Emerging Markets Beat U.S. Junk in Upside Down World, Gaffney Says

the world is turning on its head. That according to Gathleen Kathleen Gaffney, co director of Diversified Fixed Income and Eating Vans, who joins us here in our eleven three Oh studios. Kathleen, thank you so much for joining us. So I want to start with this idea that the developing markets are emerging much more quickly and faster than growing faster than than developed world, which are kind of sinking. Does this mean that you like emerging markets highled debt

over US junk bonds. I do selectively. We're finding good opportunities to invest in emerging market companies, and a handful of them are below investment grade, but rising stars likely to make their way onto the global stage and become investment grade down the road. Can you just give us some examples? So, that we understand exactly the kinds of companies you're talking about. Well, our focus has been primarily in Latin America. America Mobile, I know, is one of

the holdings in your fund. It is so Mexican telecom, but high, higher quality. I'm talking about some of the Brazilian companies and Susano is a good example. UH, paper and pulp company. UH, low cost producer number one. Uh. They came to market earlier this year very attractive spreads. That was right after the new administration and there was a lot of fear about protectionism. We saw a fair amount of new issuance that had to come with a premium.

And what's interesting in talking to management, what we saw was discipline and a drive to maintain that low cost status, but without levering up. So I'm wondering, you know a lot of people have been pouring money into emerging markets debt as well as currencies, and this could be what's been happening with the dollar earlier this year, with the dollar weakening and emerging markets currencies really strengthening. Recently, it's been the reverse. You've seen some dollar strength and UH

do you think that that will continue? That the dollar will continue to strengthen as benchmark yields rise. And what's the potential consequence for emerging markets in the near term. I think you are going to see some dollar strength. The global economy is doing well, but the focus is on the US and the unwind of the balance sheet. So we've seen yields start to move up in the US is leading that is going to draw money into the US and push the dollar higher in the short term.

That won't be so much of a problem for emerging markets if they have a fair amount of reserves. They got into a lot of trouble back in two thousand thirteen when they didn't have the dollar reserves. As the dollar strengthened, that's changed a lot. Yeah, there have been a pretty big build up in reserves. I have to wonder, though, you're talking about how yields should continue to rise or

are have been rising in the US and UH. Earlier this week, Jeffrey Gunlock of Double Line said that the treasury market was facing its moment of truth as yields on the tenure treasury surpassed two point four percent. Do you agree? And how high could this yield go? I do agree? UH? And how high it os UH probably not too high in the near term, but the important part for the markets is that it started and we're seeing the impact of that today. UH. We're seeing it

with some equities on the retail side. Mattel cut their dividend. UH. One of the trends during the period after the global financial crisis is companies haven't invested. What they've done is they is they have borrowed and they've been buying back their stocks. A dividend cut and we're seeing lots of interesting things. Is earning cycle UH could indicate that they're concerned about where their cash is and the amount of debt relative UH two revenues or their interest expense. I

should say, Um, that's a warning sign. That's a signal. Do you think that there's a warning sign when it comes to high yield debt in general? Well, credit spreads are very tight. Um. You could argue that on a relative basis they could get tighter, but it's that absolute level of risk. At four percent, you're not getting compensated for a highly levered company. So if you are invested in that particular kind of company and situation, what would you suggest to people, I really think you have to

define credit risk high yield more broadly. That's why we found value in emerging markets because you're able to pick up some additional yield to compensate you for the credit risk UH. You can also look at the bank loan market, convertible market. There are other ways to get that credit exposure other than just US high yield and European high yield. The yields are even worse than in the US, so

it's a struggle. Our Our high yield exposure UH is fairly modest right now, Kathleen, do you think that there are certain industries within the high US hi yield universe that are on the precipice of a pretty big fall. We're seeing pressure today, that's for sure, But we which which do you think is real? Which do you think has legs. I do think that the pressure on the retail sector is real and it's going to continue because there's already been a lot of pain there. There has

been a lot of pain. What's interesting is we're seeing how companies are reacting. So at the higher quality end you see CVS and Etna. But all of it is a result of the world is changing. We've got a new economy tech is really driving it and it's uh, it's going to make for some necessary decisions across industries. Thank you for coming in and spending time with us. Kathleen Gaffney is the co director of Diversified Fixed Income for Eaton Vents and helps to manage over three hundred

billion dollars of assets. Based in Boston, of course, home to Bloomberg one oh six one Boston, Newburyport and Metro West and the South Shore. Well, it is a huge day in tech shares today. The Nasdaq one hundred indexes up two and a half percent, but Alphabet and Amazon are experiencing much bigger share price pops after beating analyst estimates when they were ported earnings after the bell yesterday. Shara o Vda, Bloomberg Gadfly columnist joins us here now

and Shia. We were joking this morning that the expectation on the street was for three cents per share for Amazon, and they beat that. Yeah, I mean, how good is this? Yeah? Profit doesn't matter at Amazon. Basically, it defies all the logic of typical investing. Um, my favorite statistic is looking at Amazon's operating profit, which they seem to try to make as as low as possible. So the profit margin in this quarter was zero row point seven nine, which

is as almost as close to zero as possible. Um, what's the cash flow? Like, the cash flow is better, but it's actually um that's actually shrinking too. I mean Amazon has been in this period of intense spending. There's still like cash loves more than seven and a half billion last year, that is correct, although those yes, okay, And I'm assuming that many people see brown boxes show

up at their homes every day. Many people see brown boxes show I mean they look and they might actually include medication, prescription medication in the future, plus your order from Whole Food. It is possible that Amazon, I mean Amazon already delivers groceries um through Amazon Fresh, but it's likely they're getting more seriously into that business now that they bought Okay, So to just step back for a second.

It's all about a story, right, I mean, when you've invest in a company, particularly stock, it's about the story that you can tell investors to get them excited about the future. And that may be why the stock is up twelve percent today. Amazon is, i would argue, the most ambitious company, certainly in the technology industry right now. You can make an argument that they're the most ambitious

company in the world right now. And the fact is they are dominating two huge categories of spending, both retail electronic commerce, where they're basically all the growth in in retail spending right now, and also cloud computing, where they've turned this Amazon web business company from zero to eighteen billion and annual revenue and it's really a disruptive force. And and groceries, you know, it's eight hundred billion a

year and spending in the US alone. Well, let's talk about groceries, because they purchased whole foods, and whole foods sort of is in the industry that typically has low margins, which is grocery stores, and yet it has higher margin. And then most of Amazon's businesses, including their core business, and meanwhile their margins went down for whole foods as Amazon cut prices. At what point does this matter that they've gained market share by cutting prices to the point

where their margins are razor thin. Is that enough of a strategy to get them, uh to fit their capital structure later on? Yeah, I mean, I think two Pim's point, it's not really about where the margins are today. It's whether Amazon can leverage its acquisition of Whole Foods to grab a bigger slice of one of the largest spending

categories in the world, which is food shopping. And look, if Amazon can become a major player in um in groceries, that again, it opens another multi billion dollar annual revenue opportunity for this company. It's a big question whether they can succeed. They haven't been very successful in groceries for ten years, but they now have kind of this pretty small, aren't asset to help them get there. I just keep

thinking of one word, borders. Remember borders books. Amazon has a way of competing that really has changed the landscape for a variety of industries. That's not news. I think the big question now that people have is should they add to their holdings? In other words, you described it. The numbers don't really add up in the way that many investors are taught. Yet the stock keeps moving higher. So is it is it a trap? Or is this as long as Jeff Bezos is in charge. I mean,

they're buying aircraft, they're they're launching rockets. I mean, this is an amazing As you said, this could be the most ambitious company around. Yeah. I mean, look, this company has a track record of investing in things that seem insane for a long time and then making them into successes. So that's why you're seeing the stock price shoot up, um even though they turned in you know, kind of

any profits. I want to bring in David Garritty he chief executive officer of g v A Research, which is based in Brooklyn, and David, I want to get your take about whether you would recommend that people buy at this point given the fact that valuations are already pretty high. Uh, and it's sort of unclear where they go from here. I think the thing coming off of the results yesterday for Amazon probably were most impressed investors on the margin is the fact that the integration of Whole Foods was

actually profitable in the quarter. Company actually made twenty one million dollars on the revenues that Whole Foods contributed, to the extent that Amazon, by extrapolation, can do an effective job integrating acquisitions onto its platform. We look at the valuation on Amazon stock and we all recoil and shock, But what we have here is a very high priced currency which could be used for acquisitions to the extent that Amazon decides to accelerate and take a buy versus

build approach in going into new areas. Obviously, we've seen concerns or possible speculation raised yesterday that Amazon was going to get more significantly involved in the distribution of pharmaceuticals. Drugs UH certainly a very high margin, certainly attractive area. And if we're now looking at Amazon as being a company that not only offers very high organic growth, but it's an effective acquirer, then we see a possible path

here where growth could perhaps even accelerate. Echo. Tell me about Echo and Alexa well, to the extent that we saw prime subscriber revenues or subscription revenues rise by fifty year over a year, typically prime buyers tend to have Alexa, they tend to have Echo, and to that extent, there tends to be more data capture of those higher income households on margin, which certainly means that if we're looking at a world where there is monetization of data as

a way to drive shareholder value, it certainly seems that Amazon is clearly in the vanguard in the forefront in that area. We may not necessarily be comfortable with it from the standpoint of personal privacy, but investors are obviously very interested in what this says about the company's ability

to tailor offerings in the future. Two consumers, real quick. Uh, we didn't really get into Google too much, But does this get give you a sense sure that they are successful at selling ads and have that pressure, Uh, that that sort of monopoly At this point, I mean, Google is both growing insanely quickly and has very fat profit margins, and it seems like an impossible combination. They keep hitting it out of the park. Well, shares of Google are up more than six and a half percent right now.

Thanks very much here over there, our Gadfly columnists when it comes to all things technology. Our thanks also to David Garretty, the chief executive of g v A Research. Well, everyone may be getting ready for Halloween, and in order to have Halloween you need costumes and party supplies. And here to help us tell us about the industry is Jim Harrison. He's the chief executive of Party City. They're based in New Jersey, and Jim is in our studio in New York. Jim, thanks very much for being here.

I noticed you're wearing your orange tie and the black suit. Is that already because you're getting into the holiday spirit here for Halloween. I've been in the holiday spirit for at least thirty days as we've been building our stores an inventory, and right now is it's getting really hot in the stores. Over the next six days, seven percent of our retail sales will occur. Annual sales wi occur in the next six days. The interesting thing about our business,

that's about half our business is retail. The only half is consumer products. The consumer products business is a lotless long be It's fair to me in birthdays in America every year, nice and smooth, and a season or a celebration every month. So what does your house look like? Describe how you've decorated it. Uh, we've got tombstones, We've got pumpkins, We've got skeleton saying from trees. We've got lights to go on at night and a doorbell that

plays creeping music. Wow, you're that family. Are the guy you don't live next to? Right? All right? But having said that, let's talk a little bit about the business right now. I mean, the stock has not been doing real well. It's down about so far this year. What have been the challenges and what are you doing. The biggest challenge we have is really getting our story out. I mean, with our name being Party City, folks put us in a retail box and they think of us

as solelyer retailer. And as a result, that retail prism has really created a pallor if we would over our stock, only of our four di million dollars of b d A comes solely from our retail business on a standalone basis comes from our wholesale business. And then the remainder is the vertical model because we UH provide a roughly what's in our own stores. In that world, we have the ability to make a manufacturing profit, a wholesale profit, and a retail profit. So is what we called either

a double or a triple. I mean we have two layers in origin and of the triple is only of the eighty is actually triples. Where we manufacture, we have nine manufacturing plants around the globe. We make costumes. We make our own uh Latex balloons in Waysia, but we also domestically manufactured lots of product. We have a sixty

worldwide marketshare and metallic balloons we make those Minneapolis. We manufactured plates, cups, and napkins here in the United States, the extrude plate cups and bowls up in Rhode Island. We do injection mold to plastics down in New Mexico. So we do a lot of manufacturing. So our products go not just to the party industry, but the movie theaters, to supporting your arenas, to restaurants and bars and stuff like that. I'm wonder and does Party City sell goods

through Amazon? And uh, you know, at some point could you imagine not having a physical brick and mortar store and just focus in the manufacturing. So that's really two questions. Let me start with the first question in terms of Amazon on the party side of the business. Uh, our

products is so generally available on marketplace. Amazon does not bring in their the party goods per se, and if they did, they would be from us because we basically held all the i p as well as the broadest selection of anybody in the marketplace in terms of our

stores and opening stores. We Uh. Recent surveys have shown this this recent season on a number of surveys, anywhere from six consumers want to go to a store to buy their Halloween goods thirty five will look online for inspiration, but sixty plus percent anywhere from sixty five want to actually go into stores. And if you think about even Halloween and our business, we're a collection business on party side.

So if having a brattle shower, you're gonna buy a bunch of stuff, are you are in the two bucks coordinated icon and imagery, and you're gonna make a house festive and decorative. So it's a discutionary purchased lots excuse. On the Halloween side, our point differentiations. We call it mix it, match up, make it your own. So if you wanted to be Spider Girl, for instance, you could go to Party City and have twenty different Spider Girl outfits that you could construct with all the accessories and

and separates that we provide Amazon. Other folks on the web will Mark. They provide costume in a bag. We do costumes a bag, but it's a relatively small part of it. Whole home we're offering Spider Woman. You think I should do that? Yes, by all means, I want to know about a purchase that you did recently of a company called grand Mark, and I just so that may offer a way to expand the conversation A little bit sure. So grand Mark is a company in Mexico.

They're a distributor. They're essentially very similar to our wholesale business here in the US in terms of going to the broader market. They also have a manufacturing footprint and it's basically income papers. So a lot of products that we currently sourced from China, lead of banners, stickers, gift bags, gift wrap, we're actually starting to make ourselves and are now our own fact tree in in Monterey. Okay, my

quick question there was then the whole trade issue. Are you concerned about any of the issues related to trade, NAFTA and so on. It's once again, we're dealing with such a nominal price point that it's not really an issue. What's the biggest challenge right now for Party City? The biggest challenge for Party Sort Serria now is making sure that we stay ahead of the curve in terms of

the consumer. The consumer today, especially the younger consumers, looking for experiential and so having a house party is maybe not number one on their list. They want to go to a theater, they want to go to restaurant, they want to go on a cruise, they want they want to experience as part of that celebration. So we're building out what we call our Alternative Markets Group to get in front of that curve, so that we're going into the cruise ships and into the restaurants and providing the

products that will make those celebrations special. So do you also have people that kind of cultivate what that experience would be for the cruise or for the restaurant or whatever else. Right, So it comes comes into the numbers different ways. One in terms of creating environmental decorations, that's kits.

In terms of creating for the celebrations themselves, creating a suite of products and men use that consumers can go on select, and then we use our e commerce capabilities actually to ship directly to U two restaurants or wherever. Thank you so much for joining us, and a picture of your home. It's sound. Jim Harrison, chief executive officer of Party City gearing up and has been gearing up for the past thirty days for Halloween. Thank you so

much for joining us. Healthcare CVS Health Corp. Is reportedly considering a blockbuster buyout of health Ensure Etna, and here to talk about what this deal would mean for the broader healthcare industry as well as how exactly CVS would pay for. This is Max Neeson, Max Newson, Bloomberg gad Flight, columnists covering all things health related. Uh Max, thank you so much for joining us. So can you give us the sense, first of all, of what the logic is behind this tie up and how likely it is at

this point. Yeah. So there's kind of a two part logic to this. The first is generally in healthcare UM you know, vertical consolidation has benefits IF CVS, which in addition to running pharmacies, is a pharmacy benefit manager, owns and ensure UM you know, all those things that you're Insure wants you to do to make to make your healthcare cheaper. H use a mail order pharmacy, go to a cheap clinic instead of the doctor. It can push all of those ETNA enrollees to its businesses. So there's

that kind of direct benefit. And there's also the fact that there aren't that many other places for CBS to expand, uh it expressed scripts and United Health already control the vast majority of the pharmacy benefit industry. There's not that much expense. You could do there, and we saw with Walgreens and right Aid you can't buy that many more pharmacies without running into any trust issues. So I mean it does make sense in that sense, all right, Max.

So I'm trying to get my head around this. But at least right now I know that the investors and CVS and not too thrilled about this deal because the stock is down nearly four percent. CVS already has a contract with another insurer, Anthem, correct, Yeah, so that that's something they just signed. Anthem is starting a PBMs of its own, but it's letting letting CVS run a substantial portion of it. That was just a week ago that they signed that, So that it's obviously going to be

a complicating factor right and right now. The leverage that a CVS has in order to negotiate drug prices is why because they have a lock on business directly tied to whatever the insurance company is that we provider that you have. Yeah, so they have a big set of clients, both insurers also employers that contract with them to negotiate their drug prices. That kind of amalgamation lets them um

push for lower prices. The way they do that is by having a series of drug lists, they have a what's called a preferred formulary where they can exclude certain drugs, so they can say, if you don't give us a discount, we're going to push people to your competitors drug. The more people they have, the more leverage they have in those kind of negotiations. So this is this would be a tie up that would be incredible for their bargaining position.

How much is this a defensive move in anticipation of Amazon dot Com plowing into healthcare as everybody suspects they will. I mean, I think it's it's pretty clearly one because Amazon is a threat to so many parts of CBS is business. If it gets more directly into medicine. Um, you know, there's the PBM part, if Amazon decides to

play a role there, Uh, there's retail pharmacies. Um. So obviously moving to diversify and having kind of a captive uh set of clients would really be a benefit for the company because at the end of the day, Amazon is bigger, better funded, and better at the Internet. So they're a threat. Well, but let's talk a little bit about the funding, right, because this is not a cheap purchase which is probably why CBS shares have been falling. And they really don't have the cash to pay for this.

So this would be a pretty substantial leveraged buyout. Now, it absolutely would be. I mean, it would definitely have a stock component, but it's unclear how much of that they'd build people to do. It's going to be a significant cash outlet. C this doesn't have a ton of cash. They already have more than twenty billion dollars in debt and this deal, based on some of the figures being thrown around, could cost seventy billion dollars. That's close to

CBS market cap. So it's obviously gonna be a really big one. Hey, Max, what if you could just give us an idea of what your thoughts are about the very business model that says, if we can put as many individuals and as many corporations in between you and the service or the Uh No, seriously, the service or the product that you're buying. Uh isn't I thought that was going to be done away with because of technology, you get rid of all the middlemen, you go direct

to con sumer. Why can't that happen? Why can't they do it? Why are they're waiting for Amazon to give them the kick. Um. I mean it's because being a middleman is extraordinarily profitable. But when you have when you have Amazon breathing down your neck, I mean we've already been through that. In the financial industry, you had, you know, broke a wide swath of brokers now their advisors because

you can't make money, you know, on pennies. So I mean that's kind of the hope of what people that if that's Amazon's hope, if they want to get into this business, do you see that as viable? Do you think that trend is going to happen? You know, the question is whether Amazon wants another very complicated, low margin business. Um. You know, they have sort of unlimited capacity for it, it

it seems so I wouldn't rule it out. The defense that you know, the wholesalers and PBMs are are putting out is that you know, this is complicated their regulatory issues. But you know, in time, Amazon would be able to figure that out, and its scale will always give it a chance. I was just gonna say, you know, it's interesting. Shares the Amazon today or up eight and a half percent, shares of Etna down one point three shares, the CVS down four percent. That kind of tells you something, Max,

really quick, how likely is this to get through? I'm gonna say about fifty fifty, you know, just the divide between CVS is obvious need and the potential regulatory and funding issues on the other side. So we'll see and you're gonna be following it. For this, I appreciate it. Thank you very much, Max and Nisson Bloomberg. I have some insurance claims. Maybe you can help me with two Max and Neis and our gad Blight columns when it come out healthcare. Indeed, 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 abramowits one before the podcast. You can always catch us worldwide on Blueberg Radio.