Amazon Is Now Competing For Advertising Dollars: Soper, Ovide

Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Apple is bringing back a lot of money from overseas, and Amazon is choosing which city it wants to put its headquarters number two, and it has narrowed down the list from two d cities to twenty. Here to talk about all of this tech news is Spencer Soaper, tech reporter in Seattle, who has been writing on the Amazon Bachelorette show that we are currently admired in, as well as our own shira ov Day Bloomberg Gadfly columnist ring all

things technology. Spencer, Let's start with you. Did Amazon give any color as to its selection process and this reality television show known as Headquarters to for Amazon? No? Not not really? Uh? And this really looks like administrative clean up. You know. They put out this bit for proposals and they got way more proposals than they anticipated more than two hundred and so it was simply matter. It was just getting on wieldy for them. Uh and inboxes were

blowing up, you know, email boxes overflowing. So this is kind of like an administrative cleanup. We we don't. It's a huge, huge, very long shortlist, so it doesn't really give much indication of anything. You know, you've got West

Coast cities, East Coast City's, Heartland cities, Southeast cities, Texas cities. Um. But basically it's it's it includes all of the the front runners that that people were anticipating, So it's largely administrative cleanup and getting rid of a lot of those smaller markets that that that likely never to the chance Spencer at just the point about perhaps it's not a clean up. Maybe it's a sort of an expenditure of energy on the part of Amazon because people, of course

on the Internet, they don't get enough advertising. Um. Now Amazon will be offering advertising, as I guess, a form of entertainment on their website. Tell us about this move. Yeah, well so advertising is really emerging. Um. If if you think of Amazon and cycles right the core the core e commerce business has grown and wild investors with this with this tremendous top line growth and ability to steal steel market share from Big buckstores and department stores, but

it's never been profitable. Then along came its cloud computing division, which was also growing quickly and adding a lot to the top line, but healthing helping profitability. And now the latest thing we have emerging is advertising. It's another fast growing business, but it's also extremely profitable. It doesn't require the big investments of warehouses around the country or data centers around the country that it's commerce business or it's

cloud computing business requires. So so investors are excited about the revenue growth, but but more importantly excited about the potential profit margins of the of the advertising business. Shara, I mean, it's it's not as if some of these tech companies need more cash, but it seems like the cash is just flowing in, and the question now is really how they plan to spend it. And Apple said that it was going to be bringing back what thirty

billion dollars of cash. What did they say exactly, Well, they didn't say exactly, but if there's they did say they're expecting to spend expected to pay a tax bill of thirty eight billion dollars on their overseas cash, which implies that they're going to bring back to the US something like two forty billion dollars of their overseas cash stockpile. And where is that going to go? Do you think?

I don't know. That's a very good question. Um. So it's worth saying right that Apple, you know, patted itself on the back for paying the US Treasury thirty eight billion dollars. But the reasons paying that some now is that it's parked two billion dollars or so of cash that it considered permanently reinvested in its overseas operations because it didn't want to pay taxes on that money until now. I believe the tax rate was too high. So now with the new tax code changes, that tax rate goes

down to fifteen and a half percent. So Apple thinks, well, this is a good opportunity to bring that cash home, and it's gonna owe that tax bill regardless of whether it brings the money back to the U S or not. So it's gonna have something like two hundred billion dollars remaining after it pays taxes um on that cash stockpile. And I think investors expect the company to spend it on things like stock buybacks, which is maybe not what Donald Trump and his crew had in mind when they

passed these large tax code changes. But Apple has also said what that they will consider spending some of this to expand their real estate empire. They're gonna be adding maybe a new office. Uh of what could they be spending it on, at least domestically, right, so their Apple's announcement yesterday did include some disclosures about US investments and spending. I have to say, it's hard to know how much of that would have been done regardless of whether the

tax code changed. So, yes, the company did announce that they're going to open a new location somewhere in the US specifics TBD that will house customer service kind of personnel, at least initially. Again, it's possible they may have done

that anyway. They have a customer service location in near Austin, Texas already, And they made some disclosures about hiring twenty people in the US, although they already have eighty four thousand employees in the U S and it's likely that at the rate that they've been adding to that, the twenty people in five years is not a deviation from their current rate. So Spencer, come on in here, because Shia is talking about a ton of expansion here and

hiring plans. Those hires have to go somewhere. And I'm wondering, you know, Amazon is getting all the attention, but are there other big tech companies that are also erecting new buildings and you know, hiring mass at workforces, and are these are these cities lobbying for for that activity as well? Well? I think that the Amazon is Q two just by the nature of its size, has kind of sucked all

the oxygen out of the room. But yes, I mean cities are are always looking for any type of economic development, even even even uh small businesses maybe creating fifty or so jobs will get an audience and will get incentives depending on the market and the the attract The attraction of the tech jobs is this generally you know, clean office type setting um jobs that pay good wages. And that's always the uh, the problem or the detension around job creation tax credits is, Okay, we want job growth,

but what kind of jobs are we investing in? And you know, good paying, high skilled tech jobs generally worth the investment in terms of that that ripple effect, people are enough to buy homes and and spend elsewhere in the economy. Sure, you heard the spencer, and we're talking about the advertising business that Amazon is looking for. Who

gets hit by that? Facebook? Google? Probably not. I mean it's and I think Spencer did a good job in his story kind of talking about the potential losers there. It doesn't seem like the money that's being spent on advertisements on Amazon isn't necessarily money that would have been spent on Facebook, Um or Google anyway. But you know that's the kind of money that companies spend places like

Walmart right to get better shelf placement at big box stores. Right, those are the kinds of budgets that are maybe instead shifting to Amazon, which is now getting the sort of equivalent of money to put tide at at on the shelves at eye level. I see. So that the button right, the tide buttons or what do they called, the Amazon sells you that, thank you, Spencer, that they're not doing their job. You've got to have advertising and addition, right Spencer. Yeah,

and and what Sure just mentioned this. If you look at traditional marketing, especially big CpG brands, consumer package goods brands. These are the products that are lining the shelves of a supermarket. Uh. They've they've developed a program over years of a combination of TV commercials, radio commercials, display advertising in newspapers and magazines, coupons in your mailbox, and what Amazon brings is kind of a one stop solution for all of that UM and even even the in store placement.

They call it like trade promotional, but basically they're paying for an end cap or they might even not necessarily be paying the retailer, but offering a discounted price that that retailer come promote to get an end cap placement in the store. UM that that's spending, all of that combined is like two billion dollars for consumer package for goods companies. So even if Amazon takes us takes the piece of that, there's a lot of room for a

lot of ceiling there. Thanks very much, Spencer Soaper, Bloomberg News reporter, and our thanks also to share over Day, Bloomberg Gadfly columnist. We turn our attention now to the world of NAFTA and trade with Jacques Gordon he Is Kellogg School of Management, Real Estate professor and the global head of research and strategy for LaSalle Investment Management that helped to manage more than sixty billion dollars worth of real estate assets. Jacques, thank you very much for being

with us. You know. President Donald Trump yesterday said that terminating the North American Free Trade Agreement would result in the quote best deal to fix the twenty four year old trade packed between Canada, Mexico and the United States. But lawmakers, industrial groups, agricultural proponents, they all say this is not a good idea. What do you glean from

this back and forth? Well, it could be posturing. UM. Of course, the US President has um UH spoken on both sides of this issue at some point, saying that he was a little bit flexible about NAFTA last week and then this week. UH certainly heading into the sixth round of discussions UH scheduled up in Canada and Montreal and January twenty three. It could be it could be just being able to put a bit of fear of God into the other trade representatives from Mexico and Canada.

Who knows, UM, But in the world of real estate, similar to other industries, we are watching, UH. The NAFTA negotiations with great interest. UM I think real estate is not UM in the direct line of path of the

of the of the NAFTA negotiations. But but we're watching them carefully because of course the UM manufacturers, agriculture industries, financial services industries, well, those those folks are all tenants in our buildings, and so UM my firm and others have huge operations UM in in all three countries, and we'll be watching carefully for any UM any rollback that makes it harder for our tenants to do business. And that's that's really the focus that probably most real estate

people are watching very careful. You have big firms like Brookfield, like LaSalle, um many firms who are are investing UH and and operating large portfolios of property across the borders of Canada, US and Mexico. So so we do care about this topic as well. Amazon, for example, released their shortlist can I put short in air quotes twenties cities for their potential headquartered to UH, and it basically is

who's who of cities in North America. But it included Toronto, which I thought was very interesting and I'm just wondering, can you walk us through what the real estate effects would be on a city that one this golden ticket

that Amazon is kind of hanging out there. Well, we said, the real estate world is is really watching this carefully because, UM, what's happening is is all of those um what was it two thirty cities UH not only said, uh, do we welcome Amazon, and we've got the workforce and we've got the tax abatements, but we have the locations, we have the buildings, we have the real estate development UH expertise to handle you. Now we're down to twenty and

Toronto is very competitive on on all those fronts. And UM, just as a good example, Sidewalk Labs, which is part of Alphabet, part of that that enormous UH empire UM that UH is UM looking at doing more in cities, has chosen Toronto as a place where they will basically be working on de oping a city of the future. It wouldn't surprise me that that that whole effort and the Amazon bid that Toronto put forward was linked in

some way. Uh. I think all these cities are trying to say, look, we're the place where knowledge industries are are going to be comfortable, and a firm like Amazon should consider Toronto very very seriously. I I it makes total sense to me that Toronto is on the list. Um. Of course they're gonna have a tough competition with the likes of Washington, d C. And Boston and Atlanta and Austin, who are all on the list as well. But um,

luckily so I think. I think in terms of location, location, location, um, Vancouver, um uh, Toronto, um uh. These these cities compete right alongside American cities for jobs when things get expensive in incoding world in in San Francisco. Vancouver is a place that UM tech firms like to go as a way to diversify their operations. So there's a lot of just um integration of of the way that companies in technology as well as the ones I know Bloomberg's covering on

industrial auto manufacturing, agriculture. Of course those supply chains are all integrated across three countries too, But there are a lot of other industries real estate being one, financial services being another, technology being another, that really operate pretty seamlessly across across all three borders. So um um, you know, it's it's very difficult to to read what uh Robert Leightheiser maybe thinking, and what what the White House may

be thinking as they go into the Montreal talks. But we're all hoping that a complete rollback of NAFTA is just posturing and not really, not really, not really on the table. Jack Gordon, thank you so much for joining us. As Jacques Gordon is global head of Research and Strategy for LaSalle Investment Management, which oversees nearly sixty billion dollars in US. It's also professor of real estated Kellogg School

of Management. Coming to us from Chicago, he says that the traditional approach to being a passive, intermediate maturity focused investors seeking income only is no longer suitable for municipal bond investors. Well, here to tell us why is Bob de Mella. He is the co head of Municipal Managers from McCay Shields, helping to manage more than twenty three billion dollars. He joins us in our eleven three oh studios. Bob, thank you very much for coming in. So why is

that no longer a suitable perspective for investors? I think what has happened is, if you look at the shape of the municipal yield curve, your average investor in the high grade intermediate space no longer has a reasonable income stream anymore, and that's the primary goal for a bond or a bond strategy, right, but you also have a

reasonable amount of duration risk in that space. And so we're advising clients to actually move away from either a little longer out the yield curve or a barbell st ategy, which is even better. That's going to make a big difference for them on an income stream and also potential total return. Especially give on our outlook with regards to

the yield curve, What do you mean to mean? Because I'm looking, for example, at a tenure in New York State, you'll get about two correct, and so uh as an example, we have our our our flagship National fund, you can attain around a three and a quarter three and a half percent yield um if you're taking more of a barbell strategy, being a little more creative with regards to

the yield curve. The problem with that bond that you just pointed out, right, it's it's a two percent yield, it's an eight year duration and so therefore it doesn't take much of a rise in rates and and then your net total return is negative and you're kind of playing catch up with that, and so we think income is really important, and so people should look at their overweight allocations that they have today with the high grade intermediate part of the municipal yield curve and and allocate

away from that. Let's just seem out a little bit in just to take a look at the municipal bond category as an asset class. There was a three point one billion dollar in flow into municipal bond funds in the week end in January. This set an all time high record. This was from i c I, the Investment Company Institution for UH for investment managers, and I have to wonder, you know, this follows pretty steady flows, not this high. There's a lot of demand for this stuff

right now that should be good for municipal bonds. Now. It is definitely good for bonds, and it's one of our main themes for two thousand eighteen. We believe the municipal marketplace. One of our insights at Mackay is that the ratios of one of the relative value ratios that's always used is muni triple a yields versus triple A treasuries.

Historically on the long ends around eight percent. We believe you're going to test twenty year lows this year, in other words, that the yields on municipal bonds will fall much lower relative to treasuries than in the past has been sustainable. Correct, And a couple of different reasons for that. One is technicals, really strong demand, increasing demand, especially for

high tax states like California, New York, New Jersey. In addition to a significant reduction in supply, tax reform has a big reduction in supply going into two thousand eighteen. So here's what I'm struggling with. Because we hear about the the infrastructure problems that a lot of states are having, not hearing a lot about how that's going to get financed. There's certainly some issues with high tax states. What's the revenue going to look like? Given potential exodus is on

the heels of this tax plan? Um, how are you thinking about that? Does that concern you at all? Yeah? So you have to Yeah, absolutely, I mean you picked the you picked the problem. I'll give you you know. Yeah, No, there's there's absolutely, But the municipal marketplace is a very strong credit worthy marketplace and without issues, no but most states have done pension reform. The overall credit characteristics of the municipal marketplace is very positive. Infrastructure will definitely play

out with it. As you know, Washington, d C. Is grappling with some kind of infrastructure solution. The infrastructure need in the in the United States will not be born municipal entities. As a matter of fact, you have seen it. They've pulled away from a lot of the projects. We've had an introduction of the P three structures to public private partnerships, which is part of the funding for um tapan Zee Bridge replacement, Gothel's Bridge and also LaGuardia terminal replacement.

That brings private equity, private debt into the mix in addition to yes taxpayer municipal bonds. And so we actually think the supply of the municipal marketplace this year is going to shrink. The new issue volume is probably gonna drop. That's a big reduction, Bob. I'm just go back to this idea of having to change the way you view

municipal bond investing because of the tax overhaul. If you hold whatever bonds you purchased and maturity and you're okay with the interest rate, that you're getting I assume that you should be smiling at the end of that particular term, correct. So I'm wondering about the alignment of interest because if you're a manager of municipal debt, your interest obviously is to make sure that you don't show any big capital losses.

But if you're an actual investor, you don't really care in terms of the interim what happens to your capital. You just want to get paid and you know you're gonna get your money back at the end, So why go further out on the yield curve for that extra bit of yield? Um In in many cases it's not just a little extra bit of yield. And I'm not talking about increasing your interst rate risk again I throughout

Barbell strategy. With a Barbel strategy, you're not increasing your duration risk, and you actually can actually something short term, you can match it with something short term exactly, and you can insulate yourself from the risk that what have happens if the shape of the municipal yield curve shifts.

As an example, with tax reform, there's the potential for banks and property and casualty insurance company reducing their exposures in the municipal marketplace because their tax rates have come down. Banks and property casually insurance companies are own very large books of high grade intermediate municipal bonds. Now, I don't think they're gonna be net sellers per se, but they're certainly got not going to be marginal buyers in two

thousand eighteen. So what's going to happen in that part of the yield curve versus the rest of the yield curve. So I'm an active municipal bond money manager. I can absolutely sit there in front of a client and say, listen, look and think actively in the municipal space. You're absolutely right, Pimp. Most clients don't think actively in the community book. They put it aside. It's low risk, low ball, and as long as it gives them a reasonable tax exempt income stream.

Here at Mackay we're a little different. We say I'm gonna give you capital preservation. I'm also going to give you a slightly better than attractive income stream, but also I'm gonna look at the entire municipal marketplace from a total return lens. Because at the end of five or ten years, as you pointed out with your time horizon if I can be a little more opportunistic and make money for you in between. With some certain strategies you're after.

Tax return is substantially better without a significant increase in risk. Real quick. To your clients, understand what you tell them when you explain this to them. Yeah, we have you know what, we have a great clientele base, not only in the in the pure retail space, but the ultrahan net worth family office client space. We are different, so I'm I'm a different participant, our team is different in the municipal marketplace. We absolutely look at it through a

total return lens. There's opportunities out there as to how you you can make money UM, and there's other risks out there with it. Right. Our insights this year talk about it's a return and a risk profile in the current year. I think when you look at the different credit and yield curve UM issues with regards to not only tax reform, but everything else that's going on with regards to the federal Reserve. Yes, i am I will sound different than most money managers in the municipal space.

Bob Damela, thank you so much for joining us. Bob Tamela as co head of the Mackay Municipal managers. Another story that we're keeping track of is Airbus, which seems to be getting a lifeline. I want to bring in George Ferguson's your aerospace defense airlines analyst for Bloomberg Intelligence who joins us. Now this seems like a pretty big deal. Airbus getting the sixteen billion dollar order from Emirates, yet shares up just under one point three percent. Why are

shareholders not rallying more around this? Hey, good morning, Lisa. I think the challenge here is that the A three eight doesn't make any money for Airbus, and this order doesn't materially change the landscape for the A three eight. And the reason I say that is that the order book is still very very much um uh Emirates focus. There's some order actually. I think this will go to a hundred and fifteen firm motors, and sixty of those

will be the Emirates. I don't really see it changing the production rate right now, Airbus building about twelve of these a year, they'll they'll just dip down to about eighty year that they can't make a profit there, or much of a profit there. So the program is still sort of limping along with one real customer, which is Emirates not making any money. This doesn't change either of those outlooks. And you know, Emirates is not going to bring these orders forward quickly so that it's not going

to change production rate. So the program is still very challenged. It's just we've got a little more order in the in the back of the in the back of the backlog. Now, George's Emirates just really buying a big repair shop, because if the air bus was going to close down the production line, good luck trying to get those things fixed in the future. Yeah, I mean, I'm not so sure they're buying a big repair shop. I mean, I understand what you're saying. And anybody else fly that's a three

eight and want to fly it. I mean there are other people that do fly it, right, it's Singapore, but they've got a couple of park Air France flies it, love, tons of flies that Korean Air flies it. Um in time, there may well be problems with getting spares on on the airplane. I don't think we're near that yet. Um Rolls makes an engine for it. Plus there's a consortium with g that makes an engine for it. Saffran. Yeah,

I believe, but isn't. Isn't then the A three eighty the wrong aircraft for the time, I mean it is. And you know where we're seeing a concentration of orders is really in the narrow body fleet, which is a dfty to two some airplanes, and the small wide body fleet, which is seven eight seven's, A three fifties, A three thirties. That's where the bulk of the orders are being placed. Those those airplanes are sort of two fifty two maybe up the three hundred ish seats. That's where we see

the bulk of demand right now. At the top of the wide body world, the A three eighties and seven four sevens and even the larger twin engines, the triple seven, we're seeing less demand and it's just harder to put the those airplanes into markets and not have to deluke fares to do it. So airlines are not as excited about those airplanes right now. And again, so this sort of helps this airplane continue to roll down the road. I think Airbus thinks somewhere down the road there's a

lot of demand for this airplane. They're just trying to get it to survive until that it helps. Yeah, it helps, but it thanks. It's it's hard. Thanks very much. George Ferguson, Senior Aerospace Defense analyst for Bloomberg Intelligence. And Dave Wilson, Bloomberg Stocks Calm this. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm Pim Fox. I'm on Twitter at pim Fox. I'm

on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio