. And that's really the front end of those investments in mining and energy and manufacturing, and there is signal that manufacturing job growth will pick up.
So, okay, you know, you look at the labor market, I mean in terms of initiatives that will potentially help the.
US labor market.
You know, the conversation around artificial intelligence at your j Powell even addressed it in saying it hasn't impacted US jobs yet, So I'm just curious how are you factoring that into as you look at some of the upcoming moves the President ramping up in terms of hiring people to really focused on technology AI specifically in the administration, so looking to make more investments so that the US
certainly has a dominant role. I'm just curious how then you factor that into your estimates for the impact on the US labor market.
Well, the AI boom is driving huge demand for workers in the skills trades, in advanced manufacturing, and of course workers with AI skills, and it is our job at the Labor Department to ensure that US workers are prepared for those jobs of the future. For the first time, labor policy and education policy of pulling in the same direction.
We've aligned labor and education for the first time ever, and we are now focusing very heavily on getting workers access to job connected training that sets them up for in demand jobs and that doesn't push them to expensive degrees that leave them with nowhere to go.
Let's talk personnel a little bit. We're curious about why it's taken so long to make another nomination as BLS commissioner. Is your name in the ring? Is your hat in the ring?
I have no idea. You'd have to ask the President.
That would you if you were asked, would you serve as that?
Well?
I think there is a tremendous amount of work to do there tracking AI's labor impact, improving the timeliness, the granularity, the accuracy of the data, and I have at the Labor Department made it my priority to push forward a very aggressive labor market data modernization agenda that puts workers and learners first and gives them more access to the
data collected on them. So right now, I love partnering with the BLS on all of those kinds of initiatives, and I am happy to serve in whatever role the President sees fit.
If we're thinking just thirty seconds, but if we're thinking about previous commissioners, how will this nominee or this next commissioner be different just twenty seconds?
Thanks, I have no idea, but I think that whoever comes in has a very clear mandate from the President to put workers, learners at the center of what we do, to change the data paradigm to a real time data paradigm, and to make sure that the data is accurate and has the utmost integrity.
All right, Julia, thank you so much. Julia Apollo chiep economists for the US Department of Labor.
Stay with us. More from Bloomberg Business Week Daily coming up after this.
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I've been driving on that man's went on.
Well, let's take a drive. Drive, yeah, drive, Can you.
Just focus on driving, focus on the roasting your.
Car, drive, boss, because I'm asking to you, you just taking place in the draft.
Just drive, baby.
Let's see this is the drive to the clothes.
But we're going we don't need road.
On Bloomberg Radio, all right, everybody, We are just about eighteen minutes away from the closing bell on Wall Street. Carol Master Timstanevik live across Bloomberg platforms here at Bloomberg headquarters, and we're seeing some buying as we get closer to the closing bell here and I'm just looking at what you've got an S and P five hundred though that's still a little bit lower down about five points here,
but definitely off its worst levels of the session. Now's that one hundred, now one hundred and seven points to the upside, tim and that's good for a game of about four tenths of a percent.
All right, Let's bring in Larry Patowski's co founder and managing partner and portfolio manager of good Haven Capital Management. He joins us here in the Bloomberg Interactive Brokers studio in person, in the flesh.
In person. It is nice to be here in this studio with you both.
Great, it's been many years.
Last time, it's been a long time. Then we do this remotely. It seems like the two of you are having a lot more fun in the studio than I am in my office in New Jersey. Plus you have the unlimited snacks you know in the lobby, so I figured, what the heck comes?
Well, You're welcome anytime, and thanks for braving the cold for coming in. Hey, we want to talk about Berkshire Hathaway. We want to talk about Lenar, but I want to talk about the macro economy and sort of what the outlook looks like for twenty twenty six, and the market environment looks like for twenty twenty six. How are you thinking about the new year and asset allocation?
I am thinking that the market, there's plenty of pockets in the market that are expensive. The market overall is certainly not cheap. The economy seems okay. And I have the luxury, which I have it a little easier than you folks. You have to, you know, every day, every minute, have a somewhat of a thoughtful conclusion on everything. I have the luxury.
You are so wrong about that.
I get that's luxury saying I don't know, and nobody's yelling at me if I say I don't know. So I look at the landscape and say, it is what it is. But we've been fortunate. It good even to be able to, you know, keep turning over rocks and finding things that are undervalued. And I think the portfolio itself is attractive.
Is it still hard to be your value MidCap player? Is it still hard to be a value player. I'm looking at the fun up about eight percent year to date. Three year, we're looking at average annual returns of almost twenty percent, which puts you in the ninety seventh percentile five year about sixteen percent on average anually according to Bloomberg data, ninety eight percentile. So longer term some really outperformance there.
But is it harder right now?
To still it's always hard. I mean it's always hard, and you if you want to outperform over the long term, you can't outperform over every period. But it's always hard. But you should enjoy continuing to look under rocks and you should expect. As I've written to people for a long time, you know, there's periods of you know, the three and five year which you call at which we appreciate, or you know, numbers we're proud of, and you know, we think the portfolio is set up very nicely on
an go forward basis. But it's always hard. But it's always also interesting and it's never boring.
Okay, So let's talk about some of these individual stocks. I want to start with Leonar and the opportunity that you see with Lennard. It's one of the biggest holdings in the fund.
Why are you bullish coming out of the Great Financial Crisis? It appears that we have still been undersupplied in single family homes. You can believe whichever statistic you want, is there a two million undisplayed three four five? And so isn't that.
Amazing how we went from oversupply and empty homes to undersupply? Oh you know White, You know, you don't.
Usually go to other extremes and sometimes they stay there and everybody remembers how bad that period was. But the other interesting thing, you know, there's so many fast changing parts of the economy out there, and in good Haven we often say it ourselves, wait, what's not changing? What industry might not be changing that fast that I could have a strong view of what it might look like in three, five, seven, ten years. Single family housing. Lenore is the second biggest builder after Wharton.
It is a lower price point than some of the competitors two.
Hundred thousand dollars price but you know, so are you know Horton Poulte, you know, or a lot of them are in the ranged hole is a million bucks. But the industry and Lenora, you know, I think is leading the way is becoming what we would call a better business, higher returns on capital, higher returns on equity. They have taken what was a historic balance sheet that had a lot of land and they've spun that out, so and
they're now repurchasing shares in a material way. And I think your timing is very good to have me on to discuss this because they report earnings after the close today. The near term we expect to be somewhat tepid. That's an opportunity potentially, So you have a business that now has the ability to earn high returns on capital, repurchase shares,
the price earnings multiple. Maybe they earn around eight books for a little while, but the opportunity is that if they embark and continue to succeed in the strategy they've embarked on, you could imagine earnings at twenty bucks or so a couple of years down the road as margins return to twenty twenty four levels, units are up five six percent, you know, a year on average, and the share kind of comes down.
Why are they in a position to show and get better return on capital?
Higher return on capital because it's spinatically.
Because they've taken a balance sheet which had a lot of land, and they've spun that out into a company called Milrow, and now they've got a leaner balance sheet, okay, which gives them the ability to have higher returns on capital. They're not tying up so much capital in land okay, And they also will generate free cash flow throughout the cycle. The industry was a little boom and bust historically when they you know, they didn't really generate cash except when
they shrunk. And so here is and this is a very well articulated, well throwed out plan. Again, the near term should be a bit tepid, but so what, I think you're creating a better business model for the long term.
And so Larry.
It has more to do with their strategy versus a lower rate environment or people finally getting off the fence and buying homes.
It's a little bit of every strategy.
But I think the bigger players in the industry are in different ways embracing becoming better businesses. And the other interesting thing is that if I gave you one hundred million bucks and I said go compete with Lenar, with Horton, with Poulte, with MVR, with Toll, I think it would be very hard to do. So I think these companies the new home market has taken share from the existing home market because they have levers to pull. They have leverage and buying supplies and operating and marketing.
It's hard to be new.
It's hard. It's hard to not admire where they're going.
Before we let you go, we got to get you awayh on On, Berkshire, Hathaways. It's your top holding in the fund. Greg Abel takes the reins next year. You're okay, you're keeping all your shares.
We are for sure keeping all our shares. We made Berkshire a very big holding in the covid Or. Our return since then have been strong. This is a management team and a board with decades and decades of success. I think it is appropriate to assume that mister Buffett and the late mister Munger, after sixty years of great decisions, have made a thoughtful decision on succession, and you have to admire how well it's been laid out and articulated
in the selfless way. Mister Buffett is stepping aside and letting mister Abel write the letter, be on the podium at the meeting, letting him really, you know, write candy right if you will, let them, let him run the show. So we are. We admire how it's been done, and we think it's the kind of thing where you should give them the medefit of the doubt that it is a sensible and well thought out plan which we do well.
Fun.
Have you in studio? Yeah, come again sooner I will.
We would love it and help yourself to any snacks.
I'm going to load up my backpack.
Old school. You're not the only one to do that.
Old school.
I love God, I love the popcorn.
Larry pitcass Sky, co founder, managing partner, portfolio manager, Goodhaven Capital.
Manage it right here in studio.
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