Don't See A Scenario That Moonves Stays At Company: Sweeney

after this ruling by the Delaware judge. A victory for Shari Redstone, who happens to be a CBS director and president of the of her family's movie theater operator, National Amusements. Of course, they're pushing for a merger with CBS and National Amusements controls viacom. Here to tell us more about it all is Paul Sweeney, Director in North American Search for Bloomberg Intelligence and Internet and media analyst for Bloomberg Intelligence. Paul uh, Is this the conclusion do you believe of

Leslie Moonvest's career at CBS. Well, it certainly could be. I think we still have probably six months of litigation back and forth between the you know, like all the parties here, but this was a big blow for less uh and for the board that was trying to reassert some level of UH influence and and versus its control shareholder National Amusements here and and UH that initial uh

opportunity for them really took a big blow here. So, UM, this is something that I think, you know, the next the ball is in the court of Sherry Redstone and National Amusements and what will they do with the board, what will they do with management including less Um? And I think with the stock down six percent kind of tells you that investors think a deal is coming and merger is going to happen, and it won't include less Moonves. Yeah.

So so basically shares down more than six percent on the expectation that less Moonves will exit from the helm of CBS, that Viacom and CBS will merge, with a lot of shareholders of CBS don't want um just can you bring back the memory of y CBS is so y CBS showholders are against this merger at this point. I think CBS shareholders view Viacom as a flawed asset. Um.

It's you know, it's a company that's been struggling. Um. The cable networks are particularly prone to chord cutting because the the MTV networks, the Nickelodeon networks and all those they tend to uh you know, be targeting younger demos, and the younger demos are spending a less and less time with television Number one and number two. The film studio,

the paramount film studio has really been underperforming. So if you're CBS shareholder, you say, g my, CBS Stories working pretty well, the CBS networks doing well, the Showtime networks doing well. Um, and I'm pretty happy with my CBS investment. I don't want to uh see CBS buy Viacom because I just don't think they're a great company, and I think they're gonna be dilutive to my growth rate going forwards.

So I think most investors, and I think less Moon of Us was saying, listen, if you're going to force us to merge with Viacom, it has to be on our terms at CBS. I E our financial terms. We want to we don't want to delude our shareholders, and more most importantly, it has to be on our management terms. We want our management team to run the combined company. And that management issue is really the stumbling block here. Paul,

maybe just outline what was CBS trying to do tactically. UM. I think well, CBS was trying to invoke a part of their by laws, which is very unique to their by laws, which allows them to convene a special meeting today of the board and to declare a one time stock dividend which would dilute the ownership the voting ownership of n A I from about eight percent down to sevent effectively Nick negating the control that Sherry Redstone would have.

And that's what got blocked. You know, when you came in here, you said that Sherry Redstoree and less Moonves can never work together again, period the end. So even if there's some kind of win on this appeal, uh, you know, unless they actually can strip control from Sherry Redstone, less moon Vous is out. I think so, I think the I don't see a scenario here where, uh, this management team at CBS, this board at CBS can ever come back and work with Sherry Redstone and National Amusements.

I just think that, you know, the trust, the relationships have probably been irrevocably broken here with these legal maneuvers. So I'd like you to put on your psychology hat because I know that you have one. And talk a little bit about Sherry Redstone when she reads this result, when she hears the court ruling, is she jubilant or I mean it's sort of a tricky thing because she also owned shares in CBS. Yeah, yeah, it's it's I

I think she is. I think she's um. She's probably as a control shadow of both companies, is really playing the long game here. And the long game for her and for her family's interest into two companies is to in her mind, to put the company together to be a larger company with more global scale, more resources to compete not just against the Comcast and the Disneys of the world, but against the the Googles and the facebooks

and the Amazons and the Netflix. Is um and that is that that is a theory that is prevalent in the media world today. We're seeing lots of consolidation again, most notably with Disney looking at twenty one century Fox, Comcast circling around those same assets. Um so a T and T, you know, trying to close its acquisition of Time Warners. So her strategic rationale is absolutely consistent with

what's going on the marketplace. Uh, it's just simply that the you know, one of the two parties in this case, CBS, doesn't want to do the deal on her terms. Would it be possible for CBS under Leslie Moonvest to initiate a large acquisition, Uh no, because, um, you know, Sherry Redstone,

as again control shareholder, would not allow it. And that's one of the reasons over the years, Uh, CBS hasn't really done any large acquisitions because, um, you know, they'd be a would have to get the approval of of of National Amusement and Sherry Redstone, and I guess they

felt like that they never had that support. So, you know, I think the the only bowl case scenario left for CBS is that that they win their you know, legal case against National Amusements, um, and they are left as a standalone company with National Amusements maybe even diluted down, in which case then the story becomes very interesting for CBS shareholders because they can either uh you know, just grow with the existing management team and let the management

team you know, kind of deal with it, or um, you know, they become a acquisition candidate of their own. But that assumes that they you know, kind of went all on appeals going forward. Here, I'm wondering if you could just extrapolate out into the future, and let's talk about Sherry Redstone strategy. You're saying that she's betting on a stronger combined company between Viacom and CBS. Viacom shares up about one percent on this news. Is she right? Well? Um,

I don't. It remains to be seen the the assets here. One could argue that even if you emerge CBS and Viacom together, it's still not a great company. It's it's not a Walt Disney, um. You know, and and and you you take a look at some of the other media moguls in the marketplace. Jeff Bukas at Time Warner,

Rupert Murdoch at twenty one Century Fox. They've effectively thrown in the towel and agreed to sell their companies because they recognize that, you know, going forward over the next five to ten years, you know, how do I even think about compete against Amazon and Google and Facebook and Netflix and all these companies in the Apple um. So, you could argue that even if you emerge these two companies, you're still left at a competitive disadvantage, you know, kind

of going forward. And I do want to note it was up one percent that shares of Viacom, but they are now down about a half percent, so right, and the shares of CBS, they're down about the six and a half percent. Is there any likelihood just quickly, uh, Paul less moon Best could have a second career. I mean he's going to be a very attractive candidate for any position, absolutely, and uh, he's gonna have a lot of money in his pocket as well. So, um, you know,

we've we've seen that in the past. Um, you know, Jeffrey Katkatzenberg has been able to raise some money to kind of get into back into the business on the digital side. What we're seeing here is, I think, you know, we've seen a lot of media execs who have left kind of the big conglomerates kind of go off on their own and you know, kind of try to figure out ways to make money in the digital side of

the media business. Paul Sweeney, we will be having you back to discuss this more in depth, I'm sure as it progresses. A really interesting and fascinating and frankly surprising decision. Paul Sweeney, Director of North American Research for Bloomberg Intelligence. The shares of oil refiners are surging today a delic US holdings up more than five percent, CVR Refining a gain of nearly four percent, Holly Frontier adding more than five and a quarter percent. Here to tell us more

about the refining industry is Peter Polican. He is the U S Energy analyst for Bloomberg Intelligence. He joins us here in our and THREO studios. Peter, thank you very much for being here. Maybe you could just start up by explaining that US refining capacity is not necessarily aligned with the kind of shale oil that exists in abundance

in the United States. Yeah, that's correct. I mean a lot of people when they think about, um, the explosion of shale and US independence, they don't realize that oil by itself can't is not really terrible useful. It needs to be refined. And the US refining complex, which is the largest and biggest in the world, was built prior to shale. So what that means is it was actually built in a world to process a very different type of crew to heavier type of crude than what shale is.

So now reaching the point where these refiners have tried to benefit as much as they can from the onslaught of shale, but it's reaching a maximization saturation point. So now that crew that's the US is producing needs to find a new home. So you're seeing the spread between W A t I, which is domestic prices, and Brent, which are global prices blow U and that's gonna be persistent for some time. Who are the big refiners in the US. So we have Delic, there's Valero, um Pete,

There's PBF, Philip sixty six. All these refiners in general benefit because essentially they're gonna they're gonna capitalize on lower input costs and higher output output costs for their prices for their product. So is this a reason why we haven't really seen the profit boom in many shell companies that that some are expecting. I mean, most shell companies are still spending more than they are taking in, that's right.

I mean overall price levels going up obviously helps all these companies, but they do have a cash flow problem. But oil prices at seventy dollars quite frankly cures a lot of balance issues and debt issues that they're having. Um But the issue going forward now for them is domestic producers em p s will receive a lower price and uh someone else globally, So that means is on

a relative basis, they're not winners, Peter. I'm looking at the national average price as quoted by the triple A and the price two dollars and nineties cents, although of course, if you're in California or New York or any of the host really uh, you're ending up paying U substantially higher price in some cases California three dollars and seventy cents for a gallon? Is the increase also going to affect industries that use refined products other than gasoline, So

I'm thinking of the chemical industry. Well, I think all these industries are governed by by different forces, So the refiners are really going to benefits essentially. The way that you think about it is, look, they produce a variety of products that go into a lot of different industries, like you mentioned, from petro chemicals to gasoline, and the margins for those products are widening, which is called the

crack spread. So all the the real winner and all this uh is going to be the refiners, and they'll simply elevate the cost of their products to UH the UH the end users which are the petro chemical companies in an ultimately U S consumer. So has there been any talk about building more refinery capacity here? There has been talk of it. Xon is thinking about expanding their

their light old processing capacity UM. But the real the reality is refiners are really expensive facilities and in order for them to consider UH green field expansion, the economics need to be better. So what they've done historically is sale boomed, is that they've done added things onto their facilities such as altinization units and other type things to

to be able to process more crude. But at some point these are capital these are capital maximizing companies, and you cannot maximize the profits of refiners by increasing the increasing exponentially the amount of shille that they process. Peter, Can they just export it? Well, this is a great question in the subject of the next research report I'm writing on. But now we've actually going to reach a

cap in in exports. So currently re export about two point seven million barrels per day, and if you look at the chart for exports, it looks like something exponential growth. Now, the mistake the markets are making is that they're extrapolating that this exponential growth and exports can continue. But that's about to hit a bottle next. So refiners are maxed out. Oil has nowhere to go in the continental US, and

there's a glut of it being produced. So that's spread between w t I and Brent is going to stay wide for a long time. And this suggests that the price that people are going to pay at the pump could potentially rise just proportionately in the US to the rise in Brent. That that's right, meaning essentially gasoline is priced off of Brent global prices. So when people talk about discounted U S crudin the abundance of US shil,

why aren't we seeing it at the pumps. The reality is refiners process local crude, but the gasoline market is a global market and that's priced much higher. Wow, that was really fantastic. I understand this a lot better. Peter at Pulican, he is U S Energy analyst for Bloomberg Intelligence. We will look out for that next report, We will

read it and we will highlight it. Definitely really interesting dynamic right now, given the fact that the the oil prices are climbing to their highest level in years, and this should help those shild is, it should help the pump. And yet and yet earnings for companies in the SMP five hundred up about so far, and yet the stock

market doesn't seem to reflect that increase in profits. Here to help us understand more, as Casey Matthews, he is economist chief investment officer for you m B Bank based in Kansas City, Missouri, helping to manage more than ten billion dollars of customer assets. Casey, thank you very much for being with us. So what accounts for what is seems to be a divergence you look at as you As you mentioned profits are up, but stocks, well, the

SMP five hundred is up two year today. Right. My take is our economy in the markets are in a state of transition. We came from this Goldilocks environment where we had low interest rates, low inflation, synchronized global growth, and a course stellar corporate earnings. It's interesting our research department and I were sitting around talking about, well, what's the opposite of Goldilocks? Some degree it might be the

big bad Wolf. So today our economy is transitioned from a Goldilocks environment to an economy riddled with these big bad wolves. Now we have rising interest rates, changing inflation expectations, a question regarding synchronized global growth, peak earnings, trade wars. So you can see, you have all these issues that potentially could blow down economic activity, and that of course disrupts the market, leads to volatility and a lot of uncertainty. The big bad wolf. I think you just coined the

new phrase casey values. Are we experiencing the big bad wolf? Um? Given the fact that we are transitioning to the other part of the Goldilocks story, Um, I'm trying to figure out what does this mean that you're moving a greater proportion of your ten billion dollars of assets into cash or what are you doing with this? You have a good question. Not yet. I think clearly there are some yellow flags out there in the economy and financial markets,

but doesn't appear that we have the red flags. And when you look at a lot of market signals, many times if you look at those signals mutually exclusively, it will lead to a premature decision to de risk portfolios. The perfect example is the slope of the yield curve. Of course, the difference between the two and tenure treasuries about fifty three basis points today and this indicator has

a perfect track record forecasting looming recessions. Um So once the once the slope of that yold curve becomes flat to inverted, there's the red flag you've got an oncoming recession. But it's interesting still have twelve to eighteen months before you see the recession once that you old curve becomes inverted.

So what we like to do is look for pairings of signals, and we found is when you look at the slope of the yield curve paired with the change in high yield spreads, you get a better signal uh to de risk portfolios. And it's not as premature as just looking at one the slope of the yield curve. So those are things that we're watching right now, and right now you get a bit of a green light, meaning it's not time to de risk portfolios just yet. Casey, If someone has new money to deploy, what would you

suggest they do. Well, of course it depends on their their objectives and their risk budget. Well, let's say that they're they're willing to weigh three to five years. They don't want to lose it, of course, but they're willing that to under to undertake an investment that there isn't going to show a month by month increase in value. Yeah, I think to some degree it's it's it's the old adage of a well diversified portfolio. I would put money

at risk today. Um, I am favorable in the stock market or ass allocation models are overweight risk via the stock market and to something that US stock market, emerging stock market, developed Europe, where would it go. Yeah, we're overweight domestic large cap stocks. Of course, they have a healthy weight to mid caps and small caps, and then do have an allocation to international and emerging markets, so

across the board we would get exposure. But to answer your question, I think the play right now is domestic large cap stocks. Alright, So Casey, one thing that I'm wondering is it's one thing to say, look, I don't see a recession on the horizon. Companies look like they're in pretty good shape. It's another thing to say, look, the relative valuation just doesn't look so hot anymore, and you're certainly seeing that narrative continue to gain prominence. Is

the tenure treasury rises? Where are you on that at what point will the tenure treasury start to look attractive as an alternative to stocks. Oh, I think the yield has some legs to go on. That meaning three tan it's too early. I don't think investors are going to switch from stocks to bonds just yet, especially looking at a tenure treasury. Um. I think you have to get that yield up to closer to four percent. It's interesting.

At the beginning of the year, our forecast for the tenure treasury was three and a quarter percent, and a lot of people thought, oh, you're you're going to miss the mark there, And here we are at three point one percent already, So I think we got some time. I think the tipping point would be closer to four rather than three. Kasey Matthews, thank you so much for being with us, with us and giving us the Big

Bad Wolf theory of the world. Kasey Matthews is an economist uh and chief investment officer at u m B, a bank with ten billion dollars un management. M This is the time in the show when we wring our hands and wonder whither Walmart. We announced a pretty good earnings report earlier today and shares were up and now they're down more than a percent here to Wax. Wax Retail with US is a Jennifer Gatasha's senior US food retail and mass Merchants analyst for Bloomberg Intelligence. Jennifer, what

happened here? Why are people treating this as a negative report? Well, you know, it really was a solid quarter for Walmart. But I think the news that is out about in the deal between Kroger and Ocado is that is just reinforcing the idea that there's no clear winner in online commerce for grocery, especially UM, and that it's going to

remain a very competitive landscape for the indeterminate future. Tell people about the Kroger deal, So yeah, what what this deal that Kroger and Occada have have have penned and is really about installing highly efficient automated warehouses that do picking of grocery online orders. UM assembles those orders very quickly and then UM is able to you know, achieve a lot of scale so that they can be delivered

to people's homes in a very economical manner. UM. The biggest challenge with a with the home delivery for groceries is that it's it's the least profitable business model that companies can follow. So something that's highly efficient and highly automated really helps solve some of that problem, you know, Jennifer, I'm struck by the fact that Walmart reported earnings that included fairly good online sales. They purchased flip cart, uh, and they were penalized for it because people were saying,

you're going outside your wheelhouse. But they showed pretty good growth internationally. Why are they getting punished if they do and punished if they don't. Well, it's one of those situations where you know, at this point, um, you know, Walmart is just going to stick true to their to their their plan for the year, which is really about optimizing their portfolio, making the or experience as good as

it can um. And at this point it's very difficult to determine exactly what would make everybody happy, if there is even such a thing, um So, so really it's about staying the course, um. And they do expect that the online sales will be back up in around the entire year for for growth and the growth figureine And

really that's the plan right now. Do we have any information that this ocado technology as used by Kroger in the United States because the Occado technology is in use in the UK in their business, also in France with the deal with the casino supermarket operator. Is there any information that says it's going to work here in the United States, Well, you know, depending it could be very

efficient in the United States in certain areas. UM. The model really relies on having a good population density so near our big urban centers UM, and it relies on people in continuing to adopt online grocery. And that's something that's still more nation in the US than it is in Europe at this point, but it is continuing to grow at a pretty rapid pace. So there's an expectation that by the time these facilities are built in our operational but there will be enough demand to sustain them.

One thing I'm struck by so Kroger shares are of about two point six percent so far today after this news was announced. What strikes me though, is when you start battling on the food grounds. I think about Amazon dot Com and how we were talking yesterday about the fact that they're offering their Amazon Prime members discounts at Whole Foods. I mean, isn't this an uphill, uphill battle at this point and give him sort of the footprints

that Amazon has. Well, it's definitely a highly competitive environment, right, But you know, you have to think about with Amazon, they still haven't really mastered fresh food. Um. They've brought some some expertise in that area when they got Whole Foods, but again, Wholefords only has about four hundred and sixty stores across the United States. Um. Compare that to Kroger's over tea house. Right. So UM. So Amazon, you know, cannot ever be underestimated with their willingness to conquer a

particular category, and grocery is clearly in their sites. UM. But I don't think that there's a verdict yet that they've actually been successful doing that. And they're already scouting sites in the United States for this new kind of automated warehouse, right they are, indeed, UM, And you know, I would expect that some of the initial sights will

be in areas where Kroger already has very strong market share. UM. Certainly something that's close to their home hometown in Cincinnati, UM, and perhaps somewhere like Los Angeles or Seattle area areas where they have um leading market share and a good number of stores in the area, so they have a

large customer base they can draw from. One thing I'm I'm wondering as we talk about the Accada deal is how much this has to do with people picking up their groceries in crog locations versus and in packaging it for them ahead of time, or how much it has to do with actually delivering it to that because the last mild delivery is what everybody talks about, is being the most expensive and difficult to accomplish. Yes, uh, and

that's absolutely accurate. And these these store, these these centers are really meant to to to be that last mad delivery to people's homes. Um. And what what will happen is at some point quick and collect for you pick it up with the grocery stores is gaining popularity um. But when you're picking those groceries in the store, at some point that operation becomes interferes with other shoppers in

the store. Um. And you know, if if the offering continues to grow at the pace it has, UM, there are locations where their demand will outstrip their ability to fill offers in stores, and then those could be shifted over to one of these automated centers, Jennifer, Soabys which is based in Canada, the retailer, the grocery store. Really, they've also struck this deal with Okado for these automated warehouses.

Is there any indication that when this scales it will be a competitive advantage and that maybe even Walmart look to do the same thing well in in in Canada, much like in the United States, SOBS has an exclusive arrangement with Vocado. UM. But one of the challenges that is that is there in the Canadian market is but um the initial location for these warehouses are in the Greater Toronto area, and that is not Soby's home base. UM,

it's not where they have the majority of their stores. UM. So it will be interesting to see as it unfolds if they're able to acquire market share away from the UM from blah blaw and from Metro, who are the ones who have a greater share in that area. I want to thank you very much for being with us. Always a pleasure. Jennifer Bartash is senior US retail and Staples and Restaurants analyst for Bloomberg Intelligence. Thanks for listening

to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio