Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney alongside my co host Matt Miller.
Every business day we bring you interviews from CEOs, market pros, and Bloomberg experts, along with essential market moving news.
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Alison Williams Joyce. She's our senior bank's analyst.
She's also the director of research for all the US research stuff they do with Bloomberg Intelligence. So she's got a lot of hats to wear, so we appreciate getting a couple of minutes of her time.
Goldman Sachs Bank of America. What do you takeaways today, Alison?
So it's been a good quarter. You wouldn't know it from the stocks, but not interesting income.
Or I can make huge money running a bank today with the interest rates they're paying like nothing to you and me to depositor, and they're loaning out at these high rates.
Are what are the margins? What are the margins like? Right now?
They have started they have actually started to pay up and so we have seen that, right So that's been a little bit of ahead when that's what people.
Are worrying about.
But the cost of deposits, the rate of those costs increasing is slowing. So you know, we like a second derivative, and we like when the second is.
There an overall number, you know, like at Bank America, the average deposit payment is like, I don't know, I would guess like zero point five percent, right, and the average amount that they're charging on a loan is probably more like six.
I mean, what are we looking at.
I mean it depends bank by bank and so.
And by the way, if you know you did your math, you'd get a much higher spread. Then you're actually, you know, earning on the margin. So it's really like a couple of percent depending on the banks, depending on the mix. And we could get into the weeds and talk segment by segment. The wealth segment, for example, much closer to matching the market rate, right, So if you have a balance of a few million dollars, you're gonna be a lot more sensitive in terms of moving that balance very quickly.
Commercial balance is similar, right. People that are managing those balances are doing it for a living, so they're obviously going to move those So in those two segments, we've seen, you know, the cost very much matching what's happening on the funding side. It's really the consumer banks where you have very much smaller balances.
Even then you would.
Think it's you know, people should be moving and Paul, you talked about your savvy daughter looking at Marcus and the highest rates there, but some people are slower to move.
And if you think about Wells.
Fargo, Bank America, JP Morgan, huge retail branches, tons of these mom and pop deposits, especially Bank of America and JP Morgan gaining that share over the last several years. And so that's that's really the benefit is those big the deposit base and the portion of that deposit base that pays you know, closer closer to zero.
Not the hot money, right. That was the worry last quarter is the hot money, which means.
Like John Tucker's money.
No, no, okay, I mean and correct me if I'm wrong here, but that is basically broker deposits, right, Allison. So the worry was that it's not just Marcus that's paying more than five percent.
There are a number of other upstarts that.
Are paying decent interest rates, and so you have broker deposits that just move back and forth all over the place. And investors don't like to see too many of a bank they own too many of those deposits brokeer, right.
They don't.
That's why they really look for the core deposits, and they're really looking for those.
Super cheap deposits that live.
You know, as I said, in the consumer units are not the wealth or the commercial or those the higher beta as we would call it, not beta as we know in the market, but you know, a deposit with a high beta to the market rate.
So what are we hearing from the likes of mister Solomon and Goldman Sachs about just the investment banking businesses. Doesn't seem to be a lot going on over there anywhere.
So if you look at the fees, it doesn't seem to be a lot going on. But I think what investors are focusing on, or some of the some of the commentaries beneath the surface. So obviously you're familiar with the fact that there's activity, there's you start those conversations and then you see.
The uplift and fees a few quarters later.
And what was exciting in September was a lot of commentary from the Goldman, Sachs and other banks that things were happening beneath the surface. We're hearing a bit more of that today from both Goldman and Bank America. Equity fees and has been disappointing. We did get a few deals, so we're looking for things to get a little bit better. Dept fees being helped out on the high yeald side and em and A despite very low levels, at least increasing from the second quarter.
So one of the things that I've been amazed with over the last ten twelve years is the whole growth of the private credit business.
That's seems to.
Be actual fees that are leaving Wall Street and going to the private credit business, whether it's from the leverage loan business or the high yield market. What are the Brian moynihand's, the mister Solomon's lord.
What do they say about that business? I mean, it seems like they just let that go, I mean and let it walk across the street.
Yeah.
So, so if you looked at large so if we looked at sort of large corporate lending, that tends to be almost like a has been over the long term, a loss leader for the banks they want it more for the for the overall relationship, right, and then the types of lending that tend to be profitable, sort of that core bread and butter commercial business. I think that's where maybe some of the BBC's have tried to become
more competitive. But the but the big you know, the business right now that's working and the business that's good for these banks over the long term is card because that's you know, the consumer business has much higher yields.
Yeah, but back in the day when I was at Chase Elson, I'd do a big leverage loan to comp kiss cable billion dollar loan. We'd get a big fee up front, we'd get a nice liboard spread, we sell off ninety percent of our loans. We don't have to, you know, muddy up our balance sheet, and then we turn around to do it again.
I thought that was a really well, you're.
Talking out loads.
Leverage lendings is obviously a little bit more exciting, and again like you're talking about the full relationship, right, Like you're really looking for the fees and the full relationship. And keep in mind that, you know, even when banks do loan syndications and such like, they're generally selling off those pieces as well, right, Like they're looking for the overall origination fee on that business.
