Amazon, Real Estate, & Tech Sector

at Bloomberg dot com. Well, Amazon reported earnings after the bell yesterday, showing the first drop year over year since early t seventeen in their earnings, and the longer that investors have to digest this, the more investors to like, you know what, we actually kind of like Amazon more, actually a little bit lower to discount and shares have come back at one point down more than eight percent,

now down two point six percent. Joining us now to discuss Alex web technology calumnist for a Bloomberg opinion, Joining from London. So, Alex, We've been talking about it all morning, Amazon shares falling. It does seem though that they are stabilizing. Why do you think? I mean, I think that usually when Amazon spends money, it goes somewhere which does wind market share and generate returns, Um. On the one hand, we've gotten spending money on on improved deliveries in acceleration

the pacer which prime orders get delivered. And secondly, it looks as though they are taking a bit of a hit on on the margin for Amazon Web services, the hugely successful cloud operations. But the motivation for that might be about defending its market share. That by by cutting prices, they are fending off the incursions of the likes of Microsoft in particular, but also perhaps Google and Ali barber Um. And you know, if you're defending market share, then it's

defensible to maybe sacrifice a little bit of profitability. So Alex, you know, this is a company that's kind of dialed up expenses, dialed down expenses, you know, kind of depending upon maybe either kind of what they what they need to invest in and maybe what kind of profits they want to show the street. Are we do you get the sense that maybe the company is getting into a phase, uh of higher expenses. I think it certainly looks as

though the competitive challenges are increasing. Um. That's happening both when it comes to e commerce and cloud and therefore, you know, warrants opening the checkbook a little bit. The you know, AWS profits are still disproportionately huge. You know, they account for two thirds of the overall profit of the business. UM, we are yet to see whether really the pushes from the likes of Walmart and Target can

make a real incursion into this e commerce space. I think that there starts something like e commerce accounts for ten percent of all retail in the US, and Amazon's about of that. So until we see any meaningful shift on that dial um, then I think people can be

very confident in the Amazon's trajectory. So let's talk about a WS, the cloud computing service sector of Amazon that was also a disappoint a minute, and it arguably is You're making the argument this morning a more significant disappointment than the increased spend, and I'm wondering why people seem to be shruggling that off. I think maybe the perhaps the arguments of the rationale for that for that slight

decline are emerging. It might be we don't really know, but we might be that, as we said, it is about defending market share and UM and you know, it still is the biggest player in that space by quite some some distance, and the sort of expenditure you need to to you know, challenge in in essentially data centers is significant. You know, these chips, you know, server chips from Intel costs sort of ten twelve thousand dollars a pop, and if you've got hundreds of them, that's a huge outlay.

So it's not that once you have a competitive advantage there, it is quite hard to displace. Um. Nonetheless, the competitors in the space are very well capitalized and not to be trifled with. And you know, as long but as long as Amazon continues to throw off cash and be happy to reinvest it, then then you know it's it's by no means a sort of it's still a very healthy business. So how about one of the businesses that may not be as healthy, and that's the grocery business.

And I remember them buying something like a Whole Foods or something a year or two ago. Did they disclose much about their grocery business? Is that something that they think is going to be a growth forever in the future. I mean generally that the push from Amazon into into bricks and mortar is a play which I'm yet to see fully explained and quite how that the margin profile

of that will hold up. But UM, you know that the numbers they've disclosed from from Whole Foods, um, you know that it does seem to have declined in the most recent quarter. I think physical stores you're in your growth excluding currency effects fell by about one percent. Now that's not a trend that people will be happy to see. But you know, the Amazon argument will be, well, it's you an't necessarily to be making the sales in the stores.

They were kind of perhaps a lost leader where you go out, people see it in there, and then they might go online and buy things. Nonetheless, I don't think it seems terribly compelling. Um, you know, story to tell investors. Thank you so much for being with us, Alex Webb, and for all of your commentary throughout the morning. Alex

Webb is a Bloomberg Opinion technology calmness. You create all his columns, as well as all the other fantastic work put out on O P. I N go on the Bloomberg terminal or Bloomberg dot com slash Opinion if you go to the web. You know, I was just chatting with Lisa Affair and I was saying, you know, we haven't we don't really talk that much about risk arbitrage and trading around deals that used to be such a

big part of the market. I feel like we don't talk about it enough, but I think we can change that a little bit. Right now, you'll have Sharon It's portfolio manager for dree House Capital Management in Chicago, joins us on the phone. You have, thanks so much for joining us. Let's start with the risk arbitrage part of the market. Give us a sense of you know, how vibrant that is. What kind of returns are risk arbitraders getting these days? Sure, well, thanks for having me on.

You know, at a at a holistic level. Today, UH, annual spreads or I guess gross spreads are sitting at a just under four percent, so call it three point six percent as of quarter end. UM. There's been in the middle part of this decade quite a boom in and obviously traditional murder arbitrage activity UM. In the most recent quarter that has died down UM, partly because of

the global economic concern to geopolitical tensions, etcetera. But what we're seeing is still quite a bit of deal activity UM, not only in traditional merger arbitrage, which again you know investors can expect kind of a four percent gross return depending on when deals closed. People are looking for a mid single digits, potentially an upper single digits rate to return annualize UM. But we're also seeing a bunch of non traditional quote unquote event or deal activity, which is

also driving the the avenger of an investing landscape. How easy is it to get it right what you're dealing with this, UH at a time of such bifurcated results often Sure, Yeah, that's a great question. It's something that we've spent a lot of time focusing on. Really, the bifurcation not only in in risk are, but in in other parts of the market as well, credit and even

equity valuations. But UM has been a driving force of l but specifically for risk are, we really have seen a bifurcation where the quote unquote safe spreads UM, just like we're seeing in yield, there's a there's a flight to quality. People are trying to hide out in in these safe spreads ones, the ones that don't have either you know, contentious litigation or regulatory overhang UM or cross border UH concerns getting tied up in in government UH

tip for TAD if you will. UH. Those spreads are really compressed in overly tight, and then you have this air pocket in the middle of the risk arbitract spectrum where there aren't very many deals that live in the you know, mid to sing upper single digits range for a grosser rate to return. So then what you're left with is a handful or a slew of deals that, again for either regulatory purposes or geopolitical purposes, are sitting

essentially at coin flips. So if you think about it in an implied probability standpoint, the really safe spreads are trading in the upper implied probability. The overall deal universe is still trading around implied probability, which is somewhat in line with its historical range. But there's a whole slew of deals that are sitting essentially at coin flips, so

implied probabilities. Again, these are deals that are either need Chinese approval UH, deals that need or are being under a new FTC guideline, particularly in the healthcare space, where there's a lot of concern as to what the rules of the game are. So that's that's really what's been driving this bifurcation. And obviously, you know you nailed it on the head getting getting the ones right is significant and obviously drives returns, but just as importantly as avoiding

the blow ups is really what's important. Obviously, you know, at the beginning of eighteen with n XPN Qualcom, there was a lot of carnage in the space that kind of reset spreads a little wider. And now it's been a while since there's been a big blow up. But avoiding those is is equally, if not more important than getting the ones right. So you have when I started on Wall Street in the mid eighties, all the big investment banks had big risk are trading desk and that

was kind of the really cool place to be. Who's investing and who's playing in the risk are market? Uh? These days, yeah, I mean I think you still have dedicated funds to risk arb, both in in the liquid

space and obviously in the LP space. I think what's what's evolved over time is uh, a broader spectrum, if you will, a catalyst spectrum for events space investing, So event driven investing, anything from obviously activism gets a lot of attention, but really you know, any sort of corporate actions, recapitalizations, refinance things, pushing out maturity walls understanding either seismic shifts

and industries or regulatory concerns. So I think the the investor base and the number of strategies that one is able to utilize as really broadened out. So it's not just you know, the traditional murder arb levered play that

was prevalent as you referenced in the eighties and nineties. Today, you know, we employ on our fund a multi strategy approach, and one of the things that really allows us to take advantage of dislocations and shifts in the market is that's when that creates new opportunity for us, and we're able to you know, in a quarter where you know, Q three had the lowest deal activity both from number and value in the last five years, going back to

Q four of teens. So in a quarter like that where there's no deal activity, you still have plenty of other pockets to invest along the catalyst spectrum. Excuse me, so you know that's sorry, Go ahead, no, no, you have. I wanted to get into something that you said earlier, which is avoiding blow ups, and um, when you think when I think of avoiding blow ups, I think of soft bank, and I think of the we work situation

in the uber declines, etcetera. Um, what do you make of the recent I p O is that I either fizzled in post ip O treating or that failed to get off the ground. Yeah, you know, I think this year has been an interesting year for I p O s because it's been uh somewhat of a hit or miss year. Um. Traditionally i pos performed performed well. Obviously, you want to be able to tap capital markets in the future, so you try and price these appropriately and

so that they performed well. This year has been driven by a few large I p O s. U. I p O s broadly are there's less um kind of the traditional traditional ones that are going. But obviously the few large ones have accounted for the bulk of the activity, which is actually something that we're seeing in murder arbit

trash as well. This year is going to end up being a you know again quote unquote a good year or healthy year for for murder arb in terms of volumes, but it's really going to be driven by a few key deals. Um, what we're seeing is that there's less uh bread than the activity and in smaller deals. So you know, I think, uh, we watch the I p O is very closely because I think they're they're a good um U forecaster of general capital markets exposure and

in financing capabilities. UM we participate in a lot of UH financing deals UH in particularly in the healthcare space. That also is is a good harbinger of UH capital markets appetite and people's willingness to fund and lend. Obviously, when you have a few situations that unfold that that hurt hurt investors, there's a period of kind of licking the wounds and in resetting of not only expectations, but

resetting of of risk risk appetite. And in the merger arbitrarge space where you'll see there is is kind of spreads well wide and now people will reassess, people will require a higher rate of return, which is not surprising in a in a investment vehicle or in a in a particular pocket of the market where you know, again, if if the implied probability is ninety five scent of the time time you're going to be right five percent you're gonna be wrong. The math dictates that when you're wrong,

it's going to hurt more than when you're right. Yeah, that's why it's so important to avoid the blow us. You have Sharon, Thank you so much for being with us. You have Sharon, his portfolio manager at dry House Capital Management, coming to us from Chicago. Interesting to hear about avoiding the blow ups. Asymmetrical returns. I think they call it,

you know, when they blows up. Boy, that's big. Yeah. Well, I think that asymmetrical returns are something that some analysts over at soft Bank are focusing on in this era of ultra low interest rates. Is it still good to invest in real estate? Joining us now, Melissa Reagan had of research for new real estate writing us in our bloom Biger Active Brokers studios. Melissa, we've seen already such a big run up in the prices of real estate

around the nation, particularly in coastal cities. How much more upside at this point is there left? I'd say a lot still a lot left. And by that I say that because of the fundamentals that you see in real estate.

So if you think about apartments, for example, having one of its strongest years on record from an occupancy perspective, occupancies over that's the Hyacinths two thousand, that's nineteen years, and rents are growing three to four percent, sometimes seven eight percent, depending on the sun Belt market you're in. So the fundamentals are there to support pricing. So is

this still a big regional play as it relates to apartments? Again, you mentioned the sun Belt, I've kind of we've always heard that, I guess, So is it still regional play? It is, absolutely. I mean it depends on sort of the property type, but I would say in general, yeah, the sun Belt is really strong. Right, You've got the strong in migration coming from millennials right there, starting to form families and are thinking about where to want Where Where am I want to live? Where do I want

to live? Right? And the Sunbelt offers a great quality of life, has a deep job pool, more affordable and this is where millennials want to be driving real estate. So this has been a theme for a while. It's a talk about some of the other investments that nuvine has been making, such as cell towers, billboards and healthcare related of the cell tower business. This is a great business.

It is a great business. Please absolutely, so in this we have a healthcare technology theme for real estate investing. Why because it's generated higher risk adjustice returns in the last decade, and we think that's true going forward given the strong tail winds behind technology driven real estate. So that can be data center, cell towers, just extend billboards, depending on how you want to categorize it. Look at when you drive down the highway. I thought we talked

about that. That's not what I'm talking about. Gains? Is it? Absolutely margins? Growing lows midmid single digit tons of free

cash flow? I took them public back in the day. Absolutely, look at you, all right, there are some electronics that there are some electronic that are much more technology focus, but either way, so so yeah, So how we see the world is that these are the sectors, the technology healthcare driven sectors are the ones that are going to continue to generate higher risk and justic returns relative to just you know, your your traditional real states still going

to give you that solid income, but higher risk justice. Here's what I'm thinking about as you talk how do you avoid the blow ups as we were talking about earlier in the show, because when you talk about apartments, sure the Sun Belt might be doing all right, but

there's certainly cities that aren't. When you talk about health care properties, you can think about hospital chains that have been overbuilt and overbetded and need to get you know, cut down, and are need to have their debt restructured. So where are the potholes here that you're avoiding absolutely?

So that's a great point when you talk about healthcare and you think about something like skill nursing, right, and so that that is where you've seen a lot of operators in that space strong go with their margins, not be able to turn a profit. Dad has been a

huge struggle area for healthcare real estate. But when I think about healthcare real estate, we look at it from a life science perspective, which is driven a lot by biotech VC funding, which is not going anywhere drugs, right, the tenants in that space they make drugs that's not

going anywhere. And then we also look at it from a medical office perspective, where you're not it's not a direct play on the hospital not buying the hospital, you're buying the medical office that maybe campus adjacent or even off campus, but is strong demand right from baby boomers aging needing new hips, new knees. That's how we think about avoiding the potholes. But yes, there are many of them. Those are the sectors we really like do you avoid

markets that may be overheated. It's such as kind of the coastal areas like you know again the northeast, the west coast, are those too highly priced that you can't generate the returns you like? Absolutely? So what we've done is we have built a relative value model for every metro and by property type. And so what that says to us is, all right, you have to put in

what is your initial yield going into these markets? And to your point, if it's really low, you're not going to get no matter how good the fundamentals are, You're just not going to get the growth, even if the

growth is very strong. And so we've built these models so we can tell you on the fly this market is a better value because you get the growth, but the initial yield is higher, and so we're trying to we're doing that on the fly and dynamically so we know kind of any given day, quarter month, where to

place the capital. Is there one city you absolutely would not buy in great question, really hard to answer, right because if you think about how how real estate works, right, location, location, location,

and so there are macro plays. Certainly cities we would want to not put as much capital into but real estate, you have to remember, at the end of the day is very much micro location, location location, So that's a heart You can't you couldn't just black line an entire city, but if you could, would would would you invest in the dream mall in the swamps of Jersey? Probably not?

So it's a great it's a great it's a great point. Right, And when you think about our thirty five tomorrow cities, which you could go online and look at cities that are not on their St. Louis is not on their Detroit's not on their really tiny cities, Birmingham's on their Why these are places that are losing population? I wouldn't just not great robust demographic fundamentals. Well it's a Reagan. You'll have to come back and elaborate a head of

research for Nevin real Estate. Thank you for being with us. Well, we're just starting to get some earnings from the technology companies. We had some disappointing numbers as some of the semiconductor names earlier in the week. We had Amazon last night disappointing numbers that stock was down as much as seven or eight percent. It's only down one point repercent here as the market rallies, they get a sense of kind of what we should be looking forward to as it

relates to tech earnings. Welcome David Garretty, chief market strategist for laid long Companies, also a partner at bt block, joining us live here on our Bloomberg Interactive Broker studio. So, David, let's start with Amazon. That last night kind of a the obviously missed on earnings, A guidance on the profitability side again a little bit light, I kind of, I guess, raising concerns for some investors, like here we go again back into investment spend. Um, what do you make out

of the Amazon numbers last night? Well, I think in terms of what we're seeing, um, you know, not bad numbers. If we look in terms of some of the high growth areas for the company, I around cloud computing, Amazon Web services, you know, numbers there were up fairly solid thirty five percent a year every year. People who are inclined to pick nits might say, well, that was a deceleration from the year every year growth of thirty seven

the quarter before. But thirty five or thirty seven you still got a fairly robust number, especially against the backdrop we're we're looking about of the U. S economy being

in recession um relative their forward guidance. I mean, Amazon has always sandbagged the numbers and and certainly things are set up right now going into the fourth quarter where the U. S. Consumer looks to be relatively okay, where an unemployment levels are so you know, I think broader numbers are for four percent industry wide retail increase in

in the fourth quarter. But obviously Amazon is getting going to do a multiple of that, just given how how much they've strengthened themselves and given their investments in the quarter to strengthen their prime offering to deliver goods within one day, and also the fact that they staffed up here ahead of the holiday quarter. Let's talk about the clouds, in particular cloud computing with respect to a w S,

because that was a big disappointment as well. And it's amazing how significant a proportion of the profits of Amazon come from AWS. Really, so what happened there In terms of AWS, you certainly are seeing greater competition coming in from Microsoft Azure Service. Now one might argue how these companies put their numbers together as they report them in terms of at aws. The revenue number was nine billion.

If you look at Microsoft's you know, cloud computing numbers, they're saying they're doing eleven point two billion, which would make them look larger. But even if you disaggregated the Microsoft numbers just focused on Azure alone, Azure's growth rate in the third quarter was six year every year, which arguably is well ahead of thirty. So it looks as if Amazon is developing competition also in terms of looking

at cloud computing. While we don't have the numbers now, we will have them from Google after the clothes on Monday as to how they've been doing in terms of their own cloud offering. So clearly not necessarily a WS Amazon Web services game right now. They may still be the market leader, but they have others who are intent on catching up. Earlier this week, we had Facebook CEO Mark Zuckerberg appear before Congress for most of the day,

a kind of quite a grilling. Wonder what you thought about A his performance and B. This is signal that big U S tech is really under a new microscope by the US regulators. Well, it may not necessarily be

tech widely, but it certainly is Facebook specifically. UM I mean and one might argue that the speech that Zuckerberg had given prior to the Capitol Hill testimony, the speech he gave at Georgetown University, where he was trying to say that Facebook and in terms of what's being advertised on it, should be protected by the First Amendment rights.

But the fact of the matter is, if we deal with other media organizations such as this, there are standards that have to be observed in terms of the truthfulness from a factual standpoint of the content that's being represented.

And to the extent that Zuckerberg refuses to draw a line on making sure that either a there's factual truth in the political advertising that's being put onto its platform, or be just decides to step away from all political advertising entirely because it's not really a very large part of the business, So why sacrifice their integrity to do it? You know, Mark Zuckerberg refuses to step away from a position that has people saying that Facebook really is disinformation

for profit as a business model. Did you know that facts? We were supposed to be doing facts all this time.

That's what I understand. You don't say, all right, I want to shift gears a little bit and talk about Twitter, because Twitter share is still down today after yesterday's nearly decline, And I'm just wondering how bad you thought the results were given the fact that they're proving that they can actually increase their user base, which had been a question for a while, right, Well, there's still going to be a greater risk going into the forward twelve months around

the election cycle that you know, these users may very well be bots. So I think that there's still some skepticism that could be applied. You're not buying it. You don't think that they actually have increased their user base that much. Um, it's entirely possible that they may not. And the other evidence for basing that on well, I mean just in terms of how they've gone through and had to purge their user ace in the past, and that we're going into a point from a political cycle

where you're going to see um efforts ramped up. I mean not to say that it's a Twitter issue, but you know, Facebook themselves came out and said, oh, we've just you know, shut down four campaigns on our platform. Twitter do this in real time. I mean, they don't wait until like one big sweet moment, do they. I mean it remains to be seen. I would say that the problems that you've got with Facebook, I mean, Twitter

is basically Facebook writt small. I mean, so I would say that, you know, tech as a whole is not going to be subject necessarily to scrutiny, although arguably one might say that it's going to. But I would say that the tip of the iceberg here really has to do with the social media companies. And granted, Facebook this year has been, you know, a phenomenal stock. I think it's been up th percent. Uh, not a bad return, but still, you know a company that arguably going forward

faces greater headwinds than not. The same would apply relative to Twitter. Do you think these social media companies will be more regulated by the US? Well, I think that they need to meet the standards that other more traditional media and news organizations have to meet. So from that standpoint, time to time to get them out of the sandbox and put them into the pool with everybody else. David Garritty, thank you so much as always for being with us

and giving us your thoughts. Interesting to hear about the idea of whether the user base really has increased all that much, raising that issue ahead of the U s election. David Garretty, chief market strategist for laid Law and Co. And also a partner at bt Block, joining us here in our interactive broker studios. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer.

Paul Sweeney, I'm on Twitter at pt Sweeney. I'm Lisa Abram Woyd's I'm on Twitter at Lisa Abram Woyds one. Before the podcast, you can always catch us worldwide on Bloomberg Radio