Doritos Goes Organic to Break Into Amazon's Whole Foods, Kaplan Says

Jenny Kaplan joins us right now. Jenny Kaplan is beverage, tobacco and Cannabis reporter for Bloomberg News, and she joins us in our eleven three oh studios. So, Jenny, you know, I'd love to get your sense on, first of all, why it's taken so long for some of these traditional junk food purveyors to health if I some of these foods, and whether there's really an appetite for that. Well, PepsiCo generally and and Fridol specifically has been working for some

time to make healthier versions of their snacks. Both these core brands like Doritos and Cheetos and tostitos, and also create new products, new kinds of snacks that fit with the consumer. What's really driving this is consumers want better for you products, and that's in the snack part of PepsiCo's portfolio and the beverage part of the portfolio, and they're working towards that. But to get a dorrito to

qualifies organic isn't totally simple task. I mean, if you think of a dorito, it has that bright orange cheese. I mean, I think it's not not not generally, I don't think. So it's definitely a challenge, and technology is improved and they're trying to get more and more of these products to qualify for these growing natural parts of the supermarket. What about the purchase of whole foods by

Amazon that's got to feed into this conversation. And because you know there's a gate, you're not getting into Amazon if you're not the following all their rules and regulations in terms of what the food contains or what it doesn't contain. So there's some speculation by analysts that I've spoken with that this is actually going to be helpful for big companies like Freedo, Lay and getting some of

these healthier products into whole foods. So Amazon already carries this line of chips called simply that are simply Doritos, simply Cheetos, that that fit technically the whole Foods guidelines but aren't actually in whole foods yet. Okay, So first of all, you know, when you say healthier, I just am seeing air quotes around all of that, because, first of all, I can't imagine that the actual nutritional value

will change all that much. But I'm also wondering how much more is the price tag going to be on health if I junk food? It's a great question. The healthier segment of the snack market is what's growing at an accelerated pace, and part of that is because people are willing to pay more for products that they think are healthier or have cleaner labels, you know, don't have those things that people are trying to avoid, like GMOs

or artificial colors or flavors or preservatives. So PepsiCo as a whole is trying to push into this higher market, higher margin market where they can charge more because the consumers willing to pay for it. Well, didn't Pepsi already buy into this uh, this business right. I mean, didn't they make a purchase that would allow them to then get in. I mean they bought Stacy's pita chips, right, correct.

Stacy's is already in whole foods UH, and they have other products and their portfolio that are either in or qualified. But what's really important to talk about here is that these are the simply line is covering their core brands, So it's things like Fritos and Dorrito's. These are the big money makers for Freedo lay and for PepsiCo as

a whole. And if they don't figure out a way to sort of push these big brands a little bit towards premium, there they risk getting caught on the one hand by value plays and on the other hand by these healthier and more expensive snacks. Well, Jenny, can you give us a sense of how these Doritos, Torito tostitos and other ETOs that they sell, how they're actually doing. I mean, have they actually seen some kind of cannibalization in that whole uh line based on the increase in

desire for for healthier foods. So, based on my reporting, all of these chip brands are still doing pretty well. They've actually managed to avoid some of the trouble that Pepsi, for example, has gotten in on the soda side of things, because people are still snacking. But when they took steps to make products more healthy, as in, for example, they have reduced sodium Lays just regular lays, but with less salt, and they've actually pushed growth, accelerated growth beyond what the

rest of the Lays portfolio is doing. So they've sort of proven that healthier products work to drive sales. And I think largely people who are buying the in the natural aisle. It's not necessarily cannibalizing. Maybe those are customers who've moved away from the products altogether and now they're willing to do it. I will just say full disclosure. My eight year old son absolutely loves lace, and when I've tried to give him the baked not fried ones,

he has rejected them. It's like these aren't lace. So I mean, there is also the gold Star gold star for what least healthy aspect of food, but he definitely distinguishes it. So I imagine others will too. I mean, I don't know if you tried simply, but do they really taste the same well, it's funny. A lot of these chips. I mean, if you think about plain Lays potato chips, they already pretty much fit into this category. Like there aren't a lot of crazy ingredients in a

Plaine bag of lace. They're basically like potatoes with oil and salt. So some things it's making me feel a little better. Yeah, some things, it's pretty similar. And it really is sort of the messaging that's changed. Other things like Doritos and Cheetos. You have to imagine that the ingredients are pretty different, So it's sort of depends on

which brand you're talking about. But I think the big message here is that it's really in the marketing and the messaging and trying to appeal to this different set that isn't already picking up a bag of you know, chips in their normal grocery shopping. All right, Well, like, just talk briefly about something that we know is off the healthy chart because it's not smoking and cigarettes and the cost of a pack of cigarettes in the city

of New York. Tell us what's happening. So cigarettes in New York have just been the bottom price has just been raised by um. It's now going to cost at least thirteen dollars a pack to buy cigarettes in New York City. That's the highest in the country. New York was already the most expensive place to buy cigarettes in the country, but it's raised even higher, so it's tough

to get cigarettes here. Well, when New York originally rose prices on cigarettes, was there a material decline in smoking rates. There is evidence that raising prices leads to declines in in purchasing volumes. That being said, New York is one of the places in the country that has the highest um, the highest amounts of people basically selling cigarettes that aren't

legally HU sees basically in other things. And people who go to pick your state and then they come back with these huge cartons of cigarettes and they sell them out of their back trunks. I've seen that happen. Yeah, I'm from North Carolina originally, and I will say that when I first got to New York, just looking in windows and seeing how much cigarettes cost, it's just insane

to think of the difference. I mean, it makes sense that there are people who make a business off of driving to other states and coming back here and selling them for a higher price but still lower than that thirteen dollars a pack. Well, and and also I believe that they're gonna be a pro there's going to prohibition on pharmacies selling tobacco products when their licenses come up

for renewal. We'll see the s has already stopped selling cigarettes. Um, they made a push saying, you know, we're about trying to CVS health exactly, We're trying to be a company that promotes health. We're not going to do this, but it's interesting, it's gonna it's gonna be a big deal. It's gonna have a big impact on the industry. Um, when there are fewer and fewer places you can buy cigarettes.

That being said, the consumers very loyal, I mean smokers will buy have proven that they will continue to buy cigarettes no matter what the prices. So it's it's sort of we'll have to see whether this really has an impact on smoking rates or not so loyal that some could say that they're addicted. Jenny, sir, and thank you so much for joining us. Uh, Jenny Kaplan and thank you so much for joining us. Truly a pleasure having you.

Jenny Kaplan is Beverage, Tobacco and Cannabis reporter for Bloomberg News, joining us in our eleven at three oh studios. All Tropical Storm Harvey has now prompted at least fourteen US refineries to shut or reduce production. This affects about four million barrels a day of US processing capacity. That's around of the nation's total. Here to tell us more about commodities energy as well as agricultural is Mike mcgloane. He is our commodity strategist for Bloomberg Intelligence. He joins us

here in our studio and Sal GILBERTI. He is the president and the chief investment officer and co founder of a two cream trading based in Brattleboro, Vermont. Sal, I want to begin with you because I know we're gonna talk a lot about energy, but I want to give you the opportunity to just set the stage in terms of what is the agricultural dynamic for farmers and for end markets such as cotton. Sure, cotton is a big one.

Cotton has taken an enormous hit. Farmers were expecting a bumper crop and cotton, particularly in Texas and um As We've seen from articles and news reports and in the street reports, a lot of the cotton even even cotton that was harvested was damaged because the storm basically ravaged cotton that was in storage, cotton that was sitting on the docks, cotton that was harvested in on the sides of the field. So content a big impact, and we've seen a price rallying cotton the last two weeks in

anticipation of that. I think what people uh haven't yet factored in and in fact the markets are making new loads as we speak in corn and soybeans, is that in the path of Harvey, the current path uh as it's it's headed up into um Louisiana, Arkansas, Mississippi, Tennessee.

There are unharvested bushels of corn, They're unharvested bushels of soybeans out there that represent roughly um of the corn of the projected ending stocks for this year's crop, and UM potentially threatened our the equivalent of about eighty three of the potential soybean surplus. Now, those those things aren't all going to be damaged, but I think you may take the chains the balance sheet. There's a ential to

change the balance sheet here, which could potentially support prices. Well, yeah, I was just about to say, of the soybeans surplus could get affected and possibly even wiped out. I mean, based on the trajectory of the storm, what's your projection for how big the damage might be to some of these unharvested crops. It's really a stunning number. I think it entirely depends for corn on wind at this point. If the crops get wet, it's okay. It may raise the cost a bit, because you've got to dry your

corn once you harvested. Soybeans is another matter. If they're if they're sitting in water for a while, they're they're not quite as far along as corn in their maturity. Um, there could be some significant damage. Now, you're not gonna lose all those crops. Crops are used to being rained upon.

But because we're making such extreme price loads right now, and because actually there's a seasonal A year ago today, cotton, corn, and soybeans all price bommed and there's a seasonal strength that comes in beginning in September for all of those crops. So Harvey may actually support a seasonable season seasonality effect of bottoming prices on those three crops. And again, cotton has already rallied but corn and soybeans, no one, No

one seems to be looking at them right now. Well, we're gonna look at them after you said so, of course. But I want to bring Mike McGlone into this because Mike uh I got the report that Motiva Enterprises Port Arthur facility, which is the largest in the United States, is said to be shutting because of severe flooding issues. Tell us about the availability of refined product, because you know, if you've got soybeans, if you have corn, you're gonna

need to get it to market. Yeah, that's been the key factor in the energy market from the hurricane is this reduction supply, most notably of distillate, which means number one unleaded gas and diesel. So what's happened so far

as obviously unletting gas has taken off. It's now a fourteen percent on the year versus w t I down down fourteen percent, which is blown out the crack spread, and the crack spread is the indication is when you take crude a bear of crude oil and you converted to unleaded gas, and when that moves out means refineries are making money. But the key thing that's happening is it's reducing this supply. Now that supply is going to

come back, it just doesn't be it's not replaced. It's going to reduce inventories and gasoline inventories which are historically high. But the key thing is before the hurricane, inventories are already trending down, so should accelerate that. It's obviously accelerating the increase in in um a lot of gas prices, so it's helping rebalance the US energy market. One issue though, it's reducing exports, which are on a bowl market trend,

so that's gonna hurt for a little while. Well, and it's sort of interesting when you say rebalance that should end up helping crude values, I would think, because if there's a rebalancing and diminishing of the supplies eventually down the line, you would guess that the demand for crude would go up, and yet the values declining again. Yet

it again today. Yeah, Well that's part of it because now that we were bringing down the refining of I mean, all crude oils essentially really worthless until it's refined, So once it's refined and has values, we're bringing down that refinery demand which is obviously reducing demand for w t I. So the key thing is what's happening is Brent. W t I has moved out in Brent, which is global sea Born is doing fine. That it's getting it's seen reduced supply of w t I in the market, reduced prices,

and that's blowing that spread out. But overall this is a bullish indication. It's just showing up in the distalates more and unletting guess the key thing underlying this before that people need to remembers these trends were already fabled before the hurricane. In one bottom line is the declining value of the dollar overall, that was a very fable trend for all and all commodity prices, most note and

definitely medals. Yeah, that's continuing. Thank you so much, Mike mclown, commodity strategist for Bloomberg Intelligence, and of course our thanks to Sal GILBERTI. He's president and founder of two Creum Trading and focusing on uh, those soybeans and that corn that has yet to be harvests and what effect I

could have on the U. S economy and those particular commodities. Well, there was a headline today on the Bloomberg from stocks two bonds, the bear market signals are multiplying, to get a sense of whether that's an accurate reflection of the risks that Hugh Johnson, thanks, we're gonna get talk with you. Johnson. He's chairman and chief investment officer of Hugh Johnson Advisors, which oversees one point two billion dollars and is based in Albany, New York. Hugh, thank you so much for

joining us. So do you agree with the assessment that the warning signs of some kind of broader deterioration in markets is imminent. There's certainly some some warning signs when you start to look at the performance of sectors, for example, and you see that utility stocks have been performing very well. That's ordinarily a very defensive sector of the market and actually the best performing sector of the market during bear markets.

You also see, of course, large cap stocks. I think it can be explained away, but large cap stocks out forming small and mid cap stocks. And you see a number of things in the credit markets, such as quality spreads opening up a little bit, uh not much, but a little bit. So you do see some signs, but I think overwhelmingly if you take a look further back towards the election, if you take a look at the complete picture, which includes not just the signals coming from

the markets, but also important economic and monetary numbers. For example, bank lending, money, growth, liquidity, leading indicators for the economy, they say that we are further to go go in the current cycle. So, yeah, you can be worried. You always can be a little bit worried, as you know, Lisa, But I think that you'd be probably overstating the worrieds by moving to too much towards cash or a very

defensive beer market position. Hugh, can you be bullish on stocks and accept the possibility that there will be no tax reform bill, that there will be no change in financial regulations at least as far as approval from the Congress is concerned. I'm not talking about executive actions here. I can be very bullish on stocks PIM, but I

can be very concerned about valuation. Uh, they're really evaluation when you know, you know, and I know, and I think we all kind of know are since that the economy is growing at a very slow pace, And when you take that, it doesn't give you the kind of earnings numbers that would really justify the current levels of stocks, or might say we're fairly valued, but the upside potential is fairly limited. So something has to happen to give us the kind of earnings that we really need to

get the market to go on the upside. One of the two things would be, of course, tax reform that would give us a little bit of a lift to corporate profits and U S and P five earnings. But quite frankly, you know, if you reduce the corporate rate to two to it gives you some upside from the current level, and it gives you some better earnings eight percent instead of six percent through two eighteen, but not

not quite, not a whole lot. Uh. The The real thing that has to happen is that the consensus forecast for earnings, which is much brighter than I think that the economic forecast will allow. Statistically, the consensus forecast is really optimistic. If you get that, you can make the case for higher stock prices. So I'd be bullish, but I'd be very concerned or worried or concerned about the valuations. So what's your heads right now? Well, my heade right now is I'm not buying to the real hedge is

not buying any stocks at current levels. I'm maintaining or preserving my current you know, allocation to equities. For an account or a portfolio that says, let me have fifty and equities and the balance being in fixed income, I'm about six. The question is what I add to that

portfolio at current levels. And given those concerns about valuation uncertainty about valuation, I have to say that no. Look, I look for a better entry point, and a better entry point would be somewhere, be in the neighborhood of four to seven percent below current levels. And I think you know, with the volatility of the news that we're getting the international news, particularly North Korea, things like that could touch off a correction which would get us down

to levels that make much more sense. We've got to have a better, better entry point, Lisa, what if you're an investor who is willing to take on more risk? What would you recommend if someone wants to put the pedal to the metal and says, you know what, I think this is going higher and I really want to participate. Well, we've got plenty of clients that are just like that. Most of them right now are a little bit cautious, which is sort of surprises me given the performance of

the markets. But if they want pedal to the metal, and the first thing I'd say is, look, you know, don't don't don't have a your guidelines, say fifty stocks, fifty percent bonds. You know, give give me a little bit more room, say that, raise your target for equities, in which case I'd probably be up around in stock. So it's really up to the client to say, if I want pedal to the metal, I want to raise my allocation equities or my target, and I would be

raising it from fifty eight. And then if you want to do something, oh about that. You buy the kinds of things that really work in bowl markets. And of course technology has been a great performer, great relative performance, and there's a lot of companies in the technology sector, well known names, which are the kinds of stocks that you want to own in the portfolio. And you might buy some small cap but believe me, that has not been performing well. C Is there any asset that you're

selling right now? Uh? No, there's no asset that I'm really selling other than the fact that I'm reducing my exposure as best I can uh to fixed income because my expectation is we've got higher rates. I don't think I'm the first person to say that. In fact, I've been saying it for four years and haven't really gotten a whole lot of it. But nevertheless, I really think that the handwritings on the wall of it's going to move towards restraint in response to that short long rates

going up. So it's not so much that I'm bailing out of fixed income, but I'm really reducing my duration or maturities or however you want to say it. UM in fixed income securities, I'm trying to avoid it, and then I'm avoid things like um, you know, consumer staples. I really don't like it as a defensive sector. Uh, telecommunications avoiding it. It's a very defensive sector. You want maybe on a little bit there, but you want to

underweight that those are defensive sectors. They don't work in ballmarkets. Just it's that simple. You've heard a lot of shure about the emerging markets, people trying to move money outside the United States. You buy that trade, I do. I do. We've done that recently, you know, for the longest time of him. As you know, the international markets generally emerging

and developed just significantly underperformed US markets. And I mean I'm talking about ten years so more recently, and I really mean this year two thousand and seventeen, we've seen positive relative performance in response to improving economic numbers and earnings numbers coming from other parts of the world. So we've raised our exposure to international We raised it from a very low, almost non existent number, up to seven to ten percent of a portolio that that of the

equities in a portfolio. That doesn't sound like a lot, that sounds like a fairly low allocation, but it's pretty pretty meaningful change for US. So yeah, I do buy it. I buy I buy buying the emerging as well as developing, and but be a little bit careful. I won't warn everybody to be a little bit careful about China, where we have debt levels that, as you know, are not at all low. There's a lot of risk, a lot

of leverage, and a lot of risk in China. It sounds like a little bit of treading water at this point, waiting for something to happen. Yeah, yeah, it's something that happened. At least, then I think what I'd love to see happen, and I've been waiting a long time for this. We haven't gotten it yet. Is really the decline in stocks to levels that make a lot more sense. Valuation continues

to be a very big concern. And then you have to say that primarily because you try to make the case for better economy, better earning, stronger economy, stronger earnings, and you can't do it. It's it's two to two point three growth in the economy and under those conditions

you don't get the kind of earning. Such a really neat Thank you, Hugh Johnson, well said Chairman, chief investment officer Hugh Johnson Advisors, helping to manage more than one point to billion dollars and joining us from Albany, New York. US second quarter growth was revised upwards, suggesting there is more momentum than some people have been expecting. Uh in

the US economy. Of course, there still is a huge question of what the damages and the ongoing fallout from Hurricane Harvey will do, as well as to turmoil in Washington, and how much this will crimp future growth here. To give us a better sense of that is Carla Kadonna of course, our chief US economist for Bloomberg Intelligence, and he joins us here in our eleven three oh studios, Carl. How much of an effect will Hurricane Harvey have on GDP in the US? Well, of course, there's a a

tremendous localized impact. Houston is the fourth largest metropolitan area, UH, and we should see a range of economic data series impacted. However, when we look at the national aggregate and look at GDP UH impacts around the times of other major storms via Katrina or Sandy or whatnot, UH, there's not likely to be a huge national impact. And and here's part

of the reason why. Well, first of all, Houston is only the fourth largest city, so the rest of you know, much of the rest of the country can step in uh to UH replace the production that may have been taken off offline in Houston in some regards now, certainly with you know, pipelines and oil refineries, that's not the case. But in some other industries there can be some catch up.

But the other part of the story is here we are in August, obviously, which means that there will be a full month of rebuilding and reinvestment and repair and replacement of the capital stock, which will actually lift economic activities. So hurricanes have a tremendous negative impact on the capital stock, but that stock not flow. GDP measures the flow of production in the economy. Uh, and so GDP will actually

be partly boosted by the recovery efforts. One thing that caught my eye this morning there was a report saying that more than eight percent of the people who have lost their homes to flooding in Houston do not have flood insurance. And I have to wonder. I understand the point that rebuilding creates some kind of economic growth, at the same time, couldn't there potentially be a real hit

to the wealth of these individuals and their families. Absolutely, there will be a wealth impact due to the unfortunate circumstances of folks not being uh properly or adequately ensured, whether it's their house or or other personal property like autos and whatnot. However, those items will have to be replaced as life goes on, and uh, you know, perhaps

they'll be renters for some time. But there will be a big demand obviously for housing stock in and around the Houston area, and there will be a big demand for replacement of autos and those are UH, those will lift the economic activity. So we have some period where part of the economy is taken offline and that's a negative for GDP, but then the restoration efforts tend to largely offset that. And this is consistent with what we

have seen around other major natural disasters. Carl, I wonder if you could just comment on the second quarter GDP revisions that we've received and also what that might portend for future performance of the economy for the rest of the year. Absolutely, so when you say revisions, a lot of folks immediately tune out or or turn turn the

volume down. However, UH, these revisions were relatively interesting. So while we saw much stronger than expected performance in the second quarter, so we went from two point six percent all the way up to three percent growth, but it wasn't all revisions. There was also new information on corporate profits UH, and so we saw corporate profits increase one point three percent UH in the second quarter. That was

after a negative reading in the first quarter. UH. And it's even more impressive if we look at it in year in year terms, and this tells us that corporate profit gains are in fact the accelerating but this is relevant because we were in a corporate profits recession for much of sixteen. So the rebounding profits tells us that the economy is on firmer footing UH. And this will

support hiring gains and also business investment decisions. UH. And so we have an economy that's accelerating, you have corporate profits as a backs up, and this creates a positive feedback loop. And so for just a secondly, for this reason, I think that a FED funds rate increase still is very much a possibility for your end. And also this is going to increase capacity constraints in the economy and potentially drive this much awaited, UH sluggish period of productivity growth.

We may finally see the rebound. In response to this, Carl, this shouldn't come as a surprise to anybody. Anyone who's been following earnings and anybody who's seen with the stock market has done in response shouldn't be surprised that corporate profits are better. Does this change your view at all? Well, this makes me a little bit more confident in our above consensus forecast for economic growth in the back half

of the year. So the profit story is positive, but also the main driver of the upward revision of g DP was consumer spending. So a lot of times when you get us stronger than expected revisions to GDP, uh, you'll say, well, okay, that helped the current quarter, but it's going to take away from future quarters. That was not the case here. This show that there is more underlying momentum for consumers, which have been the predominant driver

of economic growth. So uh, taking this into account, I did not change my second half growth forecast appreciably, but it does boost overall year on your growth just because you had a stronger performance in the second quarter. So we're now two point four percent for full year growth two point four pc. And you think that the rate increase is still on the table for the FED. I think the rate increase is still on the table. So uh, the FED and a number of FED speakers have said

they need to see inflation rebounding. If we're seeing a material sustained upshift and economic growth, policy makers will have the confidence that inflation is going to follow suit. Thank you very much, Always a pleasure. Carl Rick Odonna joining us as the chief US economist for Bloomberg Intelligence. You can follow him on Twitter at riconomics, reckonomics. Well it rolls off the tongue, doesn't it? All right? Thanks very much, comic,

well done, well done. 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 wits one. Before the podcast, you can always catch us worldwide on Bloomberg Radio