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Interesting news here this morning.
To start out the day on the political side, on the local New York side of things, George Santos, the embattled Republican congressman from New York, was charged by US prosecutors with fraud and money laundering critty.
This is an interesting story on.
The local side, but it also goes to just you know, Congress and various pieces of legislation, including the debt ceiling, and how this may impact some of that. So we want to break down kind of what the legal side of this is for mister Santos. We welcome Nick Ackerman, former assistant special Watergate prosecutor Michael Zelden, former federal prosecutor the US Department of Justice. Nick, I want to start with you just give us a sense of how this is going to play out today for mister Santos.
Well, he's going to show up before a federal district court judge in the Eastern District in New York, and he's going to be arraigned. He's going to be fingerprinted first and photographed. He'll go in and he'll plead not guilty, I assume, and that will be it. Bail will be set, and I would assume that he'll be released on his own recognisance. But that really is just the start of the process. I mean, from that point on, he's going to have to decide whether he makes a deal with
the US Attorney's office or he fights it. And I'm just starting to look at this indictment right now, and I mean, there is it just seems like overwhelming evidence of fraud and deceit here, starting with his campaign and raising money and using those funds basically for his own personal use, you know, including luxury designer clothing and personal
credit card payments. And it goes on from there with him basically taking money out with respect to funds from the pandemic program that would have allowed him to get money if he had been unemployed, when in fact, the indictment charges he was employed. And it goes on from there. So I think he's got really no choice here but to try and make a deal, all of which I think will probably wind up with him resigning from this House seat.
Would bring this into some perspective for us when it comes to timing here, because we do have a presidential election coming up, not to mention the debt ceiling debate in that will go on for the next two weeks or so. How long are these legal proceedings expected to take.
Well, this could take anywhere up to a year if he decides to fight it. I mean, if he goes through the process of getting discovery, making motions, pre trial motions, and then going to trial, this could take up to year.
On the other hand, if you read this indictment and you look at the evidence that's laid out in the indictment itself, that would be a pretty futile effort in the sense that any effort to really fight this would be nothing more than entering into a long term guilty plea basically because it sounds like the government has really got him solid on this case.
And you know, the political political ramifications here are very important here. You know, the dead ceiling passed two seventeen to two fifteen with Santos voting, and so without Santos, the fate of that bill will become much less clear it might have been, you know, two sixteen to two sixteen. So this is the math really is important here as
it related to mister Santo's seat. Michael Zelden, if you were resented, if you were representing an advised or advising mister Santos, what would you advise him to do today and over the next several.
Days work out the best plea deal he can.
Yeah, it seems to be the play.
Yes, well, I was the chief of the money laundering and as a forfeiture office in the Justice Department, and these money laundering charges look pretty solid. What he is accused of doing is acquiring money under false pretenses and then having that what they call specified on lawful activity, the money derived from crime. He then engaged in additional
financial transactions over ten thousand dollars. Those are almost impossible charges to win on if the source of the money was in fact fraud, And it seems pretty clear in the first five counts of this indictment that he did in fact solicit money under false pretenses. So he's also being charged with false statements to the House of Representatives. Also again a very straightforward paper case that you either made a statement that's true or you didn't make a
statement that's true. There's not a lot of movement in there from a defense motions standpoint, and then they're asking for forfeiture of all the proceeds of his ill gotten gains. So I think the play is workout of plea and resign from Congress. But he's not that sort of person.
Yeah, Michael, how he does it?
Yeah, what type of plea would be reasonable? Do you think at this point, given what you know about the indictment.
Something that caps his exposure to five years? The money laundering statute is a twenty year maximum penalty, and the way the sentencing around money laundering works is it depends on the value of the monies that you laundered. And he's probably facing eightish years of actual time on this indictment where he convicted of all the charges, and I think that he'd like to try to stick within a
five year period of time. The prosecutors, I don't think, are going to treat him softly because of his public position. I think that in these public eruption types of cases. The government likes to make statements about this because as a not only crime, but a breach of public trust. So I think he's got a difficult road ahead of him.
Nick hopping in here, because George Santas isn't the only one in legal hot water right now. President Trump is as well yet again, this time with the case that he's lost against Egene Carroll. Walk us through the consequences there.
Well, the consequences aren't good because basically he's been labeled now as sex predator. And if you're running for president and you're trying to get votes from half of the constituents, which are women, it's not really helpful in that term. It's also not helpful in the suburban areas where he needs to get votes that he didn't get the last time, where it was really women that made the difference in
giving the presidency to Joe Biden. So from a political standpoint point, this is a complete horror show for the Republicans. It couldn't be any worse. It's also I think a harbinger of things to come with respect to the New York DA's indictment. If you look at what happened here, Basically, Donald Trump lost this case right after his lawyer cross
examined Gene Carroll for two and a half days. There was absolutely no reason, you know, from a defense standpoint, if what you're trying to prove is that she was incredible to actually bolster her credibility by asking you questions that let her explain things, let her give her full statements, allowed her to show how the alleged assault actually took place.
And you know, by the time you got through her cross examination, I mean, you could see the same thing happening with the New York indictment in the sense that you've got two cooperating witnesses, both Michael Cohen, who was Trump's former lawyer, and David Tecker, who was the head of the National Inquirer, that are going to be cross examined. And if this case is any kind of sort of preview of what's going to happen in the criminal case,
it's going to be the same thing. They're going to do the same kind of cross examination of Michael Cohen and David Pecker and will essentially enhance their credibility in the situation where both of these individuals are corroborated by documents with Gene Carroll. There were no witnesses, nobody saw what happened. It was simply her testimony. This case is much more solid and a cross examination like that is not going to be helpful to Donald Trump.
All Right, a busy, busy morning for legal issues. It's not necessarily what we thought we were going to do waking up this morning, but there's a lot to cover, and I think we did an admiral job thanks to our guest Nick Ackerman, former assistant Special Watergate prosecutor, and Michael Zelden, former federal prosecutor US Department of Justice.
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We did get that inflation print this morning. The CPI kind of came right in line with expectations. Maybe if you dig dig deep, like Michael McKee and the other economists tend to do, you get a little sense of maybe it's softening a little bit. Let's chicken with professional Anaka Treon, chief economist for Van launschat Kempen Anka. What did you take away from this CPI print this morning?
Hi, Well, it looks like, you know, we're sort of in this neither here nor their zone where it's not clear enough in the data that inflation is abating, but it's also not clear enough that it's accelerating. And I think that's what makes this whole monetary policy the climate really confusing, because I think the main thing that's important is central banks, to Fared, the ECB, all of them
have been quite outspoken about their information target. We're still nowhere near their target, and you still see also again in the latest data, evidence of stickiness, especially around services inflation, especially around wages.
Well, top, was that again about shelter costs here, because something that is so striking to me is that the shelter costs piece of this report. You're not seeing the same deceleration that I think a lot of people would expect one year after the FED started hiking rates, even with the lag baked in. Shouldn't shelter have taken a bigger hit by now?
Yeah?
And I think it's just a function of figuring out how long the time lags are, and obviously the time lag between the purchase prices of houses versus the rental pricing. And I think that's just what makes this whole thing so computing, because it's not just about a single source of pricing pressure with an inflation you know, it's not just about the energy costs. We've moved away from that.
The baton is being passed from one source of price pressure to another, and they all have their respective time lags, which just makes it quite complicated.
And anaka, I'm looking at the CPI X Food and Energy year of year of five point five percent that came in line with expectations. It's down from five point six percent last month, but boy, that number feels sticky to me. How do you expect that number to trend over the you know, the next six months or so.
Well, we think it's quite sticky too, and we've been saying it for a while, but we're amazed at how output the markets are and expecting a u turn in policy rates by the Fed. And the only way the Fed is going to u turn and actually start cutting rates in about four months time, which is what markets expect, is if there's really tangible proof of consistent declines in core inflation, and to your point, it still looks pretty sticky. So that's the biggest risk that we see for markets when you talk.
About risks we're seeing for markets, though inflation is just part of the story, I would argue a bigger part of the story. But then you have all this kind of debt ceiling. I don't want to call it drama, but drama. What is the trade there? I mean, in this circumstance that no one really thinks is going to finally come to fruition, It's going to be an eleventh hour development, what is the trade if we do indeed see the clock strike twelve and there's no agreement.
Yeah, I mean, I think the likelihood of the debt ceiling not being written the way we're all looking for me we think is rather low, because I mean, the US government simply cannot afford to go into default. And I mean, just look how proactive policymakers were around you know, the SVBS as First Republic. As soon as you see signs of crisis, they're there to fix, they're there to rescue. And I think the same will apply this time. I think the trade is I mean, it's basically adding to
the backdrop of complexity, volatility. And it's ironic because you know, the volatility that we're seeing is much more in the bond market than the top markets. Look at the VIXSUS moving dex and that's the sort of inherent volatility and you know, well one of the most important parts of capital markets. Actually, it just depicts the picture we're.
In and like it real quickly. Thirty seconds give us a sense of how inflation is in Europe.
So inflation in Europe it's very similar to the US. It's the stickiness and I think the most try thinking about Europe what I mentioned about the energy crisis. All the tension was on energy prices in Europe because of this energy crisis, Ukraine war and you know, energy shortages, et cetera. I mean, gas prices in Europe have fallen all the way back right pre Ukraine, pre everything. Wow, yet plation is still really high, really sticky, and we really have a wage inflation problem.
Interesting.
Interesting, All right, Anica, We could go on and on a lot more questions.
We'll talk to you soon.
Anica Treon, chief economist for Van Loonshot Kempen.
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Your work A talk preferred Stock. I sold some preferred stock back in the day.
Every once in a while it comes into fashion, and I would sling a lot of that stuff.
It definitely himitt in fashion today, right, No dental Warren Buffett, Yep.
Absolutely, he gets He always gets the high yielding stock. He gets people when they're down, they're desperate, Golden Sacks, Occidental Patrol. I mean he gets that preferred stock. He's very smart about that stuff. All right, let's talk about the van K Preferred Securities Ex Financials et pf XF for the kids out there with the Bloomberg terminal.
Brandon Zoski, did I get that? Awesome?
Brandon Rakzoski, VP and Director of Product Management at Vanek, joins us live here in our Bloomberg Interactive Broker studio. So Brandon, talk to us about your preferred stock. Etf EX Financials talked to why ex financials and kind of what are you guys looking to do?
Yeah, yeah, yeah, it's it's a little bit ironic that we're talking about our ETF now, you know, it sounds like it was made for the.
Last two months exactly. I don't want anything to do with financials.
We actually launched the CTF. We listed it back in twenty twelve, over another years ago. Okay, right, So we launched this when the preferred market was heating up. It was post global financial crisis. Rates we're at zero. Investors were looking for income, but the global financial crisis was fresh in everybody's mind. And you know, fast forward a decade and the US banking system was by and large stable. So pretty much the reason we launched the CTF the
diversification away from financials preferred secure curities. You know, it didn't really come into play until two months ago. And what I think a lot of investors don't know about the preferred market is it's dominated by banks, insurance companies,
and financials. So anybody, any investor that's looking to a fund, you know, mutual fund ETF and looking at the broad preferred security space, they're getting very heavy financials exposure and they've they've if they didn't know that already, they've they've certainly woken up to that over the last two months. So so we like this ETF within the space. It's it's a way for investors to diversify away from that heavy financials exposure they get elsewhere.
So Brandon, let's brown this out a little bit.
We're talking about financials.
We've got to talk about the banking crisis. Is it still a crisis or are we kind of passed that?
Yeah?
I mean, I don't know that anyone can tell you that definitively in that and that that's why why, that's why investors have to be aware of their risks, right, I mean we see, you know, you hear about a new bank every every day, so you know, it's it all started two months ago. It's been two months and we're hearing about you know, name the Pack, the West,
whatever it might be. You've got these banks, and you look at the preferred securities market, you look at broad indexes, and regional banks are still despite the selloff, regional banks are still accounting for ten to fifteen percent of these broad indexes. So there's risk and exposure that are in these ETFs and investors should be aware of them because these are the shares that are getting hurt the most.
Well, is that a part of the market that's just going to get wiped out? I mean, this isn't an equal comparison, but when I'm thinking wiped out, I'm thinking that's kind of the eighty one bond story from Credit SUITEZ, where just a class of investors just got wiped out. Is that something that could happen if you continue to see these bank failures.
We lived through this in the global financial crisis and it didn't get wiped out. I don't think it will get wiped out. I think there's a lot of investors right now that are actually looking to that space as a value opportunity. These are just so well so over sold at the moment. So if you can be opportunistic and you can look to some of these regional banks and some of their preferred shares, if you're willing to
take on that risk, there could be reward. But if you're a buy and holding investor that's just looking for that monthly income check and you're not willing to to to to weather that volatility in your portfolio, then then you should really think twice about about initiating exposure in some of these these broad indexed products.
All right, so when your ETF pf XF is the ticker, what do you guys own there?
Yeah, so okay, so you're you're you're cutting out a big chunk of the market. When you exclude financial banks, insurance, that's seventy to seventy five percent assisted market.
Yet yeah, the.
Whole financial sectors, it's it's dominant. So what you're left with, You've got utilities, You've got which.
I pitched prefers to in telecom companies back again, Yeah.
It's a it's a big portion of p effects. You know, that's twenty percent of the portfolio sold a few and then you've got.
Wait, how many telecom companies are there?
There's a lot, there's tower companies, there's all kinds of stuff. Well back in the day, I mean, is celling your telephone, fixed line, wireless?
This is back in the day.
So yeah, no, you still you got AT and T as a portion of the portfolio.
Quest you know, you haves AT and T and Hoverizon like what else is there?
But fair enough?
Continue but nonetheless, and then in real estate, that's of course on top of everyone's mind. So you are going to get some read exposure through this through this preferred ETF. So that's something to be aware of. But you know, the wonderful thing about this ETF we lived, as I mentioned, we lived through this period where systemic risk in the US banking system just wasn't top of mind for investors. So what else did this CTF give you? It gives
you a bit of a yield pickup. So X financials prefers tend to have a little bit of a higher yield. They've got a lower duration profile because these bank and financial institution prefers they're perpetual, they're you know, they're very long dated. So you're getting this yield pick up with lower duration, lower call risk, and that all comes in this this X financials wrapper.
So when I think lower duration an X financial rapper, I mean immediately think tech stocks. From from my perspective, it doesn't feel like there's a ton of exposure to that here.
No, that, yeah, you don't see that from the tech sector, the traditional high flying growth stocks. They're just not heavy issues with preferred securities.
So as you think about putting stuff into this ETF, what are some of the characteristics that you rule.
Is there a certain minimum.
Yield you want to see, is a certain credit profile you want to see? How do you guys screen for some names to get into the CTF.
We, you know, we work within a rule book, a framework that applies to the index. It's a nice ice index and it's basically built to be very broad and inclusive when you know, the simple exclusion of course is financials issuers and their underlying issues. But you know, we look to fixed rate, floating rate. You know, these can be investment grade, non investment grade, they can actually be not not rated. There's a lot of you know, rates out there that they don't go through the step of
obtaining a rating. So there's a very broad profile to this, to this CTF, and it's a complicated space. And I think that's why investors have looked to mutual funds and ETFs because there are calls, there are mandatory converts applicable to some of these preferred shairs. So so it's it's
pretty broad, it's pretty inclusive. But by market cap waiting the sex financials market, you are getting that you know, attractive yield, pick up, lower duration profile and and you're avoiding to some degree because you know, the whole market gets impacted by these sell offs, but you're avoiding quite a bit of the sell off that we've that we've experienced the last two to three months.
When just looking at the fun flows on this ticker, folks p FXF. You can look up the fun flows on new Bloomberg terminal as well. You were getting it's been two months of just straight inflows for this ETTF. What do you think might turn that around?
Well, so what we've seen so far as you see the broad preferred ETFs and some of the financial specific they bled assets. Of course, there's some people coming, you know, getting out of the out of the game, at least temporarily, so that some of that has, it seems, has come to r E TF where they want to maintain that preferred exposure that yield right now it's like seven percent yield to the to the asset class, but they don't
want to get that that banking exposure. So we've seen some inflows and when you look at the trailing periods year to date, even over the one year period, it's it's one of the leading flow getters within the preferred space. So I think there's going to be continued interest there and then you know we're talking about rates and what the federal do next, and within preferreds, that call risk
is a big deal. So as as we reach a point where we can start to you know, expect cuts whenever that may be a lot of these preferred preferred issues will will be possibly called and then you know, reinvesting at lower rates. So lower call profile in our ETF has made it attractive historically when rates are actually declining. So I think there is a lot of you know, tail end and and and prospects moving forward for this ex financials slice of the preferred market.
Is Vannik primarily or totally an ETF shop?
No, no, no, We've got a yeah, I know, we've got a history back to nineteen fifty five. We started as a as a you know, traditional actively managed mutual fund company.
So what percentage of your business today is ETFs because it seems like that is just one of the great growth stories I've seen in my yeah, thirty some odd years in the street.
The majority, so you know, sixty seventy percent of our assets are tied to ETFs. We got in the ETF industry in the two thousand and six, so ahead of head of the curve, not not not the in the first wave.
But and you folks, and you focus on this this preferred.
Yeah, yeah, a wide set of our ETF offerings.
Okay, and what else? What else is seeing big inflows into vannik.
Oh, you know, we've got interest across the across we offer, you know, exposure to a lot of different asset classes. One that we are particularly focused on, and we have been for quite some time is within the US equity market. You know, risks are abound, so we think that with uncertain markets, you should really concentrate on quality companies, high
quality companies. And we've offered for for greater than ten years in ETF M A T which is near and dear to my heart, which leverages morning Star and morning Stars equity research analysts input to identify these high quality companies that are that are attractively priced. So we've seen you know, seven hundred and fifty million come in this year end of that ETF.
Good stuff, but that is just such a great growth business. You picked a good place to be brand at rec Zoski. He is a VP and and director of Product Management at Vann proud graduate of Slippery Rock University, which I'm familiar with.
It's just north of Pittsburgh, right, got that? Yeah there, Yes, I love that, you know it? Yeah? Absolutely, it's good stuffy people. Oh, it's good stuff, good people coming out of there.
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Let's talk a little bit about what is an extraordinarily serious topic, and it looks like there's really no end in sight. But the question now is is here we are in May, we start hearing a lot of news out of Ukraine and Russia about perhaps a spring counter offensive by the Ukrainians. We want to get the latest on that. Angela Stent joins us. She is a senior fellow at the Brooking Institute and author of the book Putin's World.
Russia against the West and with the Rest.
Angela, potentially a critical time in this war in Ukraine. What do you think are the next steps that we may see from the Ukrainians.
Well, we are waiting as you said, for this counter offensive, it's been talked about really for weeks now, and the Ukrainians of course aren't going to say when it's going to happen and how they're going to do it, but we are waiting for them to push back against where the Russian troops are in the southeast of the country particularly, and they I think have been waiting for the American and also on the NATO country's equipment to arrive, the planes,
the tanks and everything else. But it really will be quite decisive because if they're not able to push back the Russian troops substantially, then we really will continue to be in the stalemate going forward.
To what extent Angela, do you see the win in Bakmu as an indicator of Ukrainian success moving forward in the offensive?
So the Ukrainians have held out there all the time because they didn't they wanted to engage the Russians there. It's not crucial to their ability to succeed there, but it would help them that they were able to take it.
So my question, I have many questions, but one of my big big questions is the support that mister Putin has or believes he has with the Russian people. Aren't the Russian people smartened to know that this is just a com colossal mistake on so many levels. Does he really enjoy the support of the Russian people?
Well, you know, the only independent remaining pulling out sit there still is showing that about seventy percent of the population support the war, some of them actively and a lot of them just passively, although fifty percent of them say there should be negotiations. So if they're only listening to state controlled media, they don't really know how disastrous the amilitary aspect of this has been. And of course
a million Russians have left since the war began. Those are the people, of course who don't support the war or who don't want to be drafted. But he does. Putin still appear to enjoy the support.
To Paul's point, though, I wonder to what extent the Russian military is still continuing to buy in on Putin's narrative. Has that changed at all?
As far as we can see, it hasn't. But you have this battle going on between Yevgeny Progossion, who's the head of the mercenary group that's been doing Wagner, which has been doing a lot of the fighting and then the actual regular military, and he has been accusing them of being incompetent, and they, of course have been pushing back.
So I'm sure that there are people in the Russian military to understand that this is who know that this is going badly, and Progussion himself has been very very critical and saying it's going badly, and so I think the Russian people are going to be hearing much more of that going forward. It's pretty amazing that yesterday at the May nine Victory Day Parade there was just one tank on display, and that was a Soviet hero from the nineteen forties, right where they normally have hundreds of them.
So people must be questioning that, Angela.
You know, the scenario that I keep coming back to, and I think a lot of folks do, is it's just there's just no end insight and this is going to be a stalemate, and boy, and nobody wants to see that. I mean, is Putin prepared for that type of situation where this could be a multi year stalemate.
So I think Putin understands that this will be a long war, but what he still believes that Russia can win because he believes that as time goes by, the Western resolve to support Ukraine will weaken. He's looking to our elections next year to see who's elected president, what happens to both Houses of Congress and to a number of European countries. Are people going to be willing still to pay so much to support Ukraine. We're all running out of ammunition, even we the United States, and tags
and things like that. So that's just calculus that in the end Russia will prevail because the West one continues supporting Ukraine.
Well, speaking of exactly what you're talking about Western support waning, the big discussion in Washington right now is about the debt ceiling. Angel I wonder how a debate like that sits with you, given that it obviously takes resources and attention away from what's going on in the ground on the ground in Ukraine.
Well, I mean, it's a very important domestic issue for us, you know, determining our future. So it's clear that, you know, I think it's it's commendable that Ukraine had disappeared, you know, from the media, with all these other things going on, and so I think it's just important to keep as much focus on that as you can, given all the domestic priorities that we have.
Andrew from your sources and the folks you speak with. Is there any scenario or what are the odds that Ukraine and this counter offensive could have a just a breakout per performance and really push Russia back and you know, if not completely defeat them, make it all but certain. Is there any realistic chance that they could have that kind of success.
I mean, it is possible. We don't know exactly how they're going to conduct this counter offensive. You know, their military has performed surprisingly well really since the beginning of the war, So it's possible. I don't think people in this country think that it's very likely, but it's possible, Angela.
You know, I know the next big shoot to drop as it relates to armaments would be aircraft, most notably fixed wing aircraft. Is there any scenario or is there a scenario where you think.
The US would would go that route, make that step.
Well, so far that Biden administration and President Biden has said that we're not going to supply the Ukrainians with these spider aircraft. On the other hand, the British are going to There is a debate going on in this country. And if you look at the pattern of what we've done for Ukraine since the war began, often we've been slow saying yes, but then in the end we've done it. So I wouldn't rule out but we will supply the
Ukrainians with this air with just these aircraft. But at the moment it's not on the cards.
And Angela, give us your six months Outlook, what do you think the headline is going to be when we bring you on six months.
From now, Well, hopefully the headline would be the Russians have had to retreat under the Ukrainians have taken back some more territory.
And Angela, mister Putin, before we let go, just what do you think you know, you've done so much work with with your book on mister Putin, what do you think his mindset is these days?
Well? I do believe that he believes he's a war with NATO and the United States and that Ukraine is just a porn in this and he thinks that the US and NATO is our out to get Russia. He's now saying that you know, the war was begun by NATA, which of course is completely not true. And so it's you know, it's a besiege fortress for him, but it's still one where apparently he believes that Russia will prevail.
Just amazing. All right, Angela, thank you so much for joining us. Angela Stentz, she's a senior fellow at the Brookings Institute.
Really a good.
View on what's going on over there in Ukraine. She's the author of the book Putin's World, Russia against the West and with the Rest, and that certainly seems to be what's playing out.
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Let's talk about the Ito market.
Brian Lynch Joints, and she says of market insight at Equity Zen Brand, thanks for joining us in our Bloomberg Interactive Brokers studio. You get a gold star for coming in, not phoning it in like a lot of people want to do.
Brand. Just tell us what you guys, do it equities in here, sure.
So thanks for having me and Equity Zen. We're pre IPO investment platform, so we help both accredited investors and institutions invest in private companies while they're still in their late stages. And we also help shareholders sell their shares and get liquidity while their companies are still private.
So how's the IPO market look in particularly after some of the banking stuff we just went through.
Yeah, I would say the IPO window is not wide open, but we're starting to see it crack open a bit. As you'd mentioned, ken View, is this successful IPO that we had last week that was the largest IPO we've had in the US since Rivian in twenty twenty one. Traded up twenty two percent on its first day. So that's a good indicator for some of these companies who are sitting on the sidelines. We've got the VIS trading
or measuring more at seventeen or so. The NAZAC had a bit of a rally this year, so there are some positive indicators, but there's still a lot of uncertainty in the market even where rates are given the state of inflation and the fact that there just haven't been a lot of IPOs.
Yeah, and it's interesting, I gotta think and just listening from the conference calls for a lot of big investment banks, the pipeline is just bulging. I mean there's a lot of company because a lot of companies have they've been waiting for twelve eighteen months for this market to open up. So what are you what's your activity been as you talk to companies, as you're talking to employees about I
need to get some liquidity in my investments. Are you seeing a pickup and activity in your business because they can't get liquid in the public markets.
Absolutely, so there is huge pens up demand for liquidity. You think about it. There are over twelve hundred unicorn companies, so these companies valued at over a billion dollars three trillion in value amongst these companies, and many, as you said, expected to have an exit twelve eighteen months ago and
that just hasn't happened. So in the meantime, we are talking to a lot of companies who realize that they are only early shareholders who need liquidity, and then the shareholders directly themselves, who on an individual level are maybe trying to put a down payment on a house or payoff student loans. And on a more institutional level, you've got early stage investors who are looking to recycle capital into new investments. So there's a huge need for liquidity
and an equity zene. We're really addressing that by brokering these secondary transactions in the private markets.
Have any of those liquidity challenges though, sort of changed the calculation for folks who are considering an IPO but that are not sure yet. Have you seen a change in that sort of thinking?
Yeah, I would say the IPO market didn't seem so welcoming for companies, and most companies have been sitting on the sidelines. But I think some of the positive indicators we've seen are giving companies more food for thought. Maybe this is something that we could do in late Q three, early Q four. So we see a lot of companies putting the pieces in places in preparation for an IPO, understanding both that they have capital needs and liquidity needs.
And as we hear more of these companies confidentially filing, I think we'll start to see more of those stories happen.
Silicon Valley Bank, What did the mise of Silicon Valley Bank The trouble's there. What did that mean for your company, your market, this pre IPO trading market.
Yeah, I think one of the main things we've seen is that there's just less funding options because of this, available to private companies. So Silicon Valley Bank was the lender of choice for private companies. They really owned that market, and in their absence, there hasn't been another player who's stepped up to help these private companies who are looking
to raise debt capital. That, coupled with the fact that rates are up so capital isn't cheap anymore, has made that a harder avenue for companies to pursue that are trying to raise funding. So they can choose to raise funding in the prime imry private market most of the time, given where they probably last raised, that will be with a down round versus these twenty twenty one valuations. But
then the other option is to IPO. So there's it's a tricky decision and there's difficulties amongst the different routes, but pros and cons depending on the needs of a given company.
Well, you make a really good point though about nobody really stepping up in the loss of an SVB, and I wonder to what extent something like that. You know the fact that we continue to talk about we're not in a banking crisis, it's totally over. But given that we haven't seen a kind of another SVB pop up, does that make you question the idea that the banking crisis is totally well and done.
Yeah, I'd say it's too soon to say that things are. You know that it's completely in the rear view mirror. We're seeing that with the First Republic. You know, it seems like there was less coverage of that or you know, didn't have the same you know, wow factor as svb's
collapse did. But a lot of these private companies, I think it was a good lesson in you know, how you diversify your banking partners, how do you make sure that you have the right risk measures in place to survive these types of events, and how do you sustain your capital for periods of volatility.
You Know what I noticed during my career is my friends on the West coast in Silicon Valley, it's much more of an equity culture. They're much more comfortable with taking equity risk and form of stock options, all that type of stuff, whereas here on the East coast, my Wall Street buddies just give us the cash.
I don't need any stock. I got enough exposure.
So but on the West coast, I mean, they're given all these options and restricted stock units and.
All this stuff. I don't know what it is, but that stuff expires.
What do I go back to my employer and say, hey, this IPO windows closed. I got all these options and RSUs and things.
Do you re up them? What happens or did they just come to you and say, find me a bit for these things.
It's a big problem that we're seeing a lot of these companies that are still private, to your point, have options that expire after ten years, and some of these companies have been private for ten fifteen years, however long it's been. So we're talking to both private companies who are looking to put better programs in place to facilitate liquidity, and then the employees themselves, who are taking it under their own portion to go out and find a liquidity solution.
And I think, to your point, there's a need for liquidity so that employees can actually feel the value of these shares and realize, Okay, these are worth something. So maybe I'm not getting the cash up front, but these shares actually have value and there's a reason behind this sweat equity. So I think that's a really big important consideration where the secondary market is helping.
People still want I mean, are you sensing a change in I don't know, people maybe want more cash less stock or do we still have that Particularly with some of the you know, the technology companies, they really do have that equity culture. If you will, that stock option culture, I can get really hit it big. What are your sense that people, maybe even after the pandemic, are saying, I like a little bit more certainty in my life.
Yeah.
I would say that this current market environment has decreased risk aversion generally speaking. So if that's for employees, for investors, for the broader population, and I think.
It's not it used to be.
Maybe this thought of you join a startup, you're going to get equity, it's going to be worth millions, and you know that's the story that was sold and that's not going to be the case for all companies. So even as an employee, similar to what investors are doing, you maybe have to do a bit more due diligence and what is the runway for this company, what is
the growth potential, what do their financials look like? And is this where I want to invest my time and my sweat equity with the hope that that's worth something one day.
Right, Like if you look at a BuzzFeed, for example, I think a lot of people were excited about the IPO, but then oh, we have to cut costs, so the news division is over.
Right, exactly, So is there liquidity? How is the liquidity in your market? Which is kind of this pre market trading of some of these stocks.
Yeah, So what we saw a lot of last year was that the bid ask spread was just really wide because sellers were still holding on to these twenty twenty one valuations and saying I'm not selling, you know, my shares at a discount, where investors were saying, look, it's what's happened in the public markets. Companies are trading down thirty forty percent. I'm not buying at these prices. So it was a bit of, you know, a back and
forth between the two. And we're at a place now where markets are being made more and trades are happening on average out of forty one percent discount to a company's last funding round, on our platform. So that's a bit of where the market is as sellers capitulate a bit and understand that the market has certainly changed.
That's what you call a down round. Brian Lynch, thank you so much for joining us. Really preciate it, Brion Lynch. She's head of market insight at equity Zen kind of dealing in that kind of pre ipo marketplace for a lot of these companies and a lot of individuals looking for some liquidity with their stockholding, so always good to get an update on that market.
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Let's talk commodities. So when you want to talk commodities, you got.
To do a couple of things.
GLCO go for those of you playing in front of a Bloomberg terminal, that gives you the global commodities prices for energy, metals, ags, all that kind of stuff. It just puts it up on one screen and very helpful to me. And then the second thing you got to do is you got to get a couple of experts from Bloomberg Intelligence, and we got them in studio, both of them. Mike McLoone senior macro strategist for Bloomberg Intelligence
based in my maybe. We got them up here for a week, so we pull them in this studio whatever we can. Fernando Valle, he covers all the energy stuff for Bloomberg Intelligence. So we got YouTube gentlemen here with us. Let's start with oil. I don't know, let's go with you, Fernando. I got WTI crude oil seventy two bucks a barrel. It wasn't eighty when your friends at OPEC cut production, but we're.
Back down to seventy two.
What's the outlook for kind of crude and across the energy space.
Well, today we got some really positive numbers on the gasoline and diesel side that can probably give it some give it a little bit of respite from the pain that it suffered since the OPEC cut, and especially because there's the highest net short position in derivatives for both WTI and diesel in over three years. So we see a real coiled technical situation that could generate some short term positive momentum. But you know, as Mike has talked a lot and myself as well, longer term is really
about the economy. In the economy is showing signs that it's slowing, we still don't see the FED pivoting to cutting rates. They may slow down their hikes and ultimately that will impact consumption and that will lead to oil prices to struggle to break over eighty through the remainder of the year.
And Maddie, here's the Mike McLoone call. As I remember now may have changed long gold, short oil.
Still and copper too. Long gold, short oil, short copper. It's basically long gold, short hour commodities.
Long gold short commodities. Why am I doing that?
The bent towards recession, so let's liquid.
It tells us.
From commodities right now, Copper is basically on the cust of dropping on the year. It's about unchanged and gold's up eleven percent. Now some of that is because we have this budget impass coming out, but it's the current trajectory and the Fed is still tightening, has been tightening typically for this to reverse, it's an indicase of going to this recession. We need massive amount of liquidity from the FED long and variable lags from easing, and they
haven't even started that. So from a commoditis standpoint, I look at crude oil down ten percent on this year, could actually drop another twenty or thirty percent only if we don't head for recession and our colleague on along from Blueberg intelligences, that starts in July, and then I look at it is what stops that, and I'm afraid with this credit crisis, it's just going.
To get worse.
Can I ask the dumb question here? Gas up three percent in the CPI print today, But based on what you're saying, I think, yay, maybe my gas is going to get cheaper now.
So let's go to PPI tomorrow when you want to talk commodities. Fernando smiling. If we can't see him, I can't here, can't see him on radio, but producer pricing is going to come tomorrow. That's a high beta version of PPI. It's basically about two beta. It means two times of CPI and it's dropping at the fastest pace in history. It's highly correlated the commodities. Commodities are collapsing.
I think it's going to mimic. The lowest ever, which was from July year over year measure was July two thousand and nine PPI that month that for that year measures down six point nine percent. We're heading towards zech is when we get to July thirteenth this year, it'll measure from the peak it'll be for June PPI. That's when crudeill peaked and commodities peak last year. So what we're seeing is a major flush and indication of a
lack of demand pull for nano mention. It might have supply issues, but that lack of the world's tilting towards that recession. Commodities are reflecting it. So I think you're fully going to see more that deflationary trends.
All right, against my better judgment, But I'm hearing that you two guys are working on some joint research together. I got an energy analyst who actually covers companies for living commodity strategist.
What kind of trouble you guys getting into.
Well, we're really discussing the outlook for commodities based on both you know, Mike's top down in my bottoms up analysis, and you know, speaking on the supply side, you're also because of the lower energy prices in Europe, you've had an increase in refinery throughput in Europe. What that means is we're going to get more imports into the East Coast. Remember, we can't really ship a lot of products from the Gulf Coast.
And I get like the President, I'm fixing that we have.
My vote, okay, and so we get it a lot from Europe. And with that utilization going up, uh, then chances are that we are going to see lower gasoline prices in the East Coast. But again, the biggest driver of gasoling prices is really oil price. And then the only caveat that I say is that we have the
biggest net short position in three years. When we get positive numbers like we did today, that could lead to a temporary unwind because everyone's expecting negative numbers and then when they don't come, they have to cover their shorts and that can create a short squeeze in higher prices.
But that's temporary.
The fundamentals are really not there right now. As Mike was mentioning on the demand poll, and then higher supply.
So I can fill up on that. And we're going to probably be calling President Biden a crudel trading maestro, because when he released the SPR last year, a strategic got it, thank you?
Which are I just found out our bunch of k under underground in like Oklahoma and Texas or Louisiana or something.
Good place to store cruel and sold is salt salt caverns.
No idea about that. It's a commodity thing.
But the key thing that we were published on is Fernando. His bottom up always helps me with the data I get into the macro. And I like to point out if I've been focused on the massive over production of North America, US and Canada crude oil liquid fields, member, I come from the farm. I have to take ethanol versus consumption that right now on an annual basis is running about one point seven billion barrels. That's about five
times a current SPR. That's not an annual one year so back at the the crisis, remember when we had the financial crisis, it.
Was the opposite.
It was about deficit of four billion barrels. So we have a massive oversupply in the US now Fernando points out, that's the macro. There's issues with with you know, with exports and imports, and you know it's a big country in Canada. Crude ol comes exports to the Gulf. But the fact is the SPR is not eating anymore except for things like hurricanes, because we are no longer in net we're net exporter.
So all right, how does the government restock this spr? Did they send some guy downe in the pits and he starts buying oil.
Well, here's the way I suggested.
That's why he's a maestro. When kamandis aren't backwardation, which means the current price is higher than the further out price, it's best to sell that. And that's what President Biden did. Enough, if you're a trader, you can on paper by those futures and reload on paper and just take the livery. But he basically sold an average price last year of Crudell's ninety three dollars of barrel. So it implies a
rough math that we brought in twenty billion dollars of revenue. Now, if he buys back, if we buy back all those barrels, which is about two hundred and twenty million barrels. I think Fernano can confirm that that and be a net cost of about fifteen billion dollars. So net net, the president would have made five billion dollars if we do that soon.
Wow.
I'd never thought about it that way, So I guess we'll see that.
The only thing I do on energy, I mean, you guys do all this stuff.
I just look at the daily national average gasoline price for America comes from American Automobile Association. It's three dollars and fifty three cents, starting to trend down a little bit. That's my energy call. But you guys are the experts. We appreciate you coming in. Fernando Valley and Mike mcglohan, they cover all this energy stuff, all the commodity stuff. For Bloomberg Intelligence, they do some great joint research b I COOMD for the commodity stuff, and BIGNTOG that gets
you all the integrated oil stuff. So you get that on Bloomberg Intelligence.
You're listening to the tape cats are live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in app, Bloomberg dot Com.
And the Bloomberg Business app.
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Let's talk about the hotel business kicking into the summer travel season.
See what's happening there.
We can do that with Patrick Pacious, CEO of Choice Hotels. That's a New York Stock Exchange listed company. CHH is a ticker to put into your Bloomberg terminal. I'm taking a look at it right now. It's done about three point six percent today, up about eight percent year to date. It's got a market cap of about six point two billion dollars. Patrick is the CEO, former Navy officer, so we thank him for service. But for me, the highlight of his resume is he is an undergraduate of the
Duke University. Okay, so he can stay. Patrick, thanks so much for joining us here. I know you guys just reported some results here. What were the highlights.
Yeah, so we had a very strong first quarter. Actually record revenue and record earnings. RevPAR which is revenue per available room, that's the earnings metric we use at the hotel space was up six percent in the first quarter, and that's pretty remarkable when you look at last year, our first quarter numbers were up ten percent over the
pre pandemic levels. So we really see a significant pickup in both demand and in rate in our business, and it's flowing through to our hotels like comfort in and quality in Patrick.
Just to ask the Bloomberg question, you guys are struggling a bit down the most in seven weeks here. What's the market getting wrong in its reaction to your earnings?
Yeah, I think the market is probably trading a little bit more on macro than it is on looking at the bicro and so of what's going on. You know, when we talk about our long term fundamentals in the travel business right now, there are I call them the four rs. They're rising wages, retirements, remote work, and the rebuilding of America that is going to bring more room nights and more customers to the mid scale hotels, the economy hotels, the extent is stay hotels that we have.
You look at rising wages. You know, in February, the Atlanta Fed Tracker shows the average median American salary is six and a half percent higher. Security costs of living adjustment was up eight point seven percent, so consumers have more money. People are retiring more. There's three and a half million people every year who are arriving at retirement age. They want their dollar to stretch further, So staying at a comfort in or a quality in when they get
out on the road is important. And then you look at remote work, which has really been pretty interesting. It's spreading out, particularly leisure travel demand as well as business travel into the shoulder days of the weekend. So we have seen occupancy gains on Thursday night and Sunday night, which have traditionally not been part of the weekend of business.
And then the rebuilding of America, whether it's the Infrastructure Bill, the Chips Act, the incredible amount of manufacturing construction that's going on across our country as companies are looking to bring the supply chain back home. We're really seeing all of that create demand in the long term hotels that are in our portfolio.
So looking at your portfolio more, I guess on the affordable side, I guess you guys would characterize it, but I know you've had some plans to kind of lean in a little bit into this extended stay side of the business. Talk to us about that strategy and what the competitive landscape looks there.
Yeah, it's really a fortunate mismatch between supply and demand. So demand for extended stay product, meaning a hotel room that has a kitchen to it, has a living area to it, is really double what the purpose built supply is in the United States, and so we have really
leaned in, particularly in the last five years. We're the growth leader in that segment brands like Woodspring Suites, Everholme Suites, Mainstad Suburban and it's really for people who are staying twenty to thirty nights in a location, and the demand drivers for that are things like traveling nurses, folks who need to be on site in a particular location for more than a week's time and really having that mid mid price product for them is something consumers are looking
for and businesses are looking for. And we've got some great brands to meet that need.
But I mean, you've got some competition there, Marriott, Hilton, Hyatt, they're there too.
How do you position yourself.
Well, we really position it with we have a proven operating model. So it's one thing to say you're an extended stay hotel, but for us, five nights is not an extended stay. We're talking twenty nights, and that's really the base of business that we have in our hotels.
We have a bit of a first mover advantage. We have a pretty effective install base of over four hundred hotels, and we've been growing the number of hotels in that segment at double digit compound annual growth rates and we expect that to last for the next five years.
Paul brings up a great point about competition though, and the long term stay piece makes me think about Airbnb. Not a great outlook from them today. Is that good or bad news for you?
You know, they really don't compete where we do, so there I think their average daily rate from a year ago was like one hundred and fifty dollars. Ours system wide is more like ninety eight dollars, so we're playing in a lower price point. We also play in a lot of secondary and tertiary travel markets where there's just less Airbnb inventory. Airbnb tends to be more urban, more destination type driven. And then our length of stay for our transient hotels is usually one to two nights, not
where Airbnb is more like a week. And then extended stay is on the other side of the spectrum. As I said in that twenty night range, so we're not really a direct in competition for them at that same price point, so it gives us a real opportunity I think, to go after those consumers who are looking to stretch their dollars.
That makes a lot of sense, and thanks for explaining that. But I do wonder Airbnb's saying, yikes, we're expecting a decrease in travel. Are you concerned about that broader outlook impacting you at all.
We're not looking at long term decrease in travel. In fact, we just had two weeks ago now about five thousand of our owners and general managers to together at our annual convention. They come from all over the country and
actually all over the world. They're pretty optimistic and as an industry, because supply growth has been fairly muted over the last two years, demand is going to hit record levels in twenty twenty four and twenty twenty five, So we feel really confident about the long term health of the consumer traveling, particularly in the in the midpoint mid price range where our hotels compete.
Hey, Patrick, I'd love to get your thoughts on kind of for your brands, your customer, whether it give us a sense of you know, vacation traveler, leisure traveler versus maybe a business traveler. What's your makeup now and what trends are you seeing with those two?
Yeah, our traditional mix is about seventy percent leisure travel, about thirty percent business travel. As I said, the size of the pie of leisure travel is getting larger. It's driven by those factors I talked about, you know, remote work and retirements and the like. But what we're seeing
also on the business travel side. Our industry verticals are what we call well, we play in both suits and boots, but it's really the boots side of the business, the construction, logistics, transportation verticals that are really expanding right now with a lot of those trends I talked about earlier.
I wonder about the business travel side because when we talk to some of the airlines, they've said it's tough when business travel decreases because those are the big spenders. Employees are able to spend a little more when it's not their money being The idea is the decrease in business travel hitting you guys at.
All, it's not. It's really we're not back to the twenty nineteen levels yet, but we still are fairly close. We seem to inch closer and closer to it each each quarter. You know, when you look at the airline business versus ours, we're primarily in drive two locations. We have six thousand hotels in the United States. Four thousand of those are within one mile of an interstate exit.
Cracker that's a cracker bottle.
Just travel gets tougher, consumers are more willing to get on the road, and we're in all the destinations you want to go to, and we're everywhere along the way. That's the way we think about it. So it really gives us an opportunity, I think as people might turn away from air travel and more into drive to locations, for us to pick up business along the way.
Patrick, you mentioned kind of a limited supply.
Does that lead you to build morete motels around the country.
Certainly that limited supply in that extended stay segment, that's exactly what we're seeing. It is probably the highest demand for hotel development right now is in that segment. It's as you mentioned, there's a lot of other competitors who are trying to get into the space, but it is something that we are continuing to see a lot of
interest where we play. The price point we play out to build a mid scale extended stay hotel is probably about a twenty million dollar all in project, and so our franchisees generally tend to put about fifty percent of the equity in, so the amount of debt that they have to take on is not as significant as is
if you're building a luxury hotel. So we are seeing our pipeline about nine hundred and twenty five hotels today and our pipeline, and about fifty percent of that is already financed, either because it's an extended stay hotel that's already about to open, or we do a lot of conversions from other brands and independent hotels into our brands, and generally that dollar amount to convert from another brand into our hotels is a much smaller check to write
and usually self financed by the asset itself.
Gotcha all right, Patrick, thank you so much for joining us.
Really appreciate getting the update on your company and on the hotel motel space. Patrick Pacious, CEO of Choice Hotels.
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