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.
Matt Miller here in the Bloomberg Interactive Broker studio. Jess Men were filling in for Carol and Tim. And we've got Dan Cole lined up here, senior principal and portfolio manager at Eagle Point Credit Management. He's on Zoom from Greenwich to talk to us about the leverage loan space. Dan, great to have you on the program.
You are, I think one of.
The biggest players in this space right and we've seen a drop in issuance, we've seen a narrowing of spreads.
But you think that's about to turn around. Give us your pitch.
Yeah, thanks for having me. We think that Eagle Point is the largest kind of seal equity investor out there in the market today, and I guess when we've been looking at kind of new issue col equity for the past nine months or so, it's been pretty unattractive relative
to the secondary opportunities out there. You know, for the kind of the top tier COLO cloral managers, we see kind of low teen zels best case, whereas in the secondary market we can pick up paper kind of loss adjusted, you know, adjusting for all kind of the defaults to
come kind of in the twenty plus percent range. Now that being said, we are seeing kind of a turn in the arbitrage, mainly because we've seen loan prices fall by a bit kind of over the past couple of weeks with all this debt ceiling kind of drama, while COLO liabilities have actually held in. So we're seeing that
arbitrage kind of slightly grow. And so while maybe new issues and as attractive as secondary today, the tide certainly seemed to be turning, making new issue a little more attractive than it was before.
So, Dan, why has the volume of issuees in the US dropped?
Yeah, I mean so, I think most of it has been. The first kind of quarter was these captive funds that were printing these clos. So what captive funds are funds that were raised by some asset managers or private equity firms to really back the clos that they were kind of issuing, So buying all the equity, and so a lot of these I guess captive fund managers were buying equity that was uneconomic to I guess the equity investors.
And why is that. It's because they had very little skin in the game, but I guess they wanted their management fee stream to turn on by doing these new clos and so you know that clearly had a large conflict of interest between the equity investors and the captive
fund and the cloudal manager. You know that being said, now now that a lot of that printed at least one one COLO kind of for the year, that are being a little more cautious about issuing the second one because it could, you know, ultimately end up hurting their performance in the long run if you're doing all these uneconomic transactions that are going to underperform.
So I imagine also, you know, as the debt ceiling debate has gotten you know, more dramatic, and the price for these loans has fallen, it's more difficult for these companies to get funding at all, so at least in this market. So the the issuance dropped simply due to that. With the debt ceiling issue resolved, if the debt ceiling issue is resolved.
Is that part of the reason that you expect issuance to pick.
Up potentially, But it's more of just the fact that loan prices have fallen a bunch of SALO liabilities have kind of held in. So we're seeing some of the arbitrage that was lost kind of middle of last year or somewhat coming back, because in about July twenty twenty two, we saw loan prices accelerate in terms of prices up while SEALO liabilities continue to widen, even though the market was feeling firmer. So that's really where kind of the
COLO the arbitraged, I guess, was severely compressed. And so we're seeing that kind of compression go away with loan prices being down further today.
What effect has the debt ceiling debate then had do these negotiations have on your market? And you know, if the outcome is positive or negative, what does that mean to you?
Yeah, I mean clearly there it's lowered loan prices as people have kind of withdrawn or as retail money has withdrawn money from the loan market. Surprisingly on the COLO side, on the COLO debt side or the liability side. There hasn't really been much of effect as kind of spreads I held hen and I think that all just speaks to just the robust nature of the COLO acid class. I mean, it is a floating rate acid class. It
has historically very low defaults. You know, the junior mezzanine tranche, the double B tronch, which is right above the equity for colos, has had about a five basis point annual default rate. So it's an asset class that has really survived I guess, numerous different cycles. And so I think people are real that this is an assea class that you can kind of ride out in the next kind of recession or downturn or whatever you want to call it.
So are we likely to see more defaults and potential downgrades from here?
Yeah, oh definitely. I mean we're we're not assuming that there's no less downgrades or less defaults going forward. But that's actually a good thing for col equity. If you think about CLO equity, you know, we think of it as a kind of a better version of a bank.
So I guess if you look at the regional banks that recently failed, a lot of them had kind of short term funding right in the form of deposits, and then when the depositors made a run on the bank, that obviously caused a lot of these banks to fail.
Whereas for clos, clos have non mark to market financing, so there's no margin calls if prices drop, and it has kind of a locked in financing for twelve years, and so in times of volatility, you're not kind of on the defensive worrying about your nancy and kind of getting pulled, but rather you're able to redeploy capital into a market that has dislocated prices and loans at a severe discount. So in the long run, as long as
you have a reinvestment period remaining within your COLO. We've seen this kind of time and time and again, whether it's eight oh nine or during COVID, COLO equity actually comes out better than it was going into kind of the downturn.
Hey, I want to ask you, Dan about the transition away from lib or to Sofur, which I feel like it's been happening for the better part of my life, even and I'm fifty. Is it really going to happen or are you really gonna, you know, lend money off of Sofur rather than libor.
Yeah, I mean that's what's been happening I guess since kind of the beginning of twenty twenty two for the new loans that were being issued, and you know, hopefully by June thirtieth, this is a topic that we'll never have to speak about again. But you know, there still needs to be about sixty percent and the legacy loans that were issued prior to twenty twenty two switch over to SOFUR, and so a lot of these amendments are
going through where the borrowers are kind of seeking. It's a negative consent amendment, so basically the lenders need to object to it, and so a lot of them are trying to sneak through these CSAs it's called, I guess, the credit spread adjustment, and it's because simply because libor is an unsecured grade and SOFA is a secure grade.
So you know, theoretically librar should be a higher number than sofur, and so if you were to move over to SOFA, you have to kind of receive this also, this credit spread adjustment, to be compensator to at least have apples to apples between librar and sofur, and so a lot of these issuers, these loan issuers and private equity firms have been trying to get a nice windfall from this this switchover by proposing no CSA or ten basis points CSA, even though the I guess the Federal
Reserve has come out or the ARC Committee which kind of sets this proper CSA Raiate has said it's supposed to be twenty six basis points. And so a lot of these amendments seem to come through come out at Friday at five pm, before a long weekend, So we've got, you know, a little short of two hours before presumably a lot of these firms are going to try to put out these negative consent amendments and hope that the loan issue or the loan lender sorry miss it for next week.
Dan, we only have about forty five seconds left, But I want to get your thoughts. What are you hearing from clients right now? What are their concerns?
Yeah, I mean, certainly there's a lot of concerns with kind of like we've talked about defaults and downgrades, but I think historically what we've seen with co equities that it's a NASA class that's performed, you know, if you had invested in COLO equity prior to the global financial crisis in eight oh nine, it had I think a medium fifteen percent return, and you know there were plenty of other I guess top quartile colos that were twenty plus percent returns, and so we really do think it's
a NASA class that thrives during volatility, and so we're we're actually pretty excited about this besting environment.
All right, Dan great having on the program. Thanks so much for joining us. Dan Coe joining us there from Eagle Point Credit Management, one of the biggest players in the c l O resale space, and I think they have about seven and a half billion dollars of assets under management. So he says, issuance is starting to turn, and that's something that we're definitely going to watch as well as for default.
Right, especially just hearing what he's been talking to you with clients about in that sort of space, and especially ahead of this weekend obviously what you were talking about, Matt when it comes to this dead ceiling.
Absolutely so hopefully he gets on those cssays and is able to deny them before he goes on his long weekend.
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You've been talking for a couple of days now about the gloom lifting in terms of equity, and we singled out a couple of strategists raising price targets. One of them Savita Subrmanian, head of US Equity and quant Strategy at Bank America, raising her year end price target on the s and P five hundred to I believe forty three hundred from four thousand. Savida, thanks so much for joining us, really appreciate it. Tell us, first of all, why you raise your target, especially in the head of
these debt sealing negotiations. We still haven't gotten an outcome, and if it goes the wrong way, it looks like stocks could take a real hit.
Sure.
Yeah, So, I think the important idea here is that the world is positioned for absolutely awful and the indicators we're looking at look not fantastic, but they look okay. So you know, I think that the idea here is the market doesn't really react on actual growth or you know what actually happens act on surprise, and I think the surprises that we get through the debt dealing with limited.
I mean, I think the prevailing assumption, even amongst the bears, is that even under a protracted kind of deliberation and bringsmanship, we get to resolution. Right, So the market sells off and then comes right back. And then on top of that, I think, you know, I can count, I can't even count at this point the number of investors that we've spoken to who have capital to deploy but are waiting
until after we get past that calendar date. The other reason that I'm more optimistic on stocks relative to fixed income is that I think that folks are thinking, we're going to see the exact same reaction. The market's going to sell off, bonds are going to rally. But there are two big differences today. The first is stoft versus bond allocations. Back in twenty eleven, when US debt was downgraded, we're about thirty percentage points higher in stocks relative to
bonds than they are today. The world has bunkered down bond allocations of the highest we've seen in ten plus years. Stock allocations are life they did a complete reversal from being overweight to underweight last year, and by the end of this year they got to the lowest levels we've seen since, you know, basically the financial crisis. So a lot of our work is telling us that investors our positions for sort of armageddon, and what we're going to
get is, you know, some muddle through. And then when you look at cyclicals versus defensive I think there are actually some positive signs for cyclicals. Dare I say it, because nobody agrees with me. But when you look at at some of the macro indicators. You know, we have a regime model that we track and it's interesting because it's made up of eight indicators, and you know, at the beginning of this year, all of them were moving down. Now five out of eight of them are actually in
positive territory. So I think the world is changing very quickly. But positioning has been priming. You know, investors have been priming for a recession over the last six quarters since we started talking about it back you know, in January or February of last year. And you know, O argue is that the pain trade in equities and especially in cyclical areas of the market could be higher rather than lower from here.
So Savita, I know your counterpart, Michael Hartnet he always has his flow show on Fridays. It sounds like he's singing a little bit of a different tune whenever he's looking at the flows data, and he's warning of equity stress, particularly in the next month, especially ahead of that FED beating. How do you square that away when you have a different type of call there at your firm.
Well, you know, I think it's it's interesting, and I think, you know, everybody looks, but well, we'll all look at the same data. But I guess it's interpretive. And I think what I'm sort of paying attention to is the fact that our economists have dialed back their re us and forecasts to you know, just zero point eight percent peak to trust decline in US GDP. A lot of economists across Wall streets don't even expect to see a
recession when you look at stocks versus bonds. You know, maybe flows have been aggressive in certain pockets of the market. But what we've seen in our desks and in our you know, hedge fund and long only positioning barometers based on US active investors, is that individual investors have seen capitulation like selling over the last four weeks, and hedge funds and long only are LFE on cyclicals, heavy on
defensives and growth. So I think that, you know, there is some interpretive element here, But where I see the strongest upside risks within the market is in US more cyclical GDP sensitive stocks what I don't like, and here I think I agree with Michael hartnett Is. I think that both of us see risks to megacap tech. This is not a cyclical area of the market. In fact, this is much more bond like. These are companies that
have benefited from free capital their long duration. They act kind of like ten year bonds, and they tend to suffer when real yield drive. Our view is that the biggest bubble, and I suppose I should say my view is that the biggest bubble on Waltz and across capital markets is in the ten year treasury right in long bonds. I think that's really where you know, it's been basically pushed up by foreign buyers as well as the FED aggressively buying treasuries, and now we're at a point where
the FED is in quantitative tightening mode. Foreign investors are no longer buying treasuries and in fact, in some cases are selling. So I think that that is the area. Anything that looks like a bond, I e. Megacap, tech, long duration, by the dream, you know, no pass upfront types of investments to me look risky. That's interesting in public equities.
It's interesting that.
You know, we're also hearing from a lot of strategists that we could see a ton of issuance from treasury, you know, eight hundred billion or a trillion dollars of issuance that would just soak up liquidity in the market, especially if the FED continues QT.
How does that affect your stocks outlook?
Yeah, I mean I think that bolsters are viewed for cyclicals. I mean, look, the fscan stop of the economy is starting to tank. Consumers are rolling over, corporates are rolling over. But I think that you know, when you think about why the seed is aggressively hiking interest rates, it's to stem inflation, to stem demand, And that to me says you should probably be in more cyclical areas of the
market rather than companies that benefit from free capital. And I think that right now investors might be using the playbooks from two thousand and eight, two thousand and nine. You know, credit sensitive stocks are financials, homebuilders, energy commodities, et cetera. And our viue is that those are actually some of the safer areas within the market because they've been starved of capital, they haven't benefited from a low cost of capital, because they've basically traded at much higher
multiples for a variety of reasons. They're now probably healthier from a balance sheet perspective, from a supply discipline perspective. You know, I would say that the big banks, the fifties or the regulated banks, are in a much better position than regional banks. And you know, the S and P five hundred has a much higher exposure to fifties than two regional regionals are only I think a percentage point of the market cap of financials within the S
and P five hundred. A lot of this says to me, Okay, you want to buy the equal weight to SMPI hundred because the market is still front end loaded with a bunch of really big cap tech stocks, and I think those companies might not do as well in an environment where real yields are rising. But if real yields are rising and the economy is still doing okay. Consumers are
still relatively healthy, corporates have balance the strengths. We're actually continuing to hear, So this is the most surprising to me. We are continuing to hear companies saying they are spending on capac and this is more traditional capac rather than just tech capecs. There's a bunch of you know, kind of penciled in AI or tech spend, but then beyond that is actually on refurbishment, infrastructure, reshoring, near shoring, you know,
structures and property and equipment, single family household constructions. So there are areas of the market that are still running hot, and those would rhyme more with cyclical sectors than defensive.
So, Savita, we only have about thirty seconds left, but have to get your thoughts on AI. When you're talking about things running hot, how are you advising clients to position with that?
Yeah, I think there are pockets of technology that are definitely going to benefit, and we obviously saw you know, it's a mass of surprises and earnings. I think it's not as broad spread a theme across the entire text complex, if you will, So you really need to be choosy within the tech space. Our biggest worries are that, you know, the overspent during COVID that pull forward could translate into
weaker demand in the years to come. But AI itself is a much more such specific story and there are fundamental analysts can help with, you know, the areas of the market that will really truly benefit.
Great Well, thanks so much for chatting with us, Savita. It's always great to have your take on that and wrapping up all things macro and strategy with us. Such a pleasure speaking with you. Thanks for having us back with y.
Yeah, thanks so much for joining us, Savita. Really interesting to get a take on one of the people, one of the strategists who upgraded her forecast, and I wonder if we're going to see more of that. I know Tom Lee also has a forecast of more than forty seven hundred.
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We're gonna talk a little crypto right now here we go, changing things up from Equity's I'm pretty pumped.
I mean, it's been a banner year for crypto.
If you hadn't seen the crash, then you would think that this sector was absolutely on fire. I want to bring in Thomas Perfumo. He is the head of strategy at KRACK and he comes to us via Zoom in New York City. He's not just a crypto nerd. He's worked on the street as well. He went to the Stern School of Business.
He is a CFA.
So we understand all of the stuff that I guess the masters of the universe know too. Thomas, thanks so much for joining us. Tell us first of all, what's behind the run up that we've seen this year. I mean, is it all about kind of the failing banks and failing confidence in the US dollar system.
Well, of course, the narrative around crypto being an alternative solution for traditional finance. I think over time has shown supportive empirically. You know, way back when we had rallies in cryptocurrency, when we had bail ins of banks internationally. So Cyprus is a good example of this many years ago.
But one perspective that you can take a look at is that on a year of a year basis, crypto has just been playing catch up to other broader equity and disease for example, the S and P five hundred and the Nasdaq, where we're more comparable to the performance over the year. And this is really of course.
Oh it looks like we're having problems with Zoom. We're gonna work on Tamas. Do we have you back?
So all right, we're talking about the run up that we've seen in crypto. It's been a pretty strong year today after the big drop from the massive highs.
Do you think there's any chance, Tomas, that we get back up there?
Do we get back to bitcoin sixty five thousand, you know, in the next year.
Well, I think there was a lot of skepticism when we saw this in twenty seventeen with the drawdown from seventeen thousand, and of course we went way past that with the peak last year, and so I don't see
any reason why we can't grow those levels. Just to give you some perspective, when you think about crypto adoption among the Internet connected population globally, it's only in the low teens right now, and so when we think about the long term macro tailwinds and the demographic tailwinds, we think adoption of crypto's up into the right.
Tamas, what are the levels that you're keeping a close eye on when it comes to bitcoorn. I know thirty thousand has been that key kind of psychological cool threshold there, But what are you keeping an eye on?
We don't really take a look, say Prime, all right, it sounds like we have an issue with our feed for some reason. We're going to try and get Tomas to turn the computer off and then restart it.
Tomas, we have you back.
It looks like we've fixed the internet for you. Tomas Perfumer. We're talking to a head of strategy over at Kraken. Talk to us about your business about Kracken. What what are you guys doing right now and what's the interest?
Yeah, of course, so Kracken is a global player in
the crypto industry. We consider ourselves an ecosystem, so we provide a variety of services, whether it's that easy buy sell experience for cryptocurrency all the way to things like staking and allowing people to earn rewards on their crypto, and our goals really are to make crypto easily accessible, allow people to transfer an exchange at your assets of any kind, and also to help create an ecosystem that people can follow as they go more deeper into their
crypto journey. And you know, when it comes to things that we're focusing on this year in particular, it's just deepening our relationship with our clients by building products and services that are memorable and wonderful for them. But when it comes to the long term for the crypto industry, what we're most excited about is just following that adoption
wave that we see globally. Right now, crypto penetration among the Internet connected population is in the low teens, so we're really early days and just outstandingly excited about what's to come.
Tomas, what is krack and doing about the crack down that we've seen from regulators in Washington. A number of companies have I know moved offshore. Are you also looking at other places to do business as the US decides it's no longer in favor of a crypto ecosystem.
Sure, so, first and foremost, you know, krack Can invests a great deal of resources to operate compliantly in all regions. Secondly, speak, we all also have the majority of our business outside of the US, So for US, the US isn't the only market that we depend on or rely on. For US, it's a big market, but nonetheless, you know, we are
obviously focused on building products outside of this country. I think from our perspective, the things that we can do is to further rebuild the reputation of the industry and help create better trust within the industry. Of course, bad actors last year did a lot of damage about things that we do, for example that earn our clients trust, are proof of reserves so that clients can independently verify that their assets are safely held with Kraken and otherwise.
You know, I'm pretty optimistic that given the bipartisan interest in solving for legislation for cryptocurrency, the US might have a chance at taking a real leadership role in the innovation of this technology and bringing it front and center to the world. So overall, I think long term I'm optimistic, but of course there's a lot of reverberations. In the short run.
We only have about thirty seconds left. Tell me, what do you hearing anecdotally when it comes to investor interest.
Of course, So when we look at the trends internally, we continue to see a lot of healthy interest in cryptocurrencies.
So sign up activity is very healthy. We had a course in acceleration in April with the run up and prices, But when we take a look at, for example, the share of taker transactions that are by transactions, and a taker transaction is effectively in order to that is immediately executed on the exchange, we see for Bitcoin that it's the majority of these transactions are by and historically going
back to twenty twenty one, that's been the case. But during significant drawdowns like the Midsummer of last year, the latter part of last year as well, we actually saw peak activity in terms of the share of by transactions, and even looking into this year is just under that peak activity. So we're pretty happy and we think that people are just digging their heels in and also agree with our view that the long term is positive for crypto.
All right, Tomas, thanks so much for joining us. Appreciate getting your take. Tomas Perfumo there, head of strategy at Kraken.
This is Bloomberg Business. Wait inside from the reporters and editors who bring you America's most trusted business magazine, plus gloom O Business Finance and tech news. The Bloomberg Business Week Podcast with Carol Messer and Tim Stenebeck from Bloomberg Radio.
Jess, We've got another AGGI lined up for you.
I'm so excited we do.
So.
We have Alyssa Sangster, chief executive officer of Forte Foundation, on the phone from Austin, Texas, who's going to talk to us about a study from Forte about NBA pay and the promotions gap, which we've been speaking about a lot. We just had a recent story in Bloomberg Business Week about this. Alissa, how are you?
How are you?
Thanks so much for joining us now unpack this latest study for us. So what did you find? Because I feel like we constantly have these conversations, especially earlier this week we were talking about this Bloomberg Business Week story about how MBA is closing the gender pay gap on starting salaries and then basically it widens. I'm curious to hear what you've seen in your latest batch of data.
Sure, So we looked at a number of factors and including compensation, career progression, and kind of the leadership barriers that are holding women back. And you know what we found was there was that gap that continued. We are seeing after you know, graduating with an NBA, there is a significant increase in salary and that that increase continues
for both men and women in terms of earning. But where it does kind of as a little disheartening as in that gap that remains so even though men and women with the same degree and those same opportunities, we're still seeing that that gap persist. But there's a lot of other pieces there well.
So if I if I read the study right, the gap, the pay gap comes down to just six percent in the first post MBA job, right, is that what first year, first salary, and then over time.
It widens back again to about seventeen percent. What's the what's the time period there?
Well, it's an average of a lot of different graduation years and people in that but were really looking at kind of zero to ten or eleven years post MBA, So it's in that timeframe.
So I mean my immediate thought, you know, my wife took a year off when we had our first child, and she was fortunate enough to work at a great company that continued to keep in communication with her and gave her promotions even while she was on maternity leave.
But that's terribly unusual.
My immediate thought is that maybe women when they have babies, they fall behind a little bit. I assume there are also many other factors, But what have you found is the re reason for the gap?
Yeah, I think that's kind of something we all go to, is that that childcare and stepping out for maternity, that those are some of the biggest contributing factors. But what we found was there were a lot of systemic issues that are still present, including a lack of role models for women who were advancing. They weren't receiving a sponsor as they were working in an organization, someone who was
really advocating for their advancement within the organization. And they also cited that they were just not confident that they were going to be able to get ahead and advance within that workplace. So while childcare challenges seems to be something we would all expect, what they reported was very different from that.
Allissa, talk to us about what you found when it came to minority women in particular.
The unfortunate finding here is that out of all of the categories. If you look across underrepresented men and women and non are men and women, the RM women were always in fourth place, no matter what criteria factor you were looking at, they were always at the bottom. But what we also found that they were number one in was those most likely to leave their employer for some
of these very reasons that we've just cited. And so four out of ten underrepresented women said within the next year they were looking to leave their current position and employer. So that's a big signal of concern.
What do you I mean, I was thinking, what do you tell companies that want to fix this? And I'm sure that you have a list of prescription that you can give to managers to set it right. But I also wonder what you tell students who are graduating and heading into the workforce about how they can try and get ahead of this and at least do what they can on their end to try and keep it more equal.
Yeah, I mean, I think you know, in any kind of educational environment, it's like a Petri dish. You know, you can test theories, you can talk about change, and I think what we think is most important during those NBA years is to really ask yourself, what kind of leader do I want to be, what kind of equity do I want to see playing out in the workforce? And how am I going to change the way business is done and thought of? Because so much of this
is legacy and as I said, systemic issues. So these are our future leaders, how can we prepare them to address these things spot on when they get into those leadership positions. There's a number of things companies can do, and investing in that management talent is really critical because they're the ones that make these decisions that make it difficult for underrepresented women and non you are in women to really advance because they're not prepared and equipped to
deal with the challenges. So more education, more training, more coaching, all of that really would help break down some of these barriers.
When it comes to the scope of getting an MBA. I'm curious if your research and far as the findings, are we still seeing the same amount of people trying to go out and get one or have you seen any sort of pullback as far as coming out of the pandemic at this point?
Sure? No, You know, applications to NBA programs EBB and flow and they actually EBB and flow with the economy, and so lingering recession usually means applications are going to go up, and as layoffs happen in corporate America, you see those numbers of people applying and enrolling in NBA programs grow. So we have not seen a decline except related to kind of the economy.
And in terms of the applicants. This wasn't part of the study, but do you see more and more women applying for MBAs we do.
I mean, one of the things we've tracked since the beginning is the growth in the number of women enrolling in those NBA programs. And over the twenty years that FORTE has been in existence, it's gone from about twenty five percent to where we're now seeing it around forty two percent enrolled, and many of our programs are very
close to fifty if not already at fifty percent. So that's been one of the metrics we've been very proud of as an outcome from the work we've been doing with our partner schools.
All right, Alyssa, thank you so much for joining us. It's been such a pleasure speaking with you. That's Alissa Sangster, chief executive Officer of Forte Foundation on the phone from Austin, Texas, and she's breaking down that data that we had in this story from Bloomberg Business Week earlier this week from Jeff Green. He did this story on NBA's closed the gender pay gap on starting salaries and then it widens.
But it's a really fascinating just seeing this dynamic, Matt, and what you were talking about is specifically when it comes to your wife as well as far as the workplace.
Yeah, well, she really had to push for that, and that's why I wonder what they teach MBA students. But I you know, you hope as these new companies mature that they'll encourage managers to give the same pay to women and men. Journal how about you let me drive?
Oh no, no, no, no, who's going to drive?
Honey? Please, I'll do the driving, gravels.
Let's mate, I want to try it.
It's the question.
This is the drive to the Globe dot Com think well.
Shot it on on Bloomberg Radio.
Jessman here with Matt Miller filling in for the Carol Masser and Tim Stenovik, and we're gonna keep it going. We have a little under twenty minutes before the closing bell here on Friday, and I'm excited to bring in our next guest map because we do have Brian Frank, who's the chief investment officer at Frank Capital Partners on zoom from Miami, Florida. Frank, it's been a couple months since I last spoke to you. Have to get your thoughts on this week. Looking at the NAZAC one hundred
on pace for yet another weekly game. It would be five straight weeks in a row we've seen this. What is your take here on the ladies, with the markets, with this year's well, with this week's rally.
Rap there, Hi.
There, Jess, Thanks for having me. It's great to be here. My take is that it doesn't look like investors have learned too much from twenty twenty one. We have these growth stocks that are leading again. In twenty twenty one they were the unprofitable growth stocks, so at least this time they're profitable companies. But the other year it looks like nobody learned anything from was nineteen ninety nine to
two thousand. So we've seen this movie before. We've seen Microsoft and Cisco and you know, the Internet giants in two thousand, Lead and trade at large price to earnings ratios and have a lot of excitement behind them that was actually justified. And those companies, many of them, doubled their earnings in the ten years after two thousand, but the stock prices were down double digits in that following
ten years. So the valuation matters, and that seems to be lost in the excitement this week in the AI revolution, which I admit is quite exciting. I use AI for my job. It's definitely made my life easier and better. But valuation doesn't go away. It doesn't change with new technology, and that really seems to be lost in the shuffle this week with these fantastic earnings reports and huge run ups and stuff.
So when do we actually see a rotation.
Then, Brian, you know, from these growth stocks into value stocks that have you know, much better.
PE ratios, much lower PE ratios. When is that going to come about?
I think that that's going to come about when my stress levels hit maximum. It's a tough time to be a value investor, but look, we got a good taste of it in twenty twenty two. My fund, the Frank Value Fund, which is a MidCap blend fund, sorry, MidCap value fund was actually up in twenty twenty two, so we got a little taste. We know it works, and this year the fund is actually positive when the category is down because we have some specific names that are
working that aren't in the in the tech sector. So there's a little bit of it going on right now, but I think truly it will come as the economy continues to roll over. That's probably the thing I would watch most. The leading economic indicators are negative. The yield cur has been inverted for a very long time. We're just kind of waiting on the coincident indicators to go negative here, and generally that leads a rotation into value.
So hopefully soon we who don't want to root for a recession, but clearly I think if you're a prudent investor, you should be planning for one right now.
You said you had some names that are working. What are you buying? What are you selling?
What's been working for us actually is a company called PCG. That's the ticker symbol. The company is PGNY. It's the largest electrical utility in California. It's been working spectacularly for us. We have bought in around the middle of last year under ten dollars a share, and it's currently trading around sixteen and that's because it got bootied out of the S and P five hundred when they restructured in chapter eleven after all the wildfires and you know, terrible things
that that company did. But they've actually hired a new CEO, completely new management team since the restructuring. The new CEO is Patty Pope, who is the first female CEO of two different Fortune five hundred companies. She comes from an electrical utility in Michigan. She's completely turned it around and it's been working because it got back into the S
and P five hundred. So one of the little known thing about active managers, how we can kind of take advantage of the indexation is we can buy things that might actually get added to the SMP over time. And that's worked out with PC and G. It got added,
we got some appreciation. But what we think is left there actually is they're going to implement their dividend so they'll become more like every other utility stock, except this one's trading at thirteen times earnings and the utility space is trading over twenty times earnings, So it's evaluation play it's a dividend play, and it's a great management team play.
It makes a lot of sense.
We have a great story in the terminals today about the index effect, right, and how too many people are playing in that space to make any money. But I guess if you get this far ahead of it, Brian, you can definitely be a winner. You also like Jack in the Box, which I mean, I wish we had these.
Do they have those in Texas?
Just they do? They do? So lucky we prefer what a burger there?
Well okay, yeah, in any case, we don't have either of them here.
Why do you like Jack in the Box?
Well?
I like it, Matt, because hopefully you will have one in New York soon and I'll have one in Miami because there are some expansion possibilities left with this company. They're not in every state yet. They are the one of the largest quick serve restaurant chains in the US, and they also have a new concept called Del Taco, which they purchased last year. And what these large companies do, like McDonald's and Wendy's, is they sell all the company
owned restaurants to franchisees. That lowers revenue, but it really boosts profit margins, so they've been doing that with Jack in a Box, it's over ninety percent franchise, but Del Taco is only fifty percent franchise. So on top of that you have some tough times from inflation. Last year, these companies weren't able to raise their prices fast enough because they need to keep prices low because they're mass market chains. But they're catching up now and food prices
are coming down. But what the market I think discounted was that margins would stay low forever on Jack Jack in the Box, and we disagree with that our research at the Frank.
Oh, keep going.
I just googled Del Taco to see if we have any in New York, so those are not here yet either, But if you want out in Queens, there's a truck called l Ray Del Taco, you know.
The last tie. Well, hopefully you and I were talking, Brian. You told me that you had lost a little bit of sleep over what was happening with the banks back in March. With all that mold. We only have about a minute left, but something that struck me. You said you haven't bought a bank sock since two thousand and eight, so I'm guessing you haven't been buying the dip clearly what we saw on the financial side.
No, we kind of learned our lesson in two thousand and eight, where unfortunately the shareholders get all the downside and none of the bailout fun upside that the insiders get there. So my opinion really hasn't changed. I think bank stocks are just structured against the shareholder and look as a stock picker as someone who's benchmark agnostic, meaning I don't have to have financials if I don't want them.
I don't see a good bet there. I see lots of other easier things to do, like Jack in the Box. So I'm happy to not play in financials right now, especially given the chaos that's going on there.
All right, Brian, it was great catching up with you once again. Thank you so much for joining us. It's Brian Frank, chief investment officer at Frank Capital Partners. He was joining us from Zoom in Miami, Florida. So what do you think about those picks when it comes to Jack in the Box?
I mean, very interesting Jack in the Box. I just want to see it come over here. I think the PG and E play is fascinating, especially since they're trading at such a discount to the rest of the utilities right now, and if they do get added to an index, it would be fascinating to see Brian read the rewards on that pom right.
And yet again, it's more of a focus total defensive type names that we've seen, especially when you're thinking about this market this year with tech and the big jump there. This is Bloomberg.
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