Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney alongside my co host Matt Miller.
Every business day, we bring you interviews from CEOs, market pros, and Bloomberg experts, along with essential market moving news.
Find the Bloomberg Markets podcast called Apple Podcasts or wherever you listen to podcasts, and at Bloomberg dot com slash podcast. I get to break to our next guest, Dan if she covers Dan, it's Tritty's birthday. He's a tech Yeah, he's a kick geek, so it's not a geek. What's nerds and geeks? Totally? Totally he's into the tech stuff. And we got to start with what he's wearing today. This is, in a word, disturbing. We've got powder blue kind of pants and sport jack and then a late
green shirt. It's very eighties. Prom I love it. I to be warm outside today. It looks good to me. It's spring. It's it's all mindset exactly. It's all my set exactly. So what was your mindset?
Dan?
I have some web bush on the Tesla numbers here the stocks off about seven percent.
Yeah, I mean the outfit's at more positive than my view of what happened with earnings because it was all about margins. I mean, demand has been pretty robust since the price cuts, but margins twenty percent was the magical threshold. Came in below that, and they sort of kept things sort of close to the chest in terms of what they were really talking about margins going forward. That's why the stocks off because the worry here is that if they continue to cut prices, margins continue to go down.
That's key to the multiple.
But they can is the big deal?
Right?
Do they have to or is it that they can? Are they doing this because they have to drive demand or is it because they can inflict pain on general motors in Volkswagen.
I think it's eighty percent because they can twenty percent to ultimately catalyze demand a soft macro because I think the way Musk and Tessa are looking at it, this is a flex to Muscles moment. It's essentially game of thrones and electric vehicles and Tasso recognizes you got be an iron fence around that install based protect continue to go after marks. But with that said, the margins, they have massive margin flexibility over traditional auto but also testa
is held do a higher stand. That's why it tradees like a tech stock. That's why twenty percent margins going below that it's gonna I'll call it tenuous in terms of the next few quarters. In terms of that margin called tuggle.
War, I would I wonder if it's not more they have to because I would argue if they hadn't been lazy about design, they really need to bring out new products, and if they were better in terms of quality control they have infamously bad build quality, then they wouldn't have to cut prices this much. I mean, the Model Y was going for sixty five grand and now you can get one for under fifty.
That's a big, big chunk.
We can make great points, and especially in China because China is really where the price wars happened between Neo bid x Ping and others. And that's the hearts and alongs of the Testa story. So I think right now in terms of the game of poker, like for many many years Musk has played, others have played checkers, but now in terms of competition grown in terms of what we see three wine three area code four GM as
well as out of Europe. Now this is a time to gain market shop, but at what price, and that's why I most investors the frustration showed that margin story doesn't get into that mid teens.
Are you worried that he's spent too much time? I mean, clearly he's spent spends way too much time tweeting and doing stupid childish.
Wait, he's got another tweet out today congratulating SpaceX. Okay, but that's actually cool.
So that's something where he's making progress for mankind. I mean, that's what Elon Musk should be doing. He's just launched the most powerful rocket that has ever come off the surface of this planet, and it's so cool. But maybe he should be paying more attention to, you know, uh, furthering great causes for humanity than doing stupid stuff on Twitter.
Wee Twitter, We talked about me. It's gonna be the most overpaid tech acquisition the history of deals, and forty four billion for someone that's probably worth twelve to fifteen billion today. It's also with a time sