Bloomberg Audio Studios, Podcasts, radio news.
You're listening to the Bloomberg Intelligence podcast. Catch us live weekdays at ten am Eastern on Apple Card playing Android otto with the Bloomberg Business App. Listen on demand wherever you get your podcasts, or watch us live on YouTube.
Berkshire Hathaway people talking about this scene getting close to a one trillion dollar valuation.
Find all I care about it?
What are they gonna do with their cash? Matthew Palozola, he joins us here. He's from Bloomberg Intelligence. He covers all the insurance comes, including Berkshire. So, Matthew, how much cash do they really have on their balance sheet? And we've been asking the same question for years? What do they do with it? Anything new coming out of Omaha?
No, So about one hundred and sixty eight billion of cash. We've been talking about this for a long time. They haven't had a ton to do with the cash. Buffett had said there's almost no targets outside of the US that he would be interested in, and the ones inside the US, the prices are getting driven up on competition. So it was it was a real I thought a kind of negative tone in the letter not only on that but on some of their operations as well.
So a walkers through that, like, what were raised concerns for you?
Yeah, So the beginning of last year at the annual meeting, Buffett had said, we think the energy business, in the railroad business, they're going to be he's gonna be lower in twenty twenty three versus twenty two. What happened was they were lower, but there was actually a couple of externalities as well that made them even worse and their
their go forward concerns. The first one was labor costs in the railroad that they were having a labor shortage and they were paying their people more so the margins in that Burlington Northern Santa Fe seemed to be like they're going to underperform peers on a go forward basis. The second was in energy in the West Coast. There's a lot of litigation on wildfire, there's a lot of regulation on their profits, and the outlook there didn't look at you either.
So but to that point, what I find interesting is that for the railroad, for example, that's why there's the cash pile, right because you make the argument that I have one hundred and sixty seven billion dollars in cash because when things don't go well, I don't have to go to a bank.
I don't have to get a loan. I can manage that.
So their cash pile is far in excess of what they would need, right, So they they want to keep a buffer of like twenty billion, and they have one hundred and sixty seven right, So they're not keeping it to support the businesses. They're keeping it because there's just nothing good to do with it.
Historically, what is warrant said about dividends or lack their own?
So he likes getting them, and he will and he'll never pay them, right, So I think in a post buffet Berkshire, maybe that's something that happens with greg Abel. I'm not one hundred percent sure, but it's never going to happen when he's in charge.
That's just a philosophical thing with him.
Yeah, he thinks we can do better with the cash than giving it back to you and letting you take the alternative.
Ask a really down question, where is that cash?
Like?
Is it in a money market fund?
Like?
Is it in bomb?
It's in money markets, bonds, short term securities? And what happened last year was the short term rates went up so much that they were earning a ton of money on it. I think that actually took they were they went from something earning like fifty million to like five billion or something just just on the cash. And I actually think that took a lot of pressure off, even them investing in equities.
So how do people I mean, you're an insurance sannel, so you're an odd duct to begin with.
Right, No, it's crazy accounting. You don't know what's going on.
How do you how do you and other analysts really analyze this conglomerate or do you just say, hey, it's a GDP growth company and that's it a slap a GDP mop.
But on it, I mean, I wouldn't say that it's tough. We try to look at it, you know, some of the parts you can value the company looking at the float. In the insurance business, there's there's a couple of different methods to do it, you know, even just on a simple pe right and what they're earning. It seems like generally the values of the businesses kind of fall in line with with peers. Like, I don't think there's a
conglomerate discount me anymore. I would consistently argue that it's not a GDP company, that it's got best in class businesses, pricing power businesses. So you're not going to just see them growing, you know, two to three percent a year. But you know a ton of the the emphasis goes on their investments and you know what they can buy.
What do you think they should buy?
You know, something I was thinking of over the weekend. I was thinking they were gonna buy Occidental, right, and they threw cold water on that last year. He said it again in the letter this year they wasn't gonna buy it. But something I thought find fits into his niche would be maybe entertainment. Right, So if you think about the thing lot, you know, maybe you're.
You're not looking at right now.
I think that because look what does he look at. He looks at stuff that there's going to be consistent demand for.
Right.
Maybe it's a little old school like he still thinks that. He says Cole's not going anywhere anytime soon. You know, it's not He bought these Japanese trading houses, right. The investment there is around nineteen billion dollars in value, and if you look at them, they're not AYI they're not flashy, they're not tech, but they are steeply involved in these
things that are just not going away. And I think that, you know, I don't cover entertainment, but I think you know, there you go, Paul, Maybe you have an idea going up, but the whole town's for sale. There's always going to be a market for entertainment.
We always need to be entertained.
So I don't know, maybe there's something in there.
Well, I mean to your Oxy point, I mean it's not that he was he was offered a really good deal, Like he got a really good deal on some shares when Oxy was looking to buy In and Darko and they needed cash. They needed cash quickly because Chevron was also making a bid. So like, will things get dramatic enough or distressed enough for there to be a really good deal? Might not be buy the whole company, but get that good deal.
What do you think?
You know?
He always says he buys he would love to own all of the companies he owns, like he would love to own Apple, right, but he can own the whole company. I mean, just say, we're not interested in necessarily running Occidental, right, So I could see them buying up more of it. I mean, they have the warrants that will increase their ownership given the strike price. But I don't again like they're not going they don't want to run it, but I think they would own as much.
Of it as they could.
Step back.
Your P and C property and Casualty's what's the call here?
Do we like it? Do we not like them?
So for Berkshire's businesses specifically, they leaned into the Florida reinsurance market heavily last year. Okay, and that worked out well. And you know, I've been guilty of saying this, and you see it sometimes in the press that they quote bet on the market, right. They didn't bet on it. They didn't like place their chips on black and hope that it worked out right. It was a risk adjusted play. They said, if we have an average hurricane season in Florida,
we'll still make a nice return. What happened is we had a far below average, so they made a lot of money. The other business for them that's kind of turning around is Geico. So if anyone here drives a car, has a car, you've probably seen auto insurance costs going up dramatically. You've probably also seen a lot less advertising, so they spent it. Did some back of the envelope calculations about one point five billion dollars less on advertising this year just in Geico. Then they wouldn't on a
run rate basis, And why was it. They did that to protect the profitability of the business. So the combined ratio of the business is kind of the inverse of their profit margin. Right, they hoped to make about a four percent profit margin underwriting insurance. They were probably gonna make zero if they didn't cut their ads spend dramatically. So they cut the ad spend. They've cut policies to specifically on the West Coast, to kind of pair that down.
So that business was actually a nice performer this year, but because they spend a lot less money on advertising.
Really interesting, that's money on my companies.
Yeah, that's dope. Sorry about that.
Matt Halizoa, We appreciate it. Thank you very much. Joining us from Bloomberg Intelligence. He's the P and C Insurance senior analyst there and also covers all things of Berkshire Hathaway.
You're listening to the Bloomberg Intelligence podcast. Catch us live weekdays at ten am Eastern on.
Applecar Play and Android Auto with.
The Bloomberg Business at You can also listen live on Amazon Alexa from our flagship New York station. Just say Alexa play Bloomberg eleven thirty.
Stocks are definitely still going up. Everyone's really confused about it and scratching their head. Yet no one's actually selling necessarily, like you cannot get a sell off in this rally. Kathy and Whistle is managing director at Morgan Stanley Private Wealth Management, and she joins us, Now, Kathy, why won't markets go down?
That's a great question, Alex, You're always throwing those tricky ones at me. I would say basically that everyone is still enthusiastic about the opportunity of interest rates coming down eventually. So there was a little bit of a pullback a couple of weeks ago when we all realized that the Fed was not going to start cutting rates as soon as they had originally thought. But now we know they're going to cut eventually, so we want to get our money in and have a long term view and get
some of the growth that's been going on. A little bit of its FOMO, a little bit of it is long term thinking.
So Kathy, we're pretty much through the earning season here. I'm not sure I've seen earnings rise as much as the market has. So what did you take away from this earnings cycle here?
Yeah, we were expecting earnings to get hit somewhat because over the last year or so, companies have been still very positive with their expectation, and at some point they we're going to have to pull in because there are sales that are going down, the cost of goods is getting more expensive, and it's harder and harder to get that earnings number that they want in order to impress
their shareholders. At the end of the day, there's only two ways to get the earnings to look good, and that's either to increase your sales and your revenue or to decrease your expenses. And a lot of companies are starting to decrease expenses. We're seeing that with the layoffs, and this is what we're thinking about of why companies are trying to reach those numbers by making those cuts and laying people off. And it's not necessarily the most healthy way to meet numbers.
So, Kathy, what do you do? Then? Golden Sachs had a noubt.
They talked about how hedge funds are selling tech last week and they're buying consumer staples for example.
What do you do in this environment.
Yeah, one of the things that I'm doing with clients actually is a very simple basic concept of asset allocation, right, which where you're starting with how much is the percentage you have in equities versus fixed income versus alternative investing,
And I'm peeling back a little bit. For those clients that have stayed in the markets and have you done quite well, you can peel back a little bit from those names that have had a big run up and start going more into that whole fixed income arena because you are getting paid now for fixed income, which we haven't gotten paid in years for fixed income. So there's opportunities there. If the FED does go ahead and reduce rates at some point in the future, there's a chance
for a little bit of a pop up too. So I think just looking at allocation is the first step, and the second step is looking at different areas of the market that we think will do well. We've liked consumer staples, We've liked you know, everyone has to buy toothpaste, right, everybody's got to buy the basic products. So you can still go there. You can go healthcare. Healthcare should do well.
We've seen some good numbers over this last earning season two with healthcare, and we think we'll do, you know, continue to do well there. And I think the financials still have a nice opportunity to recover in this market as well. So those are some of the areas that we're looking at.
Kathy.
On the fixed income side, how much credit risk are you suggesting your clients take. Do they stick with the treasures where you can still get very nice yields or do you go out into the credit space and maybe take a little bit more risk for a little bit more return.
Well, that's a great question, and it's something I've been having a conversation with my clients about. I don't think if we're going to have, you know, the Fed raise rates sometime this year, these higher short term rates are going to eventually go away and then it's going to be too late to lock into the longer higher rates. So I've been slowly legging clients out of these short term rates the Treasury bills and things like that, and going a little bit longer. If it's a taxable account
and they're in a higher tax bracket. We're looking at municipal bonds. I really like municipal bonds for those clients, so does Paul. Great, Thanks Alex. So the second piece of that is where are taxes going? They are definitely not going down. I don't know if they'll go up, maybe they'll stay the same, but they are definitely not going down. The chances with a deficit and different things that are going on, we may see taxes at some point go up.
There.
It wasn't that many years ago or decades ago that we were in a much higher tax bracket in this country for the highest earners. And if that happens, municipals will be extremely valuable in your portfolio as well.
This is also sort of a basic but yet silly question. So when you're taking a look at your asset allocation, your barbells and all of that, what do you pay attention to, Like, is it when the earnings cross the tape?
Is it going to be the PCE on Thursday? Is it going to be the Fed?
Like?
We all know where this is going, right, So do you just kind of like do your thing and check back in six months later?
I try, you know, I do look at the different data that comes across, you know, whether it's you know,
PMI or housing starts or things like that. I think it's interesting that we're starting to see the numbers look a little bit more positive for home buyers, right And it's probably because sometimes when when people are waiting too long, it kind of compresses that demand up, so then eventually they have to start I know a lot of investors are starting to think about purchasing because they just can't
wait any longer. And there's also the idea that you can always refinance in a few years if rates to go down. So I think that you have to look at what your priorities are when it comes to your values and goals and how you want to live your life, and then try to find the best way possible to do that. In terms of looking at all these different numbers. When I think about clients, it's a little bit easier for me in the sense that we have a longer term view. We don't have a day to day We're
not traders, you know. I don't have institutional clients. I have private wealth clients, individual clients, business owners, entrepreneurs, c SPIT executives that are trying to figure out what to do with their money and how to make it, you know, build and last. I've had conversations with a lot of clients in their late fifties. Their whole life, they've been in the accumulation phase, right, They're growing, they're adding money to their portfolio, and it's pretty you know, pretty low key.
Now they're starting to think about retirement, and I can tell you people get stressed when they start thinking about, oh, now I have to take this money and put put you know, I'm in the distribution phase, like how am I going to start using that money for the rest
of my life? And it's a little scary, which is why I also think, you know, clients can do a financial plan which gives you a really great roadmap year to year about what kind of money you'll come in into your portfolio and how to you know, spend it throughout each year so that you have it for the
rest of your life. So these are like the longer term themes and topics I'm thinking about when I think about clients, and I'm also looking for you know, earlier people were talking about how you know, there's a strategy. You know, Buffett takes the strategy of trying to find dislocations in the market. I've always thought that that is the best way to think about clients' portfolios, their individual portfolios, like when is there a dislocation in the market, and
can we take advantage of that. So when we see the interest rates change favorably for individual investors and their yields are getting higher, that's a great time to say that, you know, we have a little money on the sidelines, let's start putting that to work.
Kathy, to what extent do you guide your clients into alternative investments, whether that's private equity, private credit, hedge funds.
How does that work?
Yeah?
Absolutely so. Of course alternative investments, you know, you need to qualify for it, so you have to be like a certain level of investor. However, they're becoming more and more democratized and becoming more available to more investors than in the past. So the way I think about it is this equities they've had a run. We had like a ten year you know, double digit return. I think it was like, what was it, twenty ten or so
to twenty twenty, something like that. We think alternatives are an area where we can see double returns for the next ten years, so we definitely want our clients in there. And so I'm looking at an asset allocation of anywhere
on equities from like fifty to sixty. Now that fixed income is back in the game, we can peel back from the equities and add more to fixed InCom because we were kind of avoiding a fixed income for a larger portion of the portfolio in the last So you know, a few years, so you've got like fifty to sixty percent equities, maybe you've got like twenty to thirty percent fixed income, and fifteen to twenty. You know, you can go depending on the size of the clients net worth.
He goes high as thirty percent and alternatives, but fifteen to twenty is really like a good number, and when we're looking at it, we're looking at trying to level up, you know, sort of what the client is looking for versus their time frame, the liquidity needs and all those things that need to be considered.
Really interesting. Yep, that's a lot though. Fifteen to twenty.
Yeah, that's what I hear. I mean, we I hear that from the retail it's very typical.
Now it's like I would say, that's what's typical for the you know, the high networth investor.
All Right, Kathy, thank you so much for joining us.
Really appreciate that as always, Kathy at and Twistle Managing Director Morgan Stanley Private Wealth and Management joining us on a zoom calf from lovely.
Ridgewood to New Jersey. They love me and Ridgewood. That's a great tent.
They love you, Eymer in Jersey.
They let you go to Ridgewood.
Yeah, I know exactly.
I slipped in there the country club. You know, I made it once a Ridgewood country club. Lost many golf balls there. It's a great, great old course.
I love it there, you know.
But we were at a remote for one of our ria folks, retro investment advisors, And that's what the advisors are saying. They have a ton of demand from their clients for alternative investments.
Is much harder than I thought.
Yeah, it's like with bitcoin, it's like is it gonna be ten percent or one percent? And that really makes quite a big difference.
You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern.
On Apple car Play and then broud Otto with the Bloomberg Business app.
Listen on demand wherever you get your podcasts or watch us live on YouTube.
Amazon, that's another big name now that is now in the dal Jones industrials.
Good for them, it's a big day for them. But the question is kind of where do we go from here?
What are the drivers here for our good friends at Amazon, because they are the biggest play on retail, but they're also one of the big plays on the cloud and all that kind of stuff. So put them Goile It's her job to figure all that stuff out. She's a senior anos covering all the retail stuff for Bloomberg Intelligence. Put them what's the if you go talk to your clients out there, your institutional investor clients. What's kind of
the play on Amazon? Is it just shut up, I got to own it, or I own it only for the cloud? Or what's kind of the story behind the Amazon play right now?
Yeah, I think it's all about profits. For a long time, Amazon was all about marketshare, and today the story is really a profit story. It's the profitability that's about to unfold at Amazon that's really getting people excited and interested. We wrote about this a few months ago, where you know, if you look at their most lucrative businesses. And everyone knows of the cloud, which generates thirty percent EBIT margins, which we think can go to forty percent. That could
be a two hundred billion dollar business. So you're looking at sixty to eighty billion dollars in profits in the coming years. But then if you add advertising to then, Paul, you know the space, well, they have fifty percent EBIT margins, and we can see advertising growing to one hundred billion dollars in just a few years. So you're talking about fifty billion in advertising, plus if you add another sixty seventy of cloud, you're talking a big profit number here,
and I think that's what's getting people excited. Aside from that, retail is growing. And part of the reason that advertising is doing so well is because you talked about search a little earlier. You know, people go into Amazon as if it was a search engine. Right, You go in and you search for something. But the difference with Amazon versus a search engine is you go with the purchase intent. People go into Amazon looking for something and to colleck
that buyba and they already know they want it. They just want to find it and get it there in two days or less.
That is such a good point. And this is a great example of this story of Amazon replacing Walgreen. So I was talking to an anchor who's been struggling with feeling sick and feels like that winter, like you're just sick all the time. And I was telling about airborne, which you take if you feel a coming on of a cold. She's like, oh, where do I buy it?
Amazon?
I'm like, no, go to your local drug store. It's two blocks away. But that idea, right, like walking those two blocks isn't going to happen. And I have to go to Amazon to buy the thing because it'll come in two days. And I'm not even worried about it. Where is the downside?
Though?
Who know?
I mean, you laid out a pretty convincing case, So how do I I don't know what do I worry about?
So I think you know the downside? If we enter a consumer recession, clearly Amazon will be impacted, right, so we'll the rest of retail. But I think that's near term, and as we've seen in past cycles, what goes down comes up eventually. Amazon is one of those places where we think if you view it for the longer term, there's just a lot of opportunity across all its businesses. We can't control the macro, but with the logistics platform
in place, and even this example that you gave. You know, you need cold medicine, or you need anything and you have to go to CBS or somewhere else because you need it. Now you can't wait six hours, twelve hours, twenty four hours for it. But I'll tell you that Amazon's delivery has gotten much faster. I mean, I'm seeing stuff at my door that I ordered today in less than twenty four hours, sometimes eight to twelve hours. And
that's pretty incredible. And that's really a part due to their realignment of their distribution centers, which they were able to infuse and even faster delivery.
See it now, I have a general idea where Punham and her family live. It's literally amongst or very close to like I think all these distribution centers in Central Jersey.
It's unbelievable.
I think we've got to be like the Central we have to be like the distribution hub of the East Coast.
It seems like I feel like a Jersey primo.
Oh yeah, why yeah, I am so. When I see the Gove, I tell them you know, so put them. Let's let's back away from Amazon. Talk to us about just retail in general. Here.
How's the consumer doing out there? How do you what are you hearing from your companies?
I think the consumer is very focused on value today. If you're seeing the retailers that are actually being able to drive the share gains, you'll see that they offer some sort of value in their proposition. Whether it was from Walmart that you heard from earlier, you know, that's doing well. But then we hear from the other retailers, the more discretionary ones, and they're struggling. Even the at leisure companies. We heard, you know, from Puma and Adidas.
We heard from some of the other companies where they may have done well in four Q because holiday was really strong last year, but when they look out for their guidance, it's been conservative for the most part from most of the retailers that I've heard from, And I think that just goes to show you that you have to have what the consumer wants, and you have to have it at the price that the consumer wants it at for you to actually succeed in today's environment.
Macy's comes out tomorrow, we have to wait for next week for like Colds and Target and all those guys. But Macy's comes out tomorrow. I mean, that's a fine line to walk for Macy's.
What are you expecting?
Yeah, I think I think holiday was really really strong last year. So I think when these companies report four Q results, you will see some reflection of that even across the department stores. But the question is really once again on the longer term, right where they stand in the longer term is the surviable business model? How many stores should they have? How oh do we lose? You
kind of grappling with right now. And we are in an environment where the consumer is spending on needs over once and if it is un once they're traveling, that's where they're going.
Yep, So we're you know, we talk about inflation.
Putum prices buy and large in the supermarket don't come down after they shot up. However, many percent here that's just the inflation rate of growth is slowing. How about for like Adidas, do they ever cut the price of a shoe because inflation's declining?
Does that wrappen?
No, they had discounts, right, So if you want to bring prices down, retailers use discounts as a medium to do that. But once prices go up, they don't come down.
See that's that's a problem with inflation. That's why inflation is insidious.
Yeah.
But so to kind of Paul's question, but really to my question, are we going to see a lot of discounting from retailers?
So?
I don't know if you guys know this.
Have we talked about Alex's a counter indicator?
No?
I only shop on sale, Okay, so where I'm shopping, you should be shorting the stocks. So this is a joke that winds up happening because I'm shopping there because their inventory is bloated and because the sales are so good. So am I going to be going to Bluemi's in the next couple weeks or they finally have their pricing power in inventory in check?
I think inventory is getting more in check as we move into the spring. So I was in stores actually on Friday, and the discounts were pretty reasonable. They weren't too aggressive. There were some clearance wracks across them all, but I can tell you the stores were quiet. There was no one in there on a Friday afternoon. It
was very, very quiet. So It's interesting because there's new inventory that's flown in for the spring, and as stores put this new inventory out, they're going to be a little careful with their discounting, and we could see more discounts come in in April on the spring inventory before now they're being steady and careful with them.
I bought a new sport code over the weekend and maybe i'll break it out for you guys on Friday.
Something looking forward to. Oh I can't wait.
This is the long cell. This is this is sort of a.
Actually walked into a local retailer. Shopping local.
That's how you go because guess what the Brooks Brothers and the Shrewsbury Mall done.
Close kidding, Yes, actually I've been there any number of times. It's just a crushing blow, crushing blow.
Uh so put them what's the Is there a fashion thing out there that that's moving the market, moving the needle, that's maybe getting one of your names kind of outperforming the others.
I think across fashion it's the same trend that we've been seeing. You know, denim is still in in terms of at leisure. People are dressing down still, but there are more drops, are more balanced I think we're seeing a little bit more of the work attire come back into play since people are returning to work in a more normal fashion, so we will start to see the career part of the business is probably outperformed this year.
That's really interesting. Who said to benefit from something like that?
I say the Department stories, really any Amazon, any of the retailers that have a more formal offering, and not to say suits, right, you don't need to be wearing suits to work anymore, but you do need to come out of your comfort where whether it's joggers or leggings, and really put on some dresses or some slacks to get it to the work.
But John, take off those at leisure pants.
The fashion police Paul of yelling at some guy who was like wearing jim shorts in the office.
Well, the one the sandals is almost a change that could have been I'm taking your lanyard and your.
Badge and keep your toes in your shoes.
Yes exactly, I mean I'll go.
I'll sit there on the sixth floor on some of these days and check people, give them some advice. Put them goil thanks so much for joining us. Put them Goyle Senior retail analyst for Bluemberg Intelligence. She was joining us to via zoom from the Princeton, New Jersey headquarters of a Bloomberg Intelligence, even though we fought for years to get to New York.
You're listening to the Bloomberg Intelligence podcast. Catch us live weekdays at ten am Eastern on applecar.
Play and Android Auto with the Bloomberg Business.
You can also listen live on Amazon Alexa from our flagship New York station, Just Say Alexa playing Bloomberg eleven thirty.
We just had a headline crossing this is according to Semaphore, that the FTC is going to sue a block the Kroger Albertson's merger today. And this comes across as a ton of M and A has taken place in many different industries, and a lot of them going up against the DOJ. Capital One Discover last week. There's been a ton of oil mergers as well. So there's literally no one else to talk to but Jennifer Ree. She's a
senior litigation analyst at Bloomberg Intelligence. In my mind, the best person on this topic pretty much out there on the street. Oh yeah, for sure, Hey, Jen, there's a lot to kind of get through right now, but in terms of capital one and discover what's your prediction here?
This one is such a tough one.
You know.
I think that the Department of Justice is kind of in a conundrum with this one, right because they're under a directive to get tougher on deals, and in particular get tougher on bank deals. I mean, this has come from back in twenty twenty one when President Biden issued an executive order saying, look, you know, we can't just rubber stamp these bank deals. We've got these huge banks, We've had problems with banking, and we need to get
more aggressive. And the Department of Justice is on board with that, you know, we've heard their statements saying that they're on board with that. But you also have a market that simply hasn't been competitive for many, many, many years, and that's in credit card processing.
Right.
We really have just two biggies, Visa and MasterCard, and this deal provides an opportunity to really bolster competition in an area that's been problematic ever since. I can remember. When I started Anti trust, the very first lawsuit I worked on was the Department of Justice versus Visa and MasterCard alleging that they were engaging in con that was
blocking out Discover and American Express. And ever since then, right, we've had allegations of or private litigation public litigation against those two companies for antitrust violations, and we've had regulation. So this is an oper This deal does have these strong pro competitive benefits, but you've also seen massive political reaction against it. So you really have two very strong
opposing sides. And I think it's just going to come down to the investigation and how the Department of Justice views the credit card issuing market and the overlaps in the credit card issuing market between these two companies, and how it weighs out any potential for harm it might find against this pro competitive aspect.
So, but it seems like a reasonable argument that putting Capital One and Discovered together does in fact create a viable competitor to Visa master Card.
Otherwise there will never be a viable competitor.
Actly Yeah, No, that's exactly right. And that's why this is an unusual deal, because you know, all companies with deals come in and say, oh, they're all sorts of pro competitive benefits that are going to benefit consumers and innovation, et cetera. And usually, you know, sometimes they're kind of lawyer created, sometimes they're really you know, it's unclear whether they're going to come to fruition. And most of the time the Department of Justice or Federal Trade Comission are
going to be very skeptical about those claims. They say
they don't really ever bear fruit. But in this case, it's much it's a much stronger claim, and it is kind of obvious to see how there really truly could be a very significant pro competitive benefit here, and so it could be one of these unique deals where that aspect is given more weight than usual by the Department of Justice and possibly be considered important enough to allow the deal to go through even if there might be some other issues.
Jen couldn't I have made the same argument with say Spirit and Jet Blue, and that definitely didn't work out.
You know, it's so interesting you bring that up, because I see so many parallels between that case and this case, even though completely different intries. Because there was a very strong argument that those two combined could have bolstered competition
against the legacy airlines Delta United, et cetera. But the problem there was that there was a small set of consumers that really depended on the unbundled low fares that were offered by Spirit, and we're going to lose out where Jet Blue took over those routes and retrofitted the planes and created more space but raised fares and a weird way, you kind of have the same dynamic here.
You can create a lot more competition as against the incumbents, the big legacies Visa and MasterCard, but you might have some sort of a negative effect on underserved consumers because Capital wanted to discover when they issue credit, they tend to focus more on underserved populations than do some of the other big issuers of credit. So people who are new to credit, people who carry a revolving balance, subprime borrowers.
And it may be that there's a view that this impacts that a smaller group of subprime borrowers, and in Jet Blue and Spirit, at the end of the day, that one out the doj one because of that harmful impact on a small set of particular consumers. You have the same thing here, But what you might have here is a stronger argument on the pro competitive side than you had in that case.
Well, how about as Alex was just reporting here the FTC to sue to block Kroeger Albertson's merger today it's according to summerfor Ken, Isn't that an easy fix?
We just sell some stores where they overlap, You know.
That part of it is the easy fix. But remedies have two pieces. It's what are you going to sell? And who are you going to sell it to? And both of those pieces have to pass muster. So I think on the what are you going to sell? That's probably an easy fix because ultimately the companies that they can squabble over twenty stores or so, but if they can sell them, if they have to sell them, The issue here, I think is going to be all about
the buyer. This is CNS full sale, that is the proposed divestiture buyer of all the stores the companies plan to divest in order to get clearance, and it's just not really clear whether they're going to be able to take up to six hundred and fifty stores and actually compete with those stores viably and keep those stores open and maintain competition in each of these regions where there's
too much concentration by virtue of this deal. So I think in court, what This is really going to come down to is vetting that buyer and the companies are going to have to produce a lot of evidence that that's a good buyer that's motivated, motivated to compete, and motivated to keep these stores open. And it's they're going to have to convince the judge. And if they can convince the judge of that on the buyer side, I think the deal will get cleared. If they can't, then I think the FTC will win.
There is there an argument you made for some of these potential deals that are getting a hard time from the DOJ or FTC to kind of bide time till No.
Number Six of this year.
Absolutely, like we're off the clock.
Like is this part of a strategy?
I mean absolutely, And look at capital want and discover they very well are probably going to bleed into the next administration, whether it's Democrat or Republican. There is no no doubt, Alex. I mean historically Republican administrations have the reputation in the merger world of being more business friendly and also being far less skeptical of claims of efficiencies, giving them a lot more weight. And that's going to be important, as I mentioned in this deal. Right now,
it's a little bit of a wildcard. It used to be ten years ago that whoever came in to run the FTC, if we had a Republican president, whoever got appointed as chair, the Republican majority there, and whoever came in on the DOJ side, we're likely to be more business friendly or likely to look at efficiencies in a more friendly manner. Right now, though, we have kind of
two different kinds of Republicans. You have sort of a Josh Holly type and that you guys may have seen in the news that he's already come out and complained about this deal, said the Department of Justice should block it. And then you kind of have the Joe Simon's type, who was the chair of the FTC in the previous Trump administration, a little bit more traditional in the way
we think of Republicans in the anti trust world. And so I think to some extent it might depend on who you get at the DOJ, but I would still say that it ticks higher. The chances of getting cleared probably tick higher. We have a change of administrations next year.
So Jen, do you think this current administration, the fact that it is tougher on consolidation on deals. Has that had an impact on M and A activity or a lot of companies just saying that it's not worth it.
You know, Paul, It's been a really strange cycle.
In my mind.
I think in the beginning, when deals started getting a lot of pushback and a lot of more lawsuits than were expected, it sort of slowed things down, right. I feel like there was a period last year where in the M and A slowed down, and now I feel like it's really picking back up again. And so I think there might be two reasons that it's picking back up again a lot, at least from the antitrust side. One is Alex mentioned maybe at this point, if you file,
you're going to bleed into the next administration. There might be some expectation it's going to change, it'll be easier to get a closed. But Paul, the other thing is
that the agencies haven't been that success court. So I think there is sort of a feeling, Hey, if you're willing to put in the time and the money and you're willing to litigate, you have a really solid chance of winning at court, even if you face this really hostile aggressive FDC or DOJ and I think that could also be contributing to more of these deals getting.
Signed now as well, Jenmy have like maybe a minute left, but what about energy? All the energy deals, any one of them not going to happen.
Yeah, you know what I think. My feeling and I know it's surprising, my feeling on those is that they're all going to get done. I think that there are just reasons where if you look at those markets, and you look at the permium basin, and you look at the number of producers that are in the permium basin, which I think is going to be the area that's going to be of most concern, I think all those
deals get done. And mostly Alex. I'm saying that because when I looked at the history of FTC action against these kinds of deals, I didn't see anything that far upstream. All of the divestitures, consent orders, attempts to block deals were all downstream and not upstream. And so that's the reason I think these deals get done.
This is our water cooler talk, by the way, Like when I see jennif stare at the coffee, we're like, hey, man, let's talk about that.
Oil deals just don't work clear?
Are they going to get? Jenry, thanks so much for joining us. Jenniferree.
She is a senior litigation analyst for Bloomberg Intelligence, joining us via zoom And she is the go to person on antitrust and I'll tell you institutional investors.
Her phone rings off the.
Hook when there's a big deal being litigated because she has the goods.
Here, you're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on applecar.
Play and Android Auto with the Bloomberg Business.
You can also listen live on Amazon Alexa from our flagship New York station just say Alexa playing Bloomberg eleven thirty.
Love talking ETFs because that's where all the money's going. It's just an amazing, amazing development.
In financial services over the last ten years or so to see how the funds have just really just gone into the ETFs, both passive and active. So it's why we like to check in with our next guest, Sean O'Hara, President of Pacer et FS. Sean, thanks so much for joining us here. Talk to us about kind of where you're seeing the flows these days. Is everybody trying to chase the AI trade. Is it folks looking at tech? Where are you seeing kind of the flows these days?
Yeah, good morning, Thanks guys for having me. I think, you know, it's still the same, you know, as it was last year. I think that there's real diverse spreading around. If you will have the assets. Obviously there's people, you know, chasing tech. I don't think you necessarily need to chase tech. You could buy a broad market etip like the S and P five hundred and still get pretty good tech exploriture, but not have all your eggs in that basket. Our
flows continue to be leaning towards value. Small cap has been a real being surprised for us here lately. We do have the tech side of things. We've got a data and infrastructure product. So I think we're sort of where we were last year, which is a little bit puzzling to me because last year, at least we were coming off of really an obliteration in the tech name. We're still stuck in the same place where we're looking at interest rates and what the Fed's going to do.
We're trying to figure out whether they've actually done their job and destroyed the US economy. I'm sorry, not destroyed. The US economy but cooled things down inflation wise, and then you know, earnings are always going to be the issue going forward. You know, I'm not as impressed with people beating their earnings as I am and what they're
forecasting is going to happen. And when you have these reports like you got out of Palo Alto last week where they sort of tamper things down, I think we're at a level right now where the market's priced overall a little bit on the high end, and so you know, we have to be very very careful about bad use.
I mean, you made the joke about destroying the economy, but man, that data continues to hold up really really well. Is there a reactive sense to ETF flows like big reversals that are happening? And I guess I'm just trying to understand where the biggest miss price is. If inflation kind of eventually keeps coming down and the data still stays okay.
You know that could be what happens, Alex. You could actually you know, they might not actually destroy the US economy, might do up perfectly right. They may have gotten inflation under control without you know, having unemployment spike and without having a major impact on you know, everybody's earnings. I think the interesting thing that's happening right now is that, and I think you need to keep an eye on that, is look at layoffs. I mean, we're starting to see
somewhat of an acceleration. So I think companies are starting to think to themselves going forward, how do I increase my earnings. Well, one way to do that would be on the cost side of the ledger. And so as we came out of COVID, you know, that was the big spurt that got the big tech names going. Is they were over you know, waight if you will employees and they started to cut back and that's sort of
what juice their returns. And I think you're starting to see that go sort of a little bit more broadly across the board.
Hey, Sean, you say maybe one of the ways to play AI is through the picks and shovels strategy.
Talk to us about how you'd get exposure that way.
Well, we have two strategies there. We own the data centers and the cell phone towers, and so you can't have AI streaming our Internet of things, e commerce and online ge mean, you can't have that without the buildings that essentially allow for all of the transmission of the data. So that's one way to play it would be to buy data centers and cell phone towers. We have an ETF that does that the tickers sr V of our server.
And then the other way to do it is to play, if you will, the software names and the chip makers and those names are you know, basically in videos in that mix. But it's not all about Nvidia. There are a lot of companies in that space. So we have an ETF that uh t r FK traffic that basically takes everything out of the data centers and says that's what we own.
When you talk about alternatives, we were talking to a cat the entwhistle in the last hour about alternatives and stuff. I'll throw bitcoin in there. Let's are some reads in there too. What other kind of alternative ETF flows are you seeing?
Well, we have an income story that we like that's starting to pick up some steam. Essentially, its target is to get four times to dividend of the S and P five hundred. We do four times. Yes, the tickers
QDPO get it quadruple. Anyway we do that. The way we do that is about eighty six percent of the money is basically in the S and P five hundred and fourteen percent of it's in T bills, and those te bells are used to enter into futures contracts on the dividends, and so we're able to pull forward three times or a little bit more than three point one four times this year's dividend by using those futures. And so it's really done exactly what we've expected it to do.
And with all the emphasis, for example, on covered calls, you know, with the success of some of the big players in that space, we think the limitation on covered calls is that you're selling away your upside, and with the strategy like this, you don't sell your upside away. So we're starting to see some interesting flows in that area as well.
Sean, how do you compete in this market that's so dominated by just literally a couple of three or four kind of ETF providers here? How do you kind of compete and set yourself apart?
We like to say innovative, disruptive, and unique. That's what we build. So our neighbor at home in Malvern, Pennsylvania standguards. You know who they are, we know what they do, and we know that we're not ready to stand toe to toe with them if you will invit it out on costs or let State Street do that. So we build strategies. We built an end user in mind or
an outcome in mind. Maybe that's extras return, or maybe that's risk management, or maybe it's something like the count series that just takes a completely different look at the way you define value in this world. Instead of using traditional price to book, we use free cash flow yield because the stock market is primarily intangible assets today, and so that's what we do. And so we've been able to accumulate I think our reasonable amount of assets around
forty billion right now. I think there's a lot of room for us to grow. And you know, if you're innovative and you're disruptive and unique, and you have a salesforce like we do that focuses on the financial advisors, you can continue to build a nice business. I don't have to have a five trillion dollar business. I just keep growing it like we have it, and we'll continue to do that without I.
Really want to have the job where you get to come up with the names for these things, like the tickers for us.
I want to do that.
That sounds like a good time before we let you go. It's not just us that have been doing really well, right. Japanese equity is ni K record high, the CAC, the Dacks record highs. What opportunities are you seeing internationally?
Well, we missed Japan. We probably should have had a product there because whenever Lauren Buffett starts to move in an area, it's probably good to pay attention, and so he's increasing his exposure there. So he's probably right. We've seen a pretty big increase in our global and international. My favorite story, and it may take patients. I'll just
warn all the viewers and listeners is emerging markets. I mean, you know, we have an emerging market product that has like a nine percent current dividend and it's one hundred profitable emerging market names. And I think that cycle has gone on too long. It could continue for a while, but sooner or later, the emerging market cycle will change. And if you think about historically how they do reletive
to us, over time they do better. It's just been a currency problem here lately, and so for long term investors, maybe you talk a little bit of money in emerging markets.
All right, Sean, great stuff.
Really appreciate O'Hara, President of Pacer ETFs, joins us really appreciate that on the ETF inflows, outflows and where all the action is.
This is the Bloomberg Intelligence Podcast, available on Apples, Spotify, and anywhere else you'll get your podcasts. Listen live each weekday, ten am to noon Eastern on Bloomberg dot com, the iHeartRadio app tune In, and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg terminal