Paul Sweeney on Amazon's New Delivery Service

and deliver your package is more quickly. Here to tell us about Amazon's foray into the world of delivery directly to the customer is our own Paul Sweeney. He is the director of Research North America for Bloomberg Intelligence. And Paul, does this mean that you can't get your brown boxes fast enough that Amazon has to go out and have its own planes deliver them directly to you? Yeah? It certainly is, particularly around the holiday time when you know

they really their system really spaces capacity issues. So this is just another example of um, you know, Amazon trying to get more control over the logistics of its business, uh in the delivery of its products, you know, trying to get more products to consumers faster. So we see them make significant investments in their distribution centers, their fulfillment centers, and they're even getting into the transportation business, uh, you know,

potentially with trucks. They've actually leased a lot of planes to compete with FedEx and ups and even cargo ships. So Jeff Bezos is putting his money where his mouth is. Well, can they really create a much more efficient system of distribution than the FedEx is of the world, considering how long they've been in the business and how much reach they have. No, I don't think so. I think FedEx and and ups will still be the backbone of the

delivery system of Amazon products. But you know, there's certain times of the year in certain markets where I think Amazon feels like they need a little bit more flexibility than what the existing to distribution platform can provide them, so to the extent that they can fill in some of the cracks, um, you know, maybe provide a little bit more flexibility, particularly during times of peak demand. UM, whether that's in terms of transportation or warehousing or fulfillment UM.

I think Amazon is just trying to see if they can supplement what's already in the marketplace. Hey, Paul, wonder if you could tell people How does it work that if you're a third party seller through Amazon and you have Amazon store your products at their warehouse? What happens? Explain how that relationship works and the connection between this this initiative. Sure, so the fulfillment by Amazon or fba

is has actually become a huge business for Amazon. More than half the products that they sell on Amazon dot com or from third party providers where Amazon does all the warehousing and distribution of those products. Uh. So you may be going to l ob dot com, but a lot of the logistics warehousing uh in this distribution of the product is actually handled by Amazon for a fee that gives Amazon a greater ability to to deliver more products um faster Uh two more consumers. And that's kind

of you know, what has been their value proposition? Paul? How much more is Amazon spending on shipping now than say a few years ago as it tries to ramp up its promises of one hour delivery or one day um, a lot of money. Um. You know, every single four we see this company, Yeah, every single quarter was either company put up popline revenue growth, which is what the investors are looking for north of um. Yet we see the expenses for this company grow also North So where

are those investments going. Those investments are going, you know, like we've seen over the last several years, two more fulfillment centers, more warehouses, more trucks, more people again to try to get the products closer to the end of market. Um, and all that takes a lot of money. And Jeff Bezos has you know, has the benefit in the mark place where investments have given them a very long leash to develop that business at the expensive near term profitability.

So uh, you know, I think we should expect to see Amazon continue to make these kinds of investments, uh in their business, um, you know, and you know, hopefully profits will come down the line. Hey, Paul, I don't want to be too simplistic about this, but would this be positive for companies like Boeing and GE companies that make aircraft? I mean, I remember last year, right, didn't Boeing, Uh they agreed to operate an air cargo not Boeing,

I beg your pardon, the Air Transport Services Group. They would did an air cargo deal with Amazon twenty Boeing seven six seven freighter aircraft. This has gonna be good for airlines pilots and everybody associated with the aerospace industry or am I wrong? Uh? You you're right? Um. I think as more and more product um, more and more retail sales you know, are done online, that really puts a lot of stress on the distribution system. You're not just you know, going to the local mall and buying

your product. You're relying upon a global distribution system to get it to you. And that includes aircraft. And so, you know, George Ferguson, who covers the airline industry for US, has been talking about some of the strength in the aircraft leasing market as some of the you know, a positive long term play, uh drive drivative play on the growth of e commerce. Paul Sweeney, thank you so much for joining us. We always love speaking with you. Paul

Sweeney is director of North American Research for Bloomberg Intelligence. Well, the world's business jet fleet continued to grow last year. In two thousand sixteen, it expanded by about two and a half percent to more than twenty one thousand aircraft. And here to tell us about the industry and some of those twenty one jets is Brad Stewart. He's the chief executive of exo jet. Brad, thanks for being with us. Let's jump right in and tell us about the you know,

an exo jet and the aircraft market. Before we get to the demand side, I want you to tell me about the supply of jets and what you're seeing in the industry overall. Well, great to be back with you, Pim. Uh, you know, these are these are different questions that um, you know, I think are long term trends that you've seen really since the global financial crisis. Uh. Planes, as

you said, there's a lot of them. Uh, there's you know, in my opinion, always been too many the O E MS, Bombardier, uh, text drawn you know, you name it, continue to manufacture planes and and that produces this this glut that exists. What you've seen in the last six to twelve months, that was a little bit of tightening and what they call new inventory. So planes that are you know, three to five years since make you're seeing a reduction in

the amount of airplanes there for sale. Therefore a little bit of tightening in the in the price points, and overall, I think you're seeing a drift towards a healthier supply demand marketplace. But the long term trend of there being too many airplanes out there for the level of demand, both for full airplanes and for charter um continues. Let's

talk about the charter market from the demand side. I'm curious, have you seen an uptick in wealthier individuals looking to book private flights or or what sort of the trend there no doubt and say what you will about you know, the social impact of the wealthy getting wealthier, but um as um as we've seen over the last couple of years, demand for private aviation, the hours flow and the cycle's phone is up two to three times GDP. So we're seeing you know, five six seven percent, depending on how

you want to plice the marketplace. But there's no doubt that consumption of and demand for private aviation is continuing to grow at at a pretty sustained clip. Right. Can you give us some sense, can you give some numbers to this as far as the number of flights on privately privately chartered UH aircraft or just a number of people who normally do this. It's it's staggering actually when when you step back, so we think in terms of hours, we think that sort of accounts for you know, short

flights versus long flights. Last year, private aviation flew about three million hours within North America. UM, and we're seeing that that number up, you know, like I said, five or six percent year on year. So it's a it's a massive number at a wide swath of you know, everything from turbo props at the very low end flying you know, forty five minute to an hour flight up to you know, your ultralong range G six fifty Global

Express to so you know, seven X type aircraft. UM. But but a big market flying a lot of hours, growing quickly. I was going to ask you which in more demand, but I guess you're telling me that everything from turbo prop, you've got the small cabin, mid size, large cabin, they're all in demand. Well, there's a little bit of an interesting kind of barbell seam that you're seeing. UM. And I think the jet smarters of the world, our partner wheels up at the low end, are driving significant

demand for the for the smaller cabin plane. And then you're seeing the global fortune hundred, the wealthy, the global elite really drifting towards this ultra long range large cabin. So there's a little bit of a barbell in the growth profile. The smaller planes in the in the much larger private jets are the ones growing, not at the expense of but you know, there's there's clearly a difference

between the midsize and super midsize. Yeah, there's there's there's definitely a difference between the Dessault seven X yeah, and maybe something else. Um, you know, Brad. One of the questions it always comes up, I would imagine, is air traffic control and the f a A and the effort on behalf of the government perhaps to privatize, uh, the air traffic control system. What have you heard and what are you hearing? Yeah, there's a bunch of different themes

that go on within that. You know. The first is that the technology. So I think most people who follow the industry closely know that there's a there's a real focus on modernizing the technology. So there's this requirement by that all planes that are for for charter or higher or on a d s B compliance. Um. So there's the right actions are being taken. Um. Not going to drift into the politics of whether, um, you know ATC should be privatized or not. In my opinion, they're doing

a good job they're making the right steps. Is it as quick as we'd all like? Um? You know, I don't think it really ever is um? But but it's okay. But Brad, there's a larger question here, which is traffic in general can be really tough, especially at popular airports. How do you get around that with chartered flights? Well, I think this is one of the big benefits of flying private. So um, you know, look at the major

markets the Try State and southern California. What you see is most private aviation flights, the vast majority in fact, or actually going into airports that are not either um commercial at all or certainly not dominated by commercials. So flying private actually works around that quite a bit. Um.

You know. Obviously there's a little bit of a hangover effect when there's congestion at l A X or JFK, but by and large private sort of circumvents that that sort of pinch point, if you will, Thank you so much for joining us. Brad's Stewart, chief executive officer of XO Jet talking about chartered aircraft and pim Fox, let me just tell you eight thousand five dollars an hour for some of these of flights or a flight hour, so not cheap. But evidently there are lots of people

willing to uh, willing to sell that out. But it comes with pillows, blankets, and I think whatever you'd like to eat. Yeah, I don't think that's the peel. I mean yes, but I think that it's the idea of not having to take your shoes off, and take your jacket off, and and have somebody patch you up and down and then still might be three hours late because of a delay him. You know, there was a report

put out by JP Morgan that caught my attention. It was by quantitative and derivative strategist Marco Kolonovic, and he was saying that he is expecting a potential quote great liquidity crisis when the central banks start withdrawing cash from the system, shrinking their balance sheets, possibly as soon as early next year or later this year. This will lead off a substantial crisis in markets. And here to weigh in on that as Bruce Biddles, his chief investment strategist

at BAIRED and he joins us from the lovely Sarasota, Florida. Bruce, thank you so much for joining us. Do you agree with this assessment that there is the potential for a quote great liquidity crisis. Well, I'm not so sure I would use the term great, but I certainly could see a liquidity problem um eight or nine years ago when the when the central banks began quantitative using, they were adding liquidity to the system. Now the US and Canada both have withdrawn from that, So now there's a slight

tightening there. But if you look at what's going on in Europe and Japan and elsewhere quantitative using, he is still robust and adding liquidity and very large amounts to the system. And a lot of that liquidity that has generated overseas find its way into our markets as well. So at this point I don't see a problem. Now.

With that said, if the European central banks all of a sudden realize that their economies are surging and inflation is beginning to resurface, and they begin to cut back, then I can see certainly where the markets could be in jeopardy because quantitative easing in zero percent indust rates have been a very very strong support for the market throughout most of this pollmarket. Do you believe, Bruce, that if indeed that accommodation is withdrawn, that corporate earnings are

going to more clearly drive asset prices. Well, there's there's no question about that. I think that's almost by necessity giving the evaluations we're seeing in this market, I mean evaluations today or as so as we've seen in oh in two thousand, two thousand and seven. I mean, they're really stretched here. So it's going to be um up to corporate earnings to close that gap. Now. I think that why the markets are acting so so so powerful right here in the past month or so is because

the economy is stronger than most economists believe. You can look at the I s M numbers today, the non manufacturing numbers the best is two thousand and four or five. The manufacturing I s M number the best two thousand four or five as well, and um and that's before you get the potential for a tax um cut here,

which would spur the economy even further. So the markets are really I would say, depending greatly corporation, you're coming through in the next UM year certainly given these evaluations, and I think given the economy and what we're seeing in terms of inflation now we're starting to see some

pickup in pricing pressures. So if if these corporations can can indeed raise prices, and we saw that today with Netflix, if they can indeed raise prices and maintain or increase their top line growth, then you're looking at a very very strong bottom line growth potential. Bruce, are you thinking in line with many others out there that in this environment US stocks? Good bet. Yeah. I've been a proponent

of the US market now for quite a while. I know the European markets and some others are out performing this year, but that's been the exception for the past five six years. The US markets have out performed everybody, and I think it at the end of the day that's going to continue. So, Bruce, is the best way to get exposure through a broad index fund of US stocks like SP five hundred, tracker nasdac UH and just go through it that way? Or is this more selective time?

I think it's a more selective time. If the market is being driven by um stronger economic growth, then you want to be in those sectors that are that will that will benefit the most, and of course they would be the material sector, the industrial sector, and if interest rates are going to go up, and be in the financials as well. And if you look at the last six months, the leading sectors in the market have been

those that are closely tied to the economy. Bruce, you know, I know that you are a veteran of the industry. You worked at J C. Bradford, also at Thomas Haven Bots treating options. In your experience, what advice or guidance would you give people to separate the news, however awful or terrible, or catastrophic or upsetting it might be, from what actually drives asset values. Well, UM, money is a lifeblood of Wall Street, and that's what eventually drives the markets.

It's a supplied demand situation, the same it would be in business and UM with all little liquidity that the Central Bank have added over the years, UM certainly there's been a lot of demand side build up and also a lot of domain has come from corporate buy backs

the last five or six seven years. And if the tech proposal is going to get to go through this year or early next year, and we're going to bring back two or two and a half trillion dollars, some of that money is going to find its way into buy backs again. So with that in mind, I think you maintain your asset allocation where it is despite these

high valuations. So Bruce, when you come into the office every day in a period like this, we're seeing such low volatility and such low movements, small movements in markets broadly. What are the first five things you look at? Well, two things I think the most important for the market. One on a particularly short term basis, and that is the markets typically don't get into trouble unless investors become

extremely optimate stick and um. In this ball market since two thousand and nine, I mean, optimism has come in from time to time, but it's never been widespread or deep deeply seated. As soon as the market pulls back for a couple of days, all of a sudden, sentiment returns to uh. There's skepticism around right pessimism. What I'm looking for here is if we're going to see a top in the market anytime soon, and a lot of folks are pointing to two thousand and eighteen, is being

um potentially problematic. We look for either sentiment to become excessively bullish or to interest rates the rise significantly. And and so those are the two things I'm watching, particularly rates now because for the first time we're starting to see some pricing pressures. The bond market is starting to react to that a little bit. But I think if the ten uere yield got above three percent, I think

that would be a big negative for the markets. Above three above three sent yes, No, And you do believe that the markets already priced in this tax reform or tax cut because it continues to go up every day. So I mean it's getting priced in, and probably when it when it's finally passed, it will be fully priced in. And I wouldn't be surprised if the markets reacted negatively. Then all right, I want to thank you very much for joining us. Bruce Biddles is the chief investment strategist

for Bear. Right now, I want to turn our attention to Facebook. There have been a lot of pretty scathing comments made about the company by congressmen and others, particularly about its lack of regulating some of the Russia linked advertisements that targeted a wide variety of different people leading up to the October US November you a selection. I want to bring a David Garritty, CEO of g v A Research, to talk about what the implications are for

Facebook going forward if they are regulated more tightly. This is going to be really expensive, won't it. Well. Certainly, Facebook as a company has tried to focus on having a very lean model, very much depending upon software algorithms in terms of managing its platform, and what's being called for here is for Facebook really to put in place more of a human element so as to effectively review and curate content that's actually going on to its site.

So from that standpoint, the human costs of running this business arguably are going to be going up. Certainly, they don't necessarily process information as fast as Facebook might like, so it might slow things down from the standpoint of a user experience. But relative to the issue of interference in political campaigns, I mean, this is a necessary step. Well, David, you think it's going to be successful, Uh, that remains

to be seen. I think that we're in a situation here where, you know, Facebook obviously has grown to be a platform where you've got two billion average monthly users on it um. You know, is this a platform that's potentially grown out of the ability of management to control it um, you know, away from issues of just you know, bringing more people on board to review and control. I mean,

that doesn't seem realistic, does it? I mean, come on, you're gonna get human beings to review all the stuff that's on the Internet, because it's not just Facebook, you know that, it's also Google, it's any social media site. Because once they start to aggregate the information, it's incredibly difficult to figure out where it goes, and no one is able to even figure out whether the information is

accurate or not. Well, I mean, certainly that's you know, these are all very legitimate points, and the question is, you know, can we develop technology tools to assist these people to essentially move along and have greater accuracy at a faster rate of speed. There are other issues to look at for Facebook away from just the issue of the election interference in the Senate and House Intelligence Committee activities.

We've also had movement taking place in Congress with regards to prosecution for sex crimes or providing information to support sex trafficking. There is a movement in Congress to allow a law wherein state attorney generals and district attorneys would have the ability to sue Facebook as well as other Internet companies, other social media companies. Obviously, this is something

that raises a significant litigation risk for the company. So we're not only looking here at an issue where we need to put more human elements in place, but some of the litigation risk profile around Facebook maybe materially changing as well. David, Are any of these risks to Facebook's fundamental business model? Are any of them being priced into

its stock price? I think we're still in a situation right now, getting into the fourth quarter of the year where you know, you've had a very solid performance out of what people have been calling the fang stocks, of which Facebook clearly is the first. And from that standpoint, maybe if we see a sell off here, it may

not happen until the end of the year. But I think right now we're seasonally at a point in time where portfolio managers are very much you know, inclined to continue favoring their winners, and Facebook so far this year has been a winner. So I think if there's any precipitous fall off, we may not necessarily see it immediately, but we need to set ourselves up to think about what's going to happen in the first quarter of well. I mean, because David, I'm thinking about it from from

one perspective. Yes, we can't really oversee everything that goes on the Internet. But Facebook could have given a better disclosure about which, uh funding sources were behind different advertisements, right, I mean, that's been sort of the proposal that's put out there. That is expensive, and that would also raise questions about the efficacy of the ads in that given that framework. Meanwhile, litigation risk is is massive and compliance

officers required with that. I mean, it seems like those are real imminent risks. They are eminent risks, but they do depend upon how quickly you know, Congress is going to be acting, and as we know, Congress doesn't necessarily move all that quickly. Uh, these things take time. But hence the point. I would also say that look forward more towards the first quarter of you know, these are discussions that are unfolding now how this is implemented into regulation,

into possibly new legislation. That'll take time. So we have to keep a very close sign what's taking place on Capitol Hill as far as what the risks are for Facebook stock in the first half of next year. All right, well, let's look at some of the risks, because you know, November first, we're all going to be watching hearings because Google, Twitter, Facebook, they've all said that They're going to be appearing at a public hearing UH in Washington to address these very issues.

What would do be the stock valuation of let's say Facebook, if it was in some way a regulated utility or was considered a public utility. I mean, it would be a very profitable utility. Twelve and a half more than twelve and a half billion in annual profits on you know, just north of thirty three billion dollars of sales. That's

a pretty good number, no, without a doubt. But the issue you have to look at here is it would be not just a regulated utility in the United States, it also on all the other markets where it's operating. So from that standpoint, you're looking compliance costs which are going to be unfolded across its global operations. And you know, arguably, is it going to serve to slow the growth rate for Google? I mean for Facebook, Um, that may that may actually happen, but I think it's certainly going to

cut into what their profit margins are. And I think, you know, if it does service slow the growth, then you see the multiple start to come under pressure. But I think you know, near term earnings expectations for the third quarter, I think you are safe for the fourth quarter probably as well. But it's more in terms as we look forward towards that we have to take into account these changing elements and how do they affect the evaluation. David, have you taken note of a change in tone by

Facebook's leadership as some of these issues become front and center. Well, I think in this regard, you know, if we go back and see what Mark Zuckerberg, Facebook CEO had said after the November twenty team election, when he said, that's pretty crazy idea, you know, if Russia was actually meddling to where he is now, I think we're in a

situation where management is really behind this. They need to get themselves out in front and basically say not that they're just going to hire a thousand people, you know, to try to review what's going on in the way of ads and such and content. But I think that there needs to be something more strategic being done by Zukerberg. This is going to be a moment where he really needs to mature, arguably as a leader, because clearly he's very much under the scrutiny of Congress, and he's under

the scrutiny of other governments. Elsewhere around the world. You mentioned we're talking obviously about Facebook. Is Google? Do you believe in the same area on Twitter both. I mean, all three companies that are being called to testify in public before the sent Intelligence Committee on November one are

clearly very very much in the crosshairs. One might argue though, that with respect to Facebook, and to the extent to which you know increasingly high percentage of people are depending on Facebook as their primary news source, that it's Facebook that's really probably most in the cross here's coming out of this in terms of these three companies. I want to thank you very much for spending time with us. David Garty, of course, is the principle of g v A Research, and he spends a lot of time on

you analyzing the tech sector. 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.