So what's what's the outlook for investors here? They are clients you talk to, are they are they buying the Goldman's of the world, they buying the Bank of Americas, the JP Morgans or are they just waiting to see how the economy shakes out.
It's definitely the latter. People are still very focused. Investors are very focused on commercial real estate. We know that that's something that's going to take so what are a long time to play out. I mean, the banks are we're seeing weakening and that's what we expected, but it's it's going to be a slow process. I think investors definitely get concerned when some of those concerns start playing out in the CNBS market, which moves a lot quicker
and you know, has shown some significant decline. So we know commercial real estate is coming, but broadly credit is very strong and investors are also still looking at.
Those unrealized loan losses. We did see a tick up.
Bank of Marca spent a lot of time talking about their portfolio this morning, and I think that is just something that again it's going to be a while. So the stocks, as I said, are not responding to the good earnings. And then we have these two concerns that are just going to take a fair amount of time to play out. And at the same time, investors are trying to grapple with what do higher rates mean? What
does that mean for the economy? Credit loss tends to be the big wildcard, and what's what's going to happen next year if these rates continue to be high?
Any any most dangerous times quotes today? I mean, well, Jamon always.
Makes Jamie always kicks off earning season, and he always does make some high some good headlines. I think, you know, the most interesting thing if you read between the lines and some of his comments, he's continually said, at least for the last couple of years, that the world needs to prepare for higher rates, although the number he throws out there continues to ratchet up, and so a bank should prepare for any type of risk scenario.
There are there are a lot.
Of uh, you know, there's a lot of risks out there. But he has also been saying, you know, last Investor Day, he talked about sort of detailed all the unprecedented times and we've continued to have some risks since then.
All right, good stuff.
Alison Williams as always senior banks annalists for Bloomberg Intelligence. She's also the director of Research for the Americas.
For Bloomberg Intelligence.
So a busy, busy plate.
You're listening to the team Ken's are Line program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Dot, the iHeartRadio app, and the Bloomberg Business app, or listen on demand wherever you get your podcasts.
The retail sales came in this morning much stronger than expected. So you can't keep a good consumer down, it doesn't appear, So I'm going to see what this really means for the global macro environment. Here, Russell Price joints us He's a chief economist at Ameriprice Financial. He's based in Deti, Michigan, but he is here in a Bloomberg interactive Brooker's studio. We appreciate that, Russell, thanks so much for joining us here. Again, the retail sales numbers come out pretty darn strong.
This consumer.
You can't hold this consumer down. How did you read these numbers? And how does that kind of kind of weave into your economic outlook.
Yeah, certainly it's a further upside that's likely for third quarter GDP. But retail sales that shows the consumers still have a lot of money available to spend, even if they don't maybe they're adding it to the credit card and they're certainly willing to spend. A big jump for this morning's retails came from restaurants and bars. Nine tenths a month over month shows consumers are still looking to
enjoy themselves after the pandemic. Some of the areas that were down were even just down after big jumps the prior month. We had a eight tenths decline in electronics, but that comes after a month that we saw a one point two percent increase the month before, And so consumers are still driving this bus. And even if we have the student loan repayments beginning here in October, it's still there. Still seem to be spending at.
A good level.
Where are they getting the money or is it credit? Because I recall at one point looking at a graph from Torsten slock over to Pollo that showed credit card usage taking off. It scared me at the time, but everybody I ask about it says well, we're just getting back to pre pandemic levels.
How do you see that.
I'm not very worried about credit card debt, because, yes, we are at an all time high, but just because of the way the federalies are met measures credit card debt gives it a natural upside bias. It measures on average monthly based on an average monthly balance, and so the more and more we as consumers use our credit cards, you know, the days of emergency use. Only those days are long gone, it gives it a natural upside bias.
So what I do, There's no real way to factor that part out, But what I do is I look at consumer credit card debt relative to overall consumer income, and on that basis, we are at very healthy levels. We're well below what we were pre financial crisis two thousand and nine timeframe. So even though it's at record levels on a dollar basis, it's still very manageable.
I mean, to me, it would be worrying to roll over any debt at what are rates on credit cards. People are just putting stuff on credit cards and then not paying them off every month With twenty five percent rates, that doesn't sound like a smart decision.
Well, even if you pay it off at the end of every month, just because your average monthly balance.
It's still.
And now I'm coming along with you. Now I'm getting on the same page here, I see. So that doesn't sound like a I mean, if you looked at what I charged every month, you would be probably shocked.
Sure, you have a huge cash burn with.
Your it's massive, and I mean probably spend, you know, like a good American.
More than I earn.
Right, But I do pay off the balances because I don't want to get hit with that interest rate cost.
Hey, Russell, are we gonna Are we gonna see a recession here?
And if so, how deep?
I mean, personally for my forecast, I've taken that off the table. Although no one cares about my forecast, they care about your forecast. What do you what are you thinking about that?
Well?
I think the most likely path still implies that we're likely to avoid a recession. But as we were talking earlier, I think the negative influence of higher rates are still to be seen as their full impact on the economy, particularly when it comes to small businesses, refinancings, office refinancings, and auto loans things like that. So there's still more pressure to come. So we do expect the pace of economic growth to down shift over the next few quarters.
And as such, it really wouldn't take much to for that downshift to push us a little bit lower if we were to see something such as a spike in oil prices to boost the gasoline prices to push us into negative territory for a short period of time. So even if we do see a recession, I think it would be very shallow and it would not what's most important in most people's mind, it would not likely push the unemployment rate up beyond five percent.
What's your view of you know, federal spending to me seemed to be moving at cross purposes with what the Federal Reserve was trying to do, right, I mean, we're just pouring money on this economy out of Washington, DC. As the Fed is raising rates to try and slow down the economy. The bond market seems to be a new player though involved in this. As they drive up rates on the long end. Is that tightening financial conditions enough?
Well, it certainly is, clearly, But I do think we will start to see some alleviation in the upward pressure in market based rates, Treasury rates particular because part of the boost that we've had over the last few months was from the federally from the Treasury Department rebuilding its checking account. Back in June, we had the Treasury balance down below forty billion, and now it's built back up to over six hundred and forty billion, So the checking
account is largely rebuilt. Usually they keep that at a level between three hundred and five hundred billion, so it's pretty flush today, so that component should alleviate. We still have obviously deficuspending and the Federal Reserve working off its balance sheets, so there's still a lot of upward pressure.
So once we see further confirmation that inflation truly is sid and I think that's what the market's waiting for, is further confirmation of that data, that we should start to see rates moderate a little bit.
But we're on I mean five percent watch yeah, out thirty years right, the thirty year right now four point nine nine percent, up ten basis points today. You know, the twenty year has already been in past five percent. So does that you think is that a high high water mark for yields.
I think it will end up being close to it. I think we'll probably be at this these levels for a little while longer. But again, as we move into twenty twenty four, the inflation outlook starts to get a little bit better. The Federal reserve insin indicates that they're more on pause. I do think that we'll see those rates come down a little bit, maybe somewhere between a quarter and fifty basis points, so they'll come down somewhat.
That'll alleviate some of the concern about the economic environment, and I think we'll have some up side for twenty twenty four overall.
Andy Russell, just real quick, you're based in Detroit. A lot of your fellow Detroit folks are on strike here. When are they gonna work something out here between the auto companies and the audio?
Yeah, that's it is a very difficult question. Certainly, I don't have much insight into the negotiations by any means, but it is something that's a rolling pressure on activity in the area. Fortunately, we didn't see much of that in today's industrial productiony. Manufacturing activity still expanded, but certainly the auto industry needs to see that resolved sooner rather than later.
You guys have a football team this year.
That's a very good that's a good.
With the Lions.
Yeah, that's right, that's the NFL.
Met That's okay with me as long as we're just talking about the Lions and the NFL.
Yes, that's all you need to know. Russell Price, thanks so much for joining us. Russell Price is the chief economist for Amerprice Financial. Joining us live in our Bloomberg Interactive Brokers studio.
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Talk about It, Diplomatic, full court Press.
US Secretary of s Anthony Blincoln in Israel for the second time in like a week.
Now.
We've got news that tomorrow President Biden will be going to Israel as well. Let's get the latest on kind of what this means for this difficult situation. Henry Meyer joins a season reporter for Bloomberg News based in Tel Aviv. Here, Henry, it seems like the United States obviously the top, top political folks making their way to Israel to try to, I guess, improve a very difficult situation. What's the feeling in Israel about President Biden coming over tomorrow.
Well, clearly it's seen first of all as a signal of US support at this really critical time for Israel. You know, they've been preparing now for a grand offensive into Gaza, and the US has been pledging, you know, military support and also saying that it supports Israel right to defend itself in the face of a lot of criticism now of the bombing which has taken place in Gaza and concern about the civilian casualties that will result if Israel does indeed decide to send grand troops into Gaza.
What is the status of that right now? I mean, I imagine they're still all amassed at the border. They've swept as many are pushed as many people from the north of Gaza down to the south in order to get in there.
Is it imminent?
I mean, are you hearing anything about the timing of the invasion?
I mean, what we understand is that you know, it is planned to take place imminently. I mean, clearly it's not going to take place while these visits are occurring. I mean, today we have the German Chancellor who's visiting tomorrow President Biden. But you know, it is anticipated that it could start pretty soon after that.
You know.
At the same time, you know, the US has also been telling Israel, both privately and publicly, that it's got to do everything to avoid civilian casualties. So you know, it's not clear whether that will influence the type of operation that Israel is going to conduct and go.
Henry, I guess you know here in the States, you know, we're watching like everyone else here. One of the questions that I think a lot of folks have is how much collateral damage to civilians and others do you believe that Israel's willing to inflict in an effort.
To achieve its stated military goals.
Is there a sense of in Israel how far they really want to go?
