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.
The retail sector, which continues to come out with earnings. Macy's lows and Dick's Sporting Goods all reporting shares of Macy's getting slammed. COMP sales beat, but a significant drop from a yoga shows that department store customers are pulling back on purchases. CEO of Macy's pointing to ongoing macroeconomic uncertainty and talking about promotions quote surgically implemented.
Sons Lake Precision.
This cannot be good to clear out seasonable seasonal items. Dix plummeting lows, though rallying after second quarter com sales and corely profit beat. Average annalistestaments a lot going on.
Tim, Yeah, with us, we got a great group. Bloomberg Intelligence Senior retail analyst Mary Ross Gilbert joins us on zoom In La and Bloomberg News reporter Simon Foxman here in our Bloomberg Interactive Brokers Studio Simone. I want to start with Dix and talk a little bit about this issue that we heard from Target last week, not just about the consumer pulling back, but about shrinkage, the industry term that's used for theft, employees stealing or damaged goods.
What's going on.
I mean, it seems like a very large contributor to their earnings this quarter, and we had this with Target last quarter. Back in May. Target said it was cutting its overall estimate for profits by five hundred million dollars because of shrink and what Dix was saying here on the earnings call today was simply that they had not planned for this level of shrinkage. They normally get a bit more shrink and account for it around the back
to school season, but this is more. They said, it's a really big problem and that they're doing everything they can to kind of combat it. But I think this echoes some of the other concerns that we've heard from retailers. I think one thing that maybe this is what we're seeing in some of the trading today. It was just such a large issue, and last time when we heard Target talk about the impact overall, it was just such
a surprise to people. I think that it was way larger than considered, and maybe that's why we're looking at shears.
Maybe they should put some security tags and things.
No, but that's so that's actually a perfect segue for
Mary Ross Gilbert. It's what I brought up on the simulcast a little earlier, Carol, And not to step on your feet, but I mean, the fact is is, if you make the changes within a store to prevent theft, there's a certain point where there creates so much friction between the consumer experience and consumer actually trying to buy something that it's not even worth going to the store anymore, like trying to get deodorant in shampoo and toothpaste from a CVS behind plastic. So Mary, weigh in on this.
What do you think of this, Mary Ross Gilbert, with the idea that you know, I said, the big winner with shrinkage is is e commerce because there is so much friction now with actually going into a store.
I would agree with you there, but on the digital side, Macy's was down, and actually Macy's called out shrink They just didn't call it shrink, they called it shortage. It kind of confused investors at first on the call, but they quickly caught on, Oh yeah, they're talking about theft, and that's exactly what it is. And look, we've been hearing about it in the news every week. We're hearing a group of grab and go theft going on, and
it tends to be along the luxury line. So Bloomingdale's, in fact, are Bloomingdale's right next to our building here. The Gucci boutique there was robbed I think about three weeks ago, so there's definitely a lot of that activity going on, and Macy's called that out also on their call.
It didn't affect their margins this quarter. They have sort of budgeted for the shrink issue, but it's definitely it's something that they guided to for their third quarter as one of the factors as well as you know, the weakness and the consumer and the fact that they saw higher debt expense and that's associated with higher delinquencies. They were planning for it, but it's it's much higher than they planned for.
You know, it feels like we're all of a sudden talking about shrink ange a lot. But I went back and just kind of did a quick Google search, and back in twenty fifteen, Bloomberg did a whole big story about shrinkage at everything from Dollar General, AutoZone, Whole Foods, Bed Meth and beyond, and then you know Walmart. So it's been an issue that's out there. It sounds like you want to jump in.
Yeah, it's hard to. I think one of the challenges we've had, and certainly the challenge the printing has had as well, is determining how large this impact actually is, because yes, people are blaming shrink for things, and certainly in California, the laws have changed that in a way where the law doesn't punish theft up to a certain level, and that seems to encourage some degree of shrink overall,
theft overall, but no one can kind of tell. I mean one thing, you know, Timmy were talking about how creating this atmosphere where people are worried about safety in stores pushes people to online. It's interesting because at the same time we're seeing Macy's, we're seeing Dix really invest in trying to get people back into stores, whether it's with Dixon House of Sport or Macy's with its smaller, more boutique elements.
We talk about that a little bit because Dix has actually just crushed it since the pandemic. I mean, the stock is up six hundred and fifty percent even with today's decline since March of twenty twenty, and a big part of that is because of the huge investments that the company has made in this experiential element. So what can people do in Dick's stores that you know they can't do online?
I think they're like rock climbing walls. You get special customer service, you know, especially engaging with the customer in a way that is not possible online. Right, there's already an incentive to try and go to stores. If you need a specific size, you don't know what tui as you are, you really have to go to figure it out. Instead, you're going to order multiple shoes and then you got
the pain of sending them back and stuff. It's trying to create an incentive for people to be in stores, and one of the things we've seen across retailers is this investment into these smaller scale stores as well to try and get people in.
So I want to go back to those that reported. So let's go back to Macy's for a moment, Mary, because what I thought was interesting, is what the CEO said.
And I know.
Our team also talked with the CEO earlier on Bloomberg Television or at least for Bloomberg Television. But these surgical surgically implemented talking about promotions surgically implemented to clear out seasonal items. That says to me some like over inventory. So is that just bad purchasing and bad decisions? Like how is Macy's doing generally?
Yeah, so I think just to clarify the point on surgical, that's actually a good thing. So what he was trying to say is because they have invested in data technology and analytics, they are able to target their promotions more pointedly, and as a result, they're able to move out merchandise more quickly and not take as much of a hit as they would normally have done without that capability. So,
if anything, that's actually a good thing. And they were able to, you know, clear out that merchandise well in advance of you know, what they were planning to do, So that is the good news. Yeah, going into the first quarter, they were seeing strength. I think everyone was.
We you know, we had a good January, and then all of a sudden, the world changed and we started to see the declines you know, since then, and they've continued, and I think, as Gannett pointed out, I mean the consumer is also spending on experiences and travel, and then with their fifty percent of their customers earning seventy five thousand in under, they're strapped when you think about living expenses being so high, and look golf prices picking up
some share possibly as we've seen, you know, strength in their figures.
I did think it was interesting that the MACCFO saying credit card delinquities accelerated in the second quarter, particularly in June and July, which negatively impacted results. We've just got about twenty five seconds left for Lows. What do we need to know?
Housing a little bit stronger than everyone anticipated, and contractor division especially kind of strong.
Is that because people don't want to move and they don't want to they want to spend.
The question, right, It's a little unclear at this point. You know, contractor was stronger for home depot as well, which is.
More important to the home depots business. Isn't exactly, Yeah.
Home depot split is fifty five forty five, whereas Lows is seventy five. DIY to twenty five typically. But this is interesting, right, Maybe people are stuck, maybe they're spending more. It's hard to get a sense whether this is a long term trend yet because the dynamics are moving so quickly, but there is an under supply of homes.
I will say Low's is up three point six percent, so definitely an app.
For the one good one.
Yeah, I know exactly. There's not a lot. Simon Foxman here in our interactive broker studio. Reporter at Bloomberg News, thank you, Thank you, Mary Ross Gilbert are thanks to you as well, Senior retail analyst at Bloomberg Intelligence. On zoom from Los Angeles, 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.
One of my favorite moments of our broadcast was Iri Jersey our interest rate strategies here at Bloomberg Intelligence talking about was it on the live blog right? And he, you know, I said, what's more important to you? You know, in video or Jackson Hall? And I'm assuming he's going to be like Oliver Jackson Hall and he talked about on the blog saying, how people though we're talking about the importance of Nvidia this week.
Yeah, you know it's funny.
Ben Emmons, Van Emmon's over at newl New Edge Wealth, who listens to us. He has, sends a newsletter, he watches us. He just sent me that story. How in vidious Jensen Wong maybe driving fed rate hike expectations.
I just think it's interesting that you know that that focal point. So anyway, this is why we wanted to talk about it. We I don't always love to do previews, but I felt like this was really important, and especially when you've got somebody like our own Bloomberg News US Semiconductor networking reporter Ian King, who knows this space so well. And Ian is of course joining us on zoom from San Francisco. Ian, we did see Nvidia, which has been on a tear certainly this year. I just want to
pull it up to see how it closed today. It was down about two point eight percent, but it did hit another intra day record today on expectations that things are going to be pretty good when it reports after the close tomorrow remind us why this is such an important focal point.
Well, if you believe in AI, if you believe that this is the future of computing and that it's going to revolutionize so much of the economy, then obviously, well.
Who's going to profit from that? First of all?
And you know, the company arguably the only company that's really shown I've done instable impact from it already is in video because the chips that they provide are absolutely central to the training of all of that software that's going to do all of these magical things.
So we're told, do you believe the hype.
And I believe the numbers the company? The company this quarter is on course to report quarterly revenue that just twenty twenty was annual revenue, So clearly there's been a rapid acceleration there. It was a company that was a niche. Now this data center business is absolutely huge and the majority of its business, whether that's sustainable or not, we'll get a window into tomorrow obviously, but in terms of proving, hey,
look here's some real numbers, we've done something. It's absolutely there. Ask me about AI in general, and I might have a different answer.
Well, we may get there yet, later in the program, we did just show chart of in video stock up more than two hundred percent. So far, you're to dating in what is it that makes in video different? What's the company's moat and does it have any true competitors?
They have competitors who are wildly chasing them to try and catch up. The company's moat is that they saw this coming. I mean, a few years ago, a company that was making gaming chips started talking about accelerated computing, started talking about this being a thing, and everybody was like, really, are you sure. The CEO was talking about how many people were at universities were training on his software every
eing quarter. We're like, yeah, we've got this many universities now teaching people this Kuda program.
And again, well she was like, what's going on here? Why do we care? Now? Fast forward to where we are.
Right now, everybody's using their chips, everybody's using their software because that software allows a form of computing to happen that was previously very very difficult, very time consuming, and very expensive. Still expensive, but now it's possible.
I mean, at this point, considering all the conversations and all the reporting that you know, you and just kind of our overall team have done about the excitement of AI in general, one would assume that their numbers have to be blockbuster, right, or is there something in the cycle that companies will buy some chips and then they'll be a little bit of a lag and then they'll buy some more. Help me out and help me understand so that I'm hopefully somewhat smart when they report tomorrow.
No, you've You've nailed it.
That's the perfect question to be asking ahead of tomorrow, because then if you read the analyst reports, they're all over the place.
Why are they all over the place?
Well, three months ago Wall Street got embarrassed, right, fifty two percent ahead of what the consensus number was, Right, was the projection that in Video gave wow?
Right?
So what's happening this quarter is all of the analysts that are struggling, well, is it going to be that strong? Is it going to be stronger? Is the is the projected range going to be even stronger than that? And the answer is they don't really know, because you could actually explain how strong.
In Video's numbers are.
And this is, according to Bittenstein, by just looking at the spending of just four of these big hyperscalers of the Microsoft's, of the Google's you factor in all of
the others, it could be even bigger. The gating factor on the flip side is back to supply did in video order enough chips did in video were in video as ambitious as they could have been to capture this because you remember, you get chips about four months after you order them, and they outsourced production, so their estimates of what they could do are going to be the gating factor here.
So when I think about like, I love our supply chain function or supply like right, who's who are the customers?
Who are the Bloomberg?
I love it? I love it, But the supply chain management, I mean, and video's got to be on top of it, right to make sure that they can actually meet all the demand that's out there.
Yeah, I mean that The good news on that on that end is that the PC market still isn't great and the smartphone market still sucks, so TSMC isn't devoting as much silicon to those customers, so that in theory frees up this extra capacity for in videos what it
calls accelerators, which everybody's buying right now. As I said, the gating factor is how well did in Video see this coming the orders that they put in three months ago that they're going to get chips for now, you know, just how much of the order is in enough?
So what can Invidia tell us? What can company executives on the call tell us about demand?
Yeah, I mean, you know, there's a lot of mixed signals right now, general data center demand. It's not great because everybody's spending on AI PC demand, which is another huge market for them.
That's not great.
We don't have that many strong expectations for that part of their business. What will be interesting, I think, and this is what in Video has been very careful and I think very sort of perceptive in what they've done, is to try to spread the use of AI beyond these so called hyperscalers, beyond the Microsoft, beyond the Googles, beyond the facebooks, and they're trying to basically embed the use of this technology into the.
Economy at large.
Still early days there, people will be looking for signs of that kind of spread, of this becoming a more sort of baked in part of the economy. And that's back to your earlier comments. I think if they can show progress there, then the excitement can continue and it won't just be a factor of what Google is spending every quarter.
So what does that look like when we actually see AI spread throughout the economy beyond these hyperscalers.
I mean, initially for in video, it looks like companies that you wouldn't expect to be direct users of invidious technology becoming exactly that. So you have maybe pharmaceutical companies using accelerated computing for drug discovery instead of using the traditional methods to get the approval that they would go through the experimentation progress, Maybe we do it all on a computer. If they start ordering in a big way, it's spread into that side. This is an affirmation of
in video, this isn't just a one hit wonder. This, this isn't a one use thing. So we need that kind of use a case to emerge and to become embedded and for that to become a significant part of the spending.
I mean that goes into the euphoria side of it, right, Like if this just premeates in terms of the AI, the generative AI impacting everything that we do, I mean, man often running right, I.
Mean it's it's you've seen the stories we've written them ourselves, and you've had these conversations. Are we at the beginnings of the internet here where pets dot com and everybody else got a wild voluation that was based upon nothing, or are we at the beginning of something which is more profound and more going to be much deeper embedded in economic activity. Obviously in Video is arguing that that's the case. Some people who are concerned that the valuations are saying, maybe this is a fad.
You and I asked you earlier about you know, who competes with in video? You said, competitors are chasing them and the difference within videos that in video start coming. But who are as close as competitors right now?
I mean, is there anyone?
Two companies AMD obviously another graphics maker. They have a directly comparable product to in video that's coming in the fourth quarter of this year. We'll see just how quick the uptake is on that. They've given strong projection, so we'll see. And the other one is obviously Intel. They already are in this market. But again software how easy it is to use what they're going to provide, because in Video has made what they provide very easy to use, very just plug and play.
As far as the industry is concerned.
You're incredible as always. Ian King, Bloomberg News US semiconductor and networking reporter, just knows everything.
YEA, what are you doing tomorrow?
Get some sleep, buddy.
You're listening to the Bloomberg Business Week podcast. Catch us live weekday afternoons from three to six Eastern on Bloomberg Radio, the Bloomberg Business App, and YouTube. You can also listen live on Amazon Alexa from our flagship New York station, Just say Alexa Play Bloomberg eleven thirty.
Perhaps you're like me and in your wallet you've got a couple of different health insurance cards. One is for your medical insurance. It's the one you give to your doctor's office. The other one is for your prescriptions, which you present to the pharmacy when you pick up a medication.
That prescription.
One could be for a pharmacy benefit manager, also known as a PBM.
Yeah, PBMs, Come on, you know what they are?
They do you? Well?
This is why you and do you know what they are? We haven't talked about this so much off air. They negotiate cheaper prices for employers in health plans. They also pocket drug makers cash, which you maybe didn't know about. They're under fire from all directions right now. Blue Shield of California last week say replaced some drug procurement services from CBS Health's Care PBM with an amalgam of rival offerings.
In that sent shares of CBS sliding. We all kind of like stood up a little straighter when that headline crossed.
Yeah, that was a big one.
And then officials is divers as FTC Commission Chair Lina Kahn and Florida Governor Ron de Santis, they want more transparency from them. There's a story about PBMs and how they grab extra cash for themselves from the very parties they're supposed to be playing hardball against. It's in the upcoming issue of Bloomberg Business Week. It's on newsstands later this week. It's already online though, at Bloomberg dot com, Slash BusinessWeek and on the Bloomberg terminal with more. We
got the author of the story, John Tozzi. He's Bloomberg News healthcare reporter. Also here is the editor of Bloomberg BusinessWeek, Joel Weber. He's in our Bloomberg Interactive Broker's studio.
Joel.
When I saw there was a story in the in the issue of Bloomberg Business Week about PBMs. I immediately just thought it was related to last week's news about Blue about California Blue Shield of California, you know, saying hey, we're gonna go with Mark Cuban startup, We're gonna go with Amazon startup. But the story's much bigger than that.
Yeah.
Well, I just had no idea how lucrative is to get between you know, you and your prescriptions. And it turns out that we're not alone, and how that feels like a big deal, and that even places like the FTC Federal Trade Commission has also shown an interest. John has been on this for a while and has kept me abreast of his interest in it, and so I
was really glad to see it. But how does this break down, John, Because the very people who are supposed to be keeping our drug prices affordable maybe aren't maybe don't have my best interests at heart.
Yeah, So this has been an issue in.
You were just you know, like with somebody that we could you know, take advantage of.
I'm sorry, John, this has been an issue in the industry for a long time. People who have followed it know about rebates. So basically what happens is you go to the pharmacy, you fill a prescription, your health plan pays the full dollar amount of that prescription, and then after the fact, at some point, the drug manufacturer the pharma company, sends a rebate for part of the value of the drug to your pharmacy benefit manager, and the pharmacy benefit manager sends part or all of that rebate
back to your health plan. And this is something that has been debated for years how much of the rebate gets passed through. Employers and other people who pay for healthcare have said we need to have one hundred percent of the rebates passed through. There's been this increasing pressure to kind of get all this money coming from the drug makers back to the people who are ultimately paying for the drugs.
Why are there rebates?
Good question.
I don't know if we have time for it here, but you know, I mean like this is sort of a system of payments and complexity that is built up over years.
One.
You know, what the PA say is that they lower drug prices by getting these They lower net costs by getting these rebates and other discounts from the pharma companies. They aggregate buying power, they aggregate demand, and they can go to the table with pharma and say, you know, give us, give us money back on these drugs. The question is, you know, where does that go and who who really benefits from it?
Okay, so Tim mentioned that there are some new players around. How's this going down within the industry? Like this does seem like you know that there's an opportunity here to you know, maybe take advantage of consumers.
But there are other approaches that you know are out there as options.
Right, So, I mean, one thing to know is that there's been a tremendous amount of consolidation in the market over the years. So there are now three main PBMs that control about eighty percent of the market.
I hadn't realized have been around since the sixties. I don't know why. I thought it was a newer thing, but forgive me good Yeah.
And and they're also like those businesses are integrated with much larger companies that also own health insurance companies. Uh, you know, you have CVS Health, which owns ATNA, United Health, whichnes optimar X PBM Signal, which oones Express Scripts PBM. So they have their arms and a lot of different businesses that are all related. There is growing competition in
the PBM market. There are a lot of new entrants, a lot of new tech focused companies, companies that say they're uh, you know, making more transparent offerings, but they're very small, and you know what traction they're getting is still you know, still to be.
Seen because those three big players still dominate the market.
Do you need a PBM?
You know, the industry says that employers are not forced to contract for PBM services and they choose to do so anyway, and you know that's that's their position. I think realistically, you know, there's there's not a your alternative right now. If you're providing prescription drug coverage, this is sort of the avenue to do it.
But with the blue how did it work.
Before they became so dominant in.
The nineteen sixties or before, like I don't know, like they.
Have PBMs always had a role here.
Well, I mean one thing is, you know, the role that prescription drugs play in healthcare has grown incredibly in that period. Right there are more new drugs, more expensive drugs every year. You know, in the nineteen sixties, I don't have it.
In front of me.
But the prescription spend was you know, much less than it is now. So part of this is like an evolution to you know, new innovation on the pharmacide that's very expensive here in the United States, where you know, we have a free market for healthcare and the drug makers can set their prices as high as they want, and so this is sort of an industry that's evolved
in response to that. But you know, there are there are increasing questions around, you know, how it actually worked and whether they are you know, whether they're clients, the employers are fully capturing the value of the discounts that they get. Okay.
So FTC has weighted into this and subpoena affiliates of PBMs called group purchasing organizations. I don't usually think of the FTC and you know, drugs being in the same place. I think usually more like kind of big tech crackdowns. But what is the FTC's interest here.
So the FTC has subpoenaed the PBMs themselves and then these affiliates, the group purchasing organizations as well. You know, I think as a competition regulator they have and particularly under Lena Khan, they have sort of taken a close look at this industry. They're doing what is essentially a study of competition. So it's not, you know, it's not an enforcement action. They're kind of gathering information and will
presumably produce a report at some point, you know. But again, there has been a tremendous amount of consolidation in the industry, I think, you know, and these are companies that have a lot of influence over what drugs are available.
Well, and I also feel like rebates is a loaded word. It just says like I'm getting a rebate, like something's got to be good about it.
But when I hear a rebate, I think to myself, Okay, this is, you know, a way to get you to buy something with the hope of you not actually cashing in this rebate.
Well, the thing about a rebate is by the time you get it, you've already paid for it, right that you're not. It's it's not an upfront discount, although there are those two, it's you know, so, and then what happens to those dollars when they do flow back to the plan. How much goes to the actual patient who paid maybe the full cost of the drug if they have a high deductible.
That's what I wanted to ask you, executives from the three the three big PBMs, this is in your story, so that they pass almost all the rebates they receive from drug makers back to clients. But we don't really know that, do.
We well or do they They say they do, and in some programs, like in medicare, there are regulations around requiring them to do that. But the other thing that we've sort of come to learn is that even as they say they're passing back almost all of the rebates or all the rebates in some cases, there's other money they are getting from drug makers that is not called a rebate.
So it's called a manufacturer administrative fee, or an inflation protection fee, or a data fee, or you know five or six other different terms that show.
My SELFE trail. Is this what this is?
Like?
Like all these crazy little fills anyway?
It so it sounds like it.
Well, right, And so, I mean, one of the questions employers have is, you know, how much money are these companies making from pharma companies?
And it's money that is tied to.
The prescriptions that you know, you and I are filling, right, and so where does that go, and that's sort of the big.
Unanswered question and all all of this.
Where does it go?
Where does it go?
Yeah, there is a bipartisan interest in perhaps regulating this space. Is this one of those areas that everyone in DC actually gets along about.
I think there is a lot of agreement.
You know, we've seen bipartisan bills both in the House and in the Senate from several committees. You know, one thing, just the political context here is you know, last year in the Inflation Reduction Act, that took kind of a big swing at pharma because Medicare will be able to negotiate drug prices for the first time, and PBMs are sort of kind of next up in a way that you know, Congress has been looking at this industry pretty closely, and we'll see if there's action on that in this session.
I thought it was really interesting too that it was noted. I think it was a quote from somebody in the story about how these fees that these PBMs get, that they're tied to the price of a drug, even though the process doesn't matter if the drug costs twenty bucks or two thousand dollars.
Yeah, that's one of the really interesting things about this whole business is like a lot of people, a lot of actors' fees are tied to a drugs a list price. So you know the argument is that if your fee is tied to the list price, then you make more money on higher price drugs, so you have incentives to you know, cover and sell and promote higher price prasim Pick.
Anybody, right, well, you know, pick a list.
Right we go, v Hey, John, I wanted to go back to what happened last week when Blue Shield of California said I was going to replace some of its PBM reliance. So it was using CBS health Care mark the PBM for pretty much everything, and now it's going to use those upstarts that Joel mentioned mark Cubans, cost plus Drugs, something from Amazon. How closely is the industry watching this, because we saw a lot of stocks move south as a result of this.
Yeah, I mean what's interesting is that Blue Shield of California is using some newcomers. It's also still using CVS for this specialty specialty drugs, which is maybe half or more of its pharmacy bend. So and it's also using another PBM called Prime Therapeutics that has a relationship with sickness express Scripts. So there they are doing something different, they are not totally disentackling them from the existing system.
So does that essentially tell us that, Okay, the future of PVMs could be in specialties.
That is definitely a growing area both of you know, for drug makers and for PBMs.
You know, kind of high cost.
Drugs that are called specialty. Although the definition around what is especially drug and what isn't is a little fuzzy sometimes too, but yeah, that is that is a place when you listen to these companies, that is a place where they are growing and you know, they have clinical programs around specialty drugs, and you know they're making more and more of their profits there.
Okay, John, you know this space incredibly well, You're always all over it. Tell me something that you learned while you were working on this one.
You know, I had.
Actually not seen some of the contract language that we uncovered for this story, and it is pretty it is pretty revealing to look at. You know, we looked at a contract of between express Scripts PBM and one of its clients where they say, you know, we contract with pharma companies for our own account, you know, and we may make positive margin on those relationships, you know, so
they are disclosing that to their clients. So what they're not you know, what nobody really knows is like how how significant is that to their business?
And it makes me wonder, you know, as the cost of drugs just keep going go up and up and up, like how this potentially plays into all of it. This is why we were obsessed with this story all there. We were talking about it. John Tazzi, incredible, Thank you so much your rebates in the mail. John is of course healthcare reporter at Bloomberg News, as Joel said, just knows this space inside and out. John of course in our Interactor Broker Studio along with the editor of Bloomberg BusinessWeek,
Joel Weber. Catch this story in the upcoming new issue A BusinessWeek at on newstands on Thursday, already online at Bloomberg dot com, slash BusinessWeek and on the Bloomberg Termolk.
Guys, Thank you, 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.
Let's get to it, guys, let's talk about the market trade. Lauren San Palipo is director and senior investment strategy analyst for the Chief Investment Office at Bank of America. With us on phone in New York City, big title, tell me, like, what is it that kind of from day to day is always on your mind?
Well, I mean, particularly for summertime. This has been interesting recently after a really strong seven months, right, We've been watching stocks certainly rip to the upside here. It's a little bit of a digestion here in August, so that's making for an interesting August, and rates have certainly.
August is supposed to be, or has of late, right, the second worst month for stocks, September being the worst. So we have seen this trade before. We kind of take a breather in August.
That's right, yep. And so I'm not looking forward to September either your point worst season or worst month of the season here.
So seasonality, Lauren, do you think what's happening is fundamental or technical?
I think it's a little bit of both. I mean, so that seasonality is certainly not helping maybe a little bit technical too. We've seen those valuations run up, and I think this digestion is a little bit called for.
So if September is worse, how much worse?
Now?
How much are you looking for? Like a ten percent correction on all the major equity averages? Like give us an idea. If you look at some individual names, you certainly can see some interesting trends, But what is it that you're looking for specifically? And again, is it technical fundamental? Is it just what I think.
You could see? You know, I think under ten percent, it's not abnormal for markets to be pulling back by that amount a few times a year. So the fact that we've just gone sort of straight up into the right here on the chart sort of makes for this pullback scenario in September. So I'm weary, But at the same time, we've actually capitalized on some of these pullbacks. We think about buying into the market, because you know, the market really hasn't afforded those opportunities here to date.
Think or do.
Think about buying into the market or do you actually buy into the market.
Well, we're advising clients, yes, okay too.
Yeah, And are they listening? Are they a little nervous too.
I mean, well, you're seeing this year sort of this idea that there are alternatives out there, right, So we have seen some of these elevated cash positions. Money market funds certainly attractive here at five percent, so that's really yield. So there's certainly some yield chasing happening. But yeah, we're looking to just deploy those on these opportunities now through year end.
Are you at all concerned about what we've heard from retailers, specifically target Walmart? But we heard this week with executives saying that the consumer is pulling back a little bit.
I think the tone of retailers, to your point, has gotten a little bit more cautious. In first quarter, we heard some evidence of trading down, but today felt a lot different, right, I mean, we learned that more folks are sort of at different levels of income, they're shopping in big box discount stores, and then more alarming, there's even evidence of shrink or effects for those retailers. So I think that has to be telling you something.
What do you think the theft tells us, the shrink tells us?
Well, I mean, my guess people steal out of necessity. So that's not great. We're seeing credit card balance is also extremely elevated. You hear that from the FED, so the retailers, plus what the FEEDA has been telling us, it's sort of the same story here, right, although it's been.
Happening for years.
It's just at a different scale now, I think, Carol. But I think, like you said, Carol, it's the question of and Lauren, tell us, if you have this data, it's I won't say it's troubling, but what I would like to know from these companies. I don't want them to lump all these losses together, like you know, I want to know exactly how much they're losing just from not from damage and not from employees stealing, but from customers stealing. Do you do you get any of that data?
I have not ever seen that data out there, but you'd be surprised how much. I mean, in Manhattan here in New York City, all of the plastic that's up in front of products, you would think shrink would be down, theft would be down. So I think this is sort of unfortunately a sign of the times, and it's really sort of a cautionary tale in my eyes.
When you look at the Equity Universe. I am curious, are there certain areas of the market that you think are more interesting when it comes to investment potential and return potential?
Yes, And I think sector wise, energy complex it's been Joane August has been good for energy. Valuations are certainly some of the cheapest in the SMP. That's not the best reason to buy, but I think a very good reason to own energy is to own them over the next cycle. And they also have some really healthy balance sheets. So I like energy here. And also healthcare actually is just the second sector it for its defensive qualities. I think healthcare looks interesting.
It's why healthcare specifically.
I think the AI story is additive to healthcare, and I think that's a little bit overlooked. I know we've been talking about the AI story for some time now, but that productivity enhancement that AI can really offer, that seems compelling.
And where do you think the value Where do you think the value is added there? Where do you you know who ends up making money when it gets more productive? Because if there is an area that is right for disruption, it's certainly healthcare. Ask anyone who's waited, you know, months to see a doctor and then waits hours in the office to see the doctor.
Right, it made worse by the pandemic. It wasn't so kind to healthcare, i'd say, and you know telehealth add it sort of moment in the sun when we couldn't go into offices. But you're right to think that sort of healthcare. I think the infrastructure could definitely use an upgrade.
Where don't want you want to be in this investment cycle right now?
Well, we've backed away from the ultra defensive areas of the market, and I think, you know, there are some valuations in tech that don't seem so compelling here, but we do. But we do like that balance between tech, Like I said, AI that opportunity, but those are some you know, high quality plays we think that are certainly good for portfolios here.
I know you can't name names necessarily, but when you talk about AI and high quality, give us give us some themes here, because I think there are some concerns that the AI story is still Okay, Well, we believe it's going to be big, but you need to show us that it's actually.
Going to be big.
Yeah, without naming names, I mean, I think tomorrow is a big day. In an individual'snog. But you know, it's always interesting to see a single company has actually become a big time macro story. It's sort of the bone weather right of the AI theme, and that's been a very predominant narrative that's played out in inequities this year. But I also think it's a really great check on supply chains and you know, the shortages that we've been talking about since the pandemic.
I like calling it. That's what Carol's been saying too. You're like, the well I want Nvidia macro story.
You can say it, not me.
No, I really appreciate it. Lauren, take care. Lauren San Philippo, director of Senior Investment Strategy analyst for the Chief Investment Office every BAA on the phone in New York City. I just know we're all so like Gaga over AI. If Nvidia continues to see demand kind of grow into that valuation, that's a big gross story going forward.
What if it doesn't wa wah, mom, get.
Ready for correction.
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