I mean, everyone that you speak to here says that you know, this is there in a new reality now, and you know they have to go to the end. They have to achieve the objective. The objective is to dismantle Hamas militarily and its administrative role as well. In Gaza, of course, you know, this does risk extremely high civilian casualties. They're already three thousand almost Palestinians who've died in the bombing.
And although yes, they have succeeded in getting large numbers of people to move south, still you know, there are several hundred thousand left in the north, and there are air strikes also taking place in the south as well, so you know the risk of collateral damage is very real.
Why are there air strikes in the south.
I thought they moved everybody to the south to avoid the air strikes in the north.
Correct. What we understand is that they said there were targets that they had to focus on their hamas targets. So it's not that they're bombing you know, as much in the as in the North. But nonetheless that is taking place. According to what we've.
Heard Henry, prior to this, that the the terrorist attack, there was a fair about a division within Israel, you know, profound division within Israel do in large part to Netyandu and what he was trying to do with the judicial system. To what extent post attack has the averages really do they feel more united? Give us a sense of just what it feels like on the ground in Israel talking with you know, Israelis on on on on the street.
I mean, Israelis have put aside those differences for now. I mean this is you know, a national emergency and the country has come together. And you know, one of the illustrations of that was the protest movement that you know that was raising funds to protest against the judicial reforms. You know, those funds have now been redirected to help you know, the military effort. You have you know a
government now which is an emergency government which includes the opposition. So, yes, the country has come together.
And Henry, it seems give us the latest reporting from the West Bank. That's it seems quiet there. What's the latest reporting.
Well, I mean it's quiet because the Israeli authorities the same day that the terrorist attacks happened, you know, launched a massive clampdown, security clampdown. So they've been you know, carrying out mass arrests. They have been limiting, you know,
the movement of people within the West Bank. So you know, they knew that that was potentially going to be another flash point that you know, they could be a spill over into the West Bank, and so they have taken very very tough measures to prevent that from happening.
What is the value, Henry of the Israelis allowing Ismael Hanayah to continue to live in Katar.
I mean, we talked with Bobby Ghosh.
Yesterday who told us so this gentlemen, he's the leader of Hamas, and he lives in Qatar, and he is alive. And so yesterday we were talking with Bobby Gosh who pointed out that the Arab States armies are not serious, you know, fighting groups. And I imagine if Israel, if Masad wanted to go in there and take out Hanaya, it would be no problem.
Why don't they do that?
Well?
I do think that, you know, there is a benefit I think still having some kind of interlocutor. There are, for example, talk taking place now and trying to get hostages out freed. You know, more than two hundred hostages as ready, hostage is being held in Gaza. And apart from that, you know, there's so much criticism now of what Israel is doing in the Arab world that I just don't think that they would want to do such an inflammatory thing as that.
I also wonder, you know, you're in a unique position as a reporter, Henry, you were based in Moscow before this, even god, I think a master's degree at Moscow University. So you spent a lot of time covering Russia, covering Vladimir Putin and the beginning of the war in Ukraine. How does this play into all of that, because my first thought was when I saw that Hamas had, you know, committed these attacks, is this draws so much attention away from what Vladimir Putin is doing in Ukraine.
Yeah, I mean, I think you're absolutely right. The Russians see this as an opportunity. They see it as something which is going to draw a US attension away from Ukraine. I mean, there was already a sense that, you know,
the focus was switching. You saw that when eight Ukraine got held up in Congress, and now you know, the sense is that, well, the US is not going to be able to focus on two things at the same time, that the focus is going to be on making sure that you know, Israel gets the military assistance it needs, and therefore Ukraine is not going to get as much help as it was getting in the past, so very much so. Yeah, from a Russian perspective, they see the tide turning in their favor.
Henry, what do you believe or what does the averages rarely believe that they will get from President Biden tomorrow. Is this is simply a show of solidarity or is there anything particular that you think is youre really is going to ask of the President?
Well, I mean, I think the fact of his coming here is going to be seen, you know, as making sure that Israel's enemies know that the US stands with Israel,
and that is particularly aimed at Iran. Of course, you know, the risk now that everyone is concerned about and that the US particularly has been trying to sort of counter that threat, is of this conflict spreading, spreading to the region, and specifically if Hezbollah, which is backed by Iran, launches you know, major missile attacks from Lebanese territory into Israel, you could see this this war becoming a much much wider war in the region, potentially also drawing Iran into it.
Is he going He's going to meet with King Abdullah, I know in Jordan and possibly elseci in Egypt as well.
Do they stand with us?
Can those two countries be counted on as US allies? Or I mean I believe they talked to putin first.
Those two countries, you know, have been warning about the risk the impact that would follow if Israel launches a large scale offensive in Gaza. They're very concerned about that. And you know, Sexuary Blincoln crisscrossed the region just in the last few days to try and you know, enlift Arab support for Israel's actions, but he was not successful.
All right, Henry, thank you so much for your reporting there. Henry Meyer, Senior reporter Economy and Government for Bloomberg News.
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Matt Lila, Paul Sweeney live here and I Bloomberg an Active Broker studio.
Also, you know what I do when I get to cash, yep, when I have a fair amount sitting around on my bank balance, you spend it.
Of course, But how do I spend it?
So motorcycle.
There are things that I'm always looking for a good place to buy Clinch boots engineering boots made with shinky horse hide, the kind you can only get out of Japan from one tannery there that makes the best horse side.
In the world.
Or if I'm looking for jeans, I'll go with Samurai denim, and I like twenty five ounce Samurai blue jeans made the old fashioned way on looms that Americans sold the Japanese cent Go.
All right, so this is Gore.
I like, uh, the real McCoy's the best place to get flight jackets like A two's or B three's that are like perfect compared to the old ones, only much higher quality in terms of the leather and stitching. All of this stuff comes from Japan, So how do I get it?
Racketon?
That's right, Boom, there's.
A website that I use to buy all of this stuff. Now I've grown up saying Rakuton, but maybe it's Racketon.
Let's ask our next.
Yeah, let's do that.
Julie Van Allen, she's a chief revenue officer for Racketon. Who pronounces it right.
Julie, Racketon is the way we go?
All right?
Well, I've been using it for years and Paul has never heard of it. So to us about the other things that you can do on your website because you're the chief revenue officer there, which I guess means that you're in charge of making more and more money and I only use it for maybe one niche part of your business.
So what is racketin?
So yeah, and my.
Job is just making money. It's really about ensuring that all of the merchants, so the brands and retailers who use our site to have access to the loyal shoppers who go to racketin to start their purchases have the best experience possible. So effectively, Racketin offers cash back to shoppers and helps brand in retailers engender loyalty through the shopper base who uses racketin to shop for everyday purchases.
So give us an example of Juliet kind of a typical retailer that uses your site to reach your customer base.
We range a vast array of categories from a parol to footwear. So you have your department stores, you have luxury department stores, so Macy's, the Bloomingdale's, we have direct to consumer brands. We have over thirty five hundred brands on the site. We also are across the travel vertical as well. So really hard pressed for shoppers, for consumers to come to our site and not find what they're looking for.
So give us a sense of how the consumer's behaving to We had some really strong retail sales numbers reported by today, and what are you finding on your platform?
How's the consumer these days?
Yeah, I mean your question is actually a great segue because we see such a vast array of purchases from across a number of categories, and we've been tracking the consumer sentiment and what they've been buying over the last couple of years, of course, which has been pivoting and
changing constantly given the economic conditions. But what we're seeing right now is, of course the CPI rows a little bit, which means that consumers are still feeling tighter budgets due to inflation, especially since that core inflation is what's impacting folks student loan debt repayments resuming, so that's still a burden. But what we're seeing now, especially given the raid the retail trade sales have gone on a little bit, is that they're still willing to shop, and they're still willing
to shop using discretionary spending as well. So while year to date there's been this trade down effect, whereas if you shopped at a high end department store, perhaps you've been shopping at more of a discount department store year to date. That will continue because discount steals value is definitely going to be central to the consumer mindset through
the holidays. But it's interesting already to see a willingness to increase discretionary spending start to uptick, which is something that we would anticipate to see throughout the rest of Q four.
How are your customers paying for the stuff that they're buying? I mean, imagine they could do that with a with.
A credit card or the debit card.
There are a million other ways nowadays, with PayPal and Venmo and buy now, pay later.
How are you seeing that breakdown?
So at Racketon, we don't actually facilitate the purchase. We facilitate the consumer engaging with the brand of their choosing. So you would start your shopping trip at Racketon, But say you're shopping at Macy's. You would shop at Macy's just as you would if you went to their site directly. And of course most brands and retailers these days are offering an array of ways to shop and buy.
No, but what is the selling point that, Like, why wouldn't I just go to Macy's directly?
Why do I make a stop at Racketin?
Yeah?
So Racketin is a place where you get cash back on your purchases. So we have a hugely loyal base of shoppers who shop more frequently, who shop across different categories when they can find an offer that is enticing for them. And I think what's so interesting to a lot of brands, especially going into a season like this where you have consumers who are looking for value. You have a lot of brands who aren't interested in the discount space, who aren't interested in offering coupons. There's brand
devaluation associated with these things. But at Racketon, this is really an incentive where consumers can come and get an exciting offer via cash back to shop more, buy higher value cart sizes with these brands and shop more frequently through the holidays and feel really good about what they're doing because they're getting cash back.
Well, what are some of the retail partners that you work with, what are they saying about this holiday season? Coming up here? Because again, the retail sales today look prett darn strong.
Yeah, they are strong, and they're going to continue to be strong. But I think the thing that everyone is aware of is that consumers are going to be looking for the best bang for their buck this holiday, and for retailers this year, especially coming out of the last couple of years where it was there the focus was on top line spend. It was just ensuring sales, ensuring that the customer base that was loyal to these brands
continued to shop with them through hard times. Gross margin kind of went out the window for the last couple of years. But this year to date it's been a bit of a back to health focus for most most
retailers and brands. But what I will say that we're hearing from nearly all categories and all brands and retailers is that they realize that this is going to be a very very competitive shopping season where discounts and value adds are going to be central to what consumers are looking for to make their dollars go as far as possible. So brands are really focused on how to make sure to get the best deals in front of the best shoppers and meet them where they are this holiday.
So what's what categories are really moving these days?
I mean when I go into the holidays, I always kind of hear electronics things like that.
But what's what are consumers really looking for these days?
Of course, I mean, nothing's going to change in terms of what are giftable categories that that consumers will be shopping this holiday. Certainly electronics, certainly apparel, and certainly luxury. And I think that that's actually one of the more interesting categories right now, because luxury tends to be one of those categories that doesn't really see a lot of
impact from changes in the economy. And we kind of affectionately say that that's because the rich stay rich, but who are actually seeing some changes and the core shoppers who shop luxury typically, Which is a good lesson to learn for really any brand heading into Q four, which is to say that with current economic challenges and consumers making different sorts of decisions as to where they spend their dollars, they need to figure out who is buying
their products these days. What are the younger what are the gen zers spending on? And how can they attract an engender loyalty to new shopper bases and categories who might not have been the traditional focus of their marketing spend.
All right, Julie, thank you so much for joining us. Really interesting conversation. Julie van Ullen. She is the chief revenue officer for Rocketon.
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I'm Tucker and I are.
Proud natives of New Jersey, so that means we know malls.
Yeah, we know shopping malls.
You know, when I lived in some A, New Jersey, right across the street was the Short Hills.
Mall, which is a nice mall.
That's the mall where you can get valley parking.
Yes, ways, I can get valley parking at the Westchester. I could get valley parking at the City Center in Columbus.
Are you a mall guy.
I'm a lover of malls. Yes, I'm both indoor and outdoor. But I reject the notion that you know more about malls being from New Jersey than I do being from a high close.
You don't you you live near malls, but you don't go to them. Have you been to the American Dream Mall?
No?
That all right?
If that live near the most impressive mall probably in the whole country and you've not been.
That's a good point. That's a good point.
Our next guest knows about this mall thing.
Donna Blair.
She's a chief a COEO of Pacific Retail Capital Partners, and these folks there they invest in malls and all kinds of retail stuff.
She joins us here.
Hey, Donna again, I'm a huge fan of the mall kid of the eighties, all that kind of stuff. Where are we with the American shopping mall today? A lot of folks were saying, you know, particularly with the pandemic, that business is dead.
Where are we with that?
No?
Good morning, Paul, Good morning Matt. Thank you for having me. I think that at Pacific Retail we have a different opinion about malls. You know, we look at the malls not just as is where is, but really where are they going? And the future of the mall is not necessarily all retail. It really is this mall to mixed juice approach where you look at the real estate, look at the demographics, but more importantly you look at the psychographics.
You know, why is the mall important? Is it from a retail perspective or really is it more about creating community and lifestyle. And our focus at PUERCP is really being strategic in that approach and trying to really reposition them all into more of a mixed U sasset that is going to have to evolve from just retail to being more that lifestyle and community.
So do you guys focus on the enclosed mall or the open air mall? Because I've had some matt and I've had some retail investors come in there and say, Hey, the open air mall, There's a lot we can do with that kind of business.
How do you guys view the market?
Sure, we focus on both. I would say a majority of our centers are in closed shopping centers. But when you look at the plethor or real estate that an enclosed mall has in terms of the parking fields, the anchor boxes, it actually has a lot of real estate that can be repositioned and so that a bil to kind of pivot and change and evolve the asset is super important in terms of making sure that it's relevant. There will always be retail as part of a mall,
but how do you actually reposition it? And they're a little bit more complicated when you look at the enclosed malls because you've got reciprocal easement agreements between the owners of the mall and then the anchor tenants, some of your major tenants, and also the municipalities, so they're going to govern everything. What are the uses, what are the
parking availabilities, the parking counts, how tall, how wide? And it really is how do you strategically unlock all of those encumberances to create value in the real estate and reposition it. And that's how we're really focused on the malls centric assets that we own, is just to do that to unlock their actual value of potential for us as investors and owners, but more importantly for the community and the consumers too.
What are the main complaints you know, or what do you aim to change compared to a typical mall, Because as I said, you know, I'm a huge fan. I love these indoor shopping centers and outdoor you know, communities as well, but there are issues like they all seem to have the exact same retailers, which I guess those would be your anchors, right, I don't want to go to I went to a mall in Berlin and noticed that they had the same retailers as the mall in Westchester.
I don't need to have a Gucci, a Coach and a Nimh and Marcus and every mall I go to.
You know, so how do you how do you make those kind of changes?
No, for sure, I think what we're focusing a lot is on that dynamic mix. You know, there are less national tenants that are actually in the business these days, and so right sizing the amount of retail and then
creating that diversification is important. Local is key. We spend a lot of time in our leasing strategy really focusing in on local businesses, whether they're mom and pop restaurants or whether they're local retailers, and we put them together and collect so that you can really get that local flavor.
We find one the community's more interested in that because to your point, it's something new, it's something different, You're not seeing it everywhere, but more importantly is that the community is committed to helping their own to actually help bring those businesses to life and to support them. So
that's a really important focus. You're seeing obviously a lot more food and beverage and entertainment because the experiential aspect of the shopping center is really super important and is the way that we are going to be able to create that experience where our consumers come back over and over and find something different. It's all about that activation, the experience and then that diversification of your mix.
Done.
With the cost of capital rising dramatically over the past twelve to eighteen months, what are you guys doing in terms of your acquisition activities?
That kind of made the economics a lot more.
Difficult certainly, you know, the investor pool is a lot different, and we're not going to traditional institutional investors. You know, we're really seeing a lot of individuals from the high net worth category family businesses enter the market. We have
actually found a little sweet spat spot in distressed. You were talking about New Jersey when you opened up, and we just recently acquired in may Bridgewater Commons and you know, this is an asset that has really strong demographics, really strong psychographics, but really wasn't a distressed state.
We were stress.
How about the living stone mall.
The living st mall?
I mean, are those are tougher assets to really reposition? Focusing on an asset like a Bridgewater Commons, we're really able to capitalize on the strong demographics there and be able to reposition it. So we look at a strategy that is more mall to mixed use and looking how
do we bring densifications. So that's residential, that could be for cell product, for rent product, it could be market rate, it could be senior living, and how do we really blend all of those different types of density strategies to drive traffic, but more importantly, to drive lifestyle back to them all.
Hey Donald, we had some really good retail sales numbers out today. What are your clients? What are they saying about this important holiday season coming up?
Sure, I think that we're all a little bit surprised by the sales this morning, especially when you look at the core sector. You know three times what the projections were. I think we have to caution ourselves. The cost of goods are higher, and so when we look at the point seven percent increase you know that there is still some consumer resilience, which I think is super important looking into holiday, but there also is there's a lot of
caution headwinds that are happening here. Credit card debt is climbing, we have a lot of defaults. You know, we're seeing the highest and eleven years. We're also seeing that student loans are now having to be paid, and so that's going to put pressure on holiday sales. I think that when it comes to gift giving, people are still going to be spending the money, but they're going to be looking for the values, and they're also going to change
their trends. They're not just going to be from Black Friday, you know, until the day after sales. That starting earlier, and certainly on this on last week, we saw that growth.
All Right, Donna, thank you very much for joining us.
Really appreciate getting some of your thoughts there on the greater retail business, the shopping mall business.
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In the deeal front.
Today, Wyndham Hotels and Resorts rejected a cakeover offer from Choice Hotels, saying the proposal under values the company's potential for growth and would be subject to a linking regulatory review. Let's break down this deal or non deal with Jody Lorii. She is the credit analyst with Bloomberg Intelligence. SOO follows a hotel industry, all the leisure industries from a credit perspective. Jody, thanks so much for joining us via zoom Here. What's
going on between Choice and Windom? Are we going to get a deal done here? What's going on?
Yes?
So, I mean, you know, Wyndham kind of came back to Choice and said, hey, listen, we are The words that they used were it was underwhelming, highly conditional, and subject to significant business regulatory and execution risk. And the way that I read that, and my initial take on the deal was, you know, if they were going to go with the financing that they proposed, which was half cash, you're talking about four billion dollars that likely would come
from the debt markets. We put that into perspective about where the debt markets are now and where interest rates are. I don't know if you necessarily would like the cost of financing this sort of transaction. Considering where cash flows could potentially be for the two.
Companies, what do you think the cost of financing would be? Are we talking like Carnival cruise pandemic level costs?
No, No, I don't.
I don't think they would be that high. We're we're looking at two companies. So choice is triple B minus by Moody's and SMP or BA A three by Moody's and triple B minus by S and P. And then you have Window, which is one notch lower, so it's the highest notch in high yield, which is b BA one double B plus. And so those two companies together would probably command somewhere closer to to what we've been seeing across you know, standards sort of high healed rates.
Now, the question is we don't watch junk dead all day. What's the number how much?
Well, it depends what the choice actually gets done, because the interest rates have been changing all the time. I mean, I think I think you know the key is nine question.
Is double digits.
No, No, I think it's a little bit less than nine percent at this point. I mean, I think, you know, if if we're talking about okay, so we're saying it's a four billion dollar company, I think the big question is for a compny like this, you say, okay, four billion dollar company, they or four billion dollars of debt rather for a company that combined would be about three billion dollars in revenue. You know, it's it's sort of like a weird scenario because they're like, Okay, what would
investors really feel comfortable with that? Would they not? You know, are we are we looking at like a seven or eight percent rate like we saw last week with with Norwegian? Are we looking you know, is it going to be a little bit better than that because they're a little bit higher rated. I think it would depend, you know, where they decided to go in the you know, in the yield curve. Although the yield curve right now is so flat that doesn't matter.
So JORDI, what's what's what's going on in the hotel space or why why would why does choice think that this is the deal to do here?
So I think what's happening with Choice right now is is you know, they're they're in a spot where they've improved their balance sheet, they are starting to generate cash. They're seeing that the larger hotel companies such as the Marios and the Hilton's are very interested in their space. You know, they have sort of a commanding presence in the extended stay and budget area. That's where Wyndham operates primarily.
That's where Choice operates primarily. Well, now Marriott and Hilton are saying we want a piece of the pie, and so they've been aggressively expanding into that area. And I think Choice is trying to stay ahead of that conversation by looking at Wyndham and saying, hey, here's two very large companies. Let's also be a very large company to compete with them.
So the budget hotel space, how is that different from you know where Match stays, the you know, the Ritz and the four seasons every time.
Well, if he wants to check in one of the super eights, let me.
Know, is that a good business? I gotta say.
I was just you know, I was just about before the flood a couple weeks ago to drive to Ohio and my dream was to bring my daughter along and we would stay at a Motel eight really like because that's what you do on the road trip, right, it's such a cool thing little kids. I remember when my dad took me to stay at a Hojo's or a Motel eight or whatever, and it was like awesome. Then it didn't happen because of the flood. But this these brands would be I mean they would have days In,
they would have Ramata, they would have Super eight. Right, that's not to be compused with Motel six. So they have like a lot of really cool brands that are still named after big automobile engines of back in the day. Are they are those like popular? Are they profitable?
Yeah, I mean they're certainly profitable. You see cash flows generated, so the two companies each, I mean they generate you know, you're talking somewhere in the three hundreds range for Choice, what's to be expected for twenty twenty three or twenty twenty four, and then for Windom you're expecting four hundred at least that's what our MODL screen shows for concessus estimates. That said, I mean, I think I think it's a different sort of you know, when you talk about the
structure of the company. It's a different sort of concept to stay at an extended stay than it is to stay at the high end resorts. You're looking for a different feature. A lot of people who stay at extended stays are staying there for different reasons and and also the definition of extended stay can be different among companies. So some companies like Windham will say extended day, We really mean extended to say you're doing a renovation on your house and you have to stay somewhere else for
a little bit of time. Other companies say extended stay is more in the you know, competitor to Airbnb type.
So how has Airbnb kind of impacted your industry, the hotel motel business just in general?
I think, you know, what's most interesting is that the companies have had to reconsider how they do their business model. There's there's going to be consumers who always stay at hotels for whatever reason, whether they're dedicated to insert your favorite rewards system. But then there's going to be people who are looking for the cheapest alternative and the most convenient alternative, which during the pandemic we saw much more of that. We want a kitchen, we want this, we
want that that's going to come with this day. We just don't want a small hotel room, particularly if we're trying to stay away from other people. That might shift a little bit more. Now that we're getting back into the quote unquote normal times, you're seeing a little bit more pick up in business and conference travel. You know. We we were actually just in Vegas last week, and the conference situation there is much more on the quote.
Unquote normal side than we're in Vegas.
You know a year and a half ago.
I'm sorry, would you say, where'd you stay in Vegas?
Oh?
I stay at the Venetian because that's where the conference was.
Yeah, it was the big Well, I'm a Blagio guy. Next next time you can go there, use my name. Yeah, they'll take care of you.
So beautiful.
Yeah.
You know, just while we're playing with hypotheticals here in terms of the debt, would they would this kind of deal sell debt in the market or where they go to a prime of it credit credit place and get alone there. Because now we're starting to see deals. I think we saw a five billion dollar private credit deal, and the idea is that these numbers are going to keep growing, so they could handle this.
What do you think.
I think we're a little bit in early stages to figure out how they go financing. Choice did indicate.
That there's.
I mean choice, Yeah, I know, I mean it's it's definitely anything's a possibility.
Let me put it that way.
Anything's a possibility. That said, Choice indicated that they are working with two bank banking companies that you know, two bankers that said that they could give them financing, you know, give them short term financing while they go secure longer term. That said, yeah, I mean the public markets, it's really a question of timing. So companies come to market and it's terrible timing and they get these horrible rates like we saw with some of the other companies I cover.
Then they'll come to market, I'll get these fantastic rates. So it really is just a matter of timing, and it's a matter of how comfortable people are with the deal. Now, in normal times, the lodging industry is usually pretty sleepy. People aren't super excited by it. Unless there's some sort of transaction that happens, then it becomes a little bit
more interesting. Normally, the bonds don't trade all that much for lodging, so this is the type of thing that you say, oh we we you know, we can wake up from our beds of lodging and decide to really care about the That was my terrible way of making some sort of achnology for effort. But but companies can you know now we're starting to see that their their bonds are a little bit more volatile today. So it
is exciting. It's it's unlikely that, you know, for the window bonds, it's a negative per se, although you know, it's really a question of whether or not the change of control gets triggered gets triggered. I don't think it would, in which case, you know, the bondholders are kind of taken for a ride, so it will be in a thing to play out. I don't really know how much more it's going to go, though, yeap.
All right, we'll stay on top of this deal. When we get anything else, we'll get back to you. Jody Lori, she's a credit analyst for Bloomberg Intelligence following the lodging industry and again a potential deal here in the lodging business. Choice Hotels take a look at Wyndham Hotels and they're jockey back and forth on price We appreciate gatting Jody's points.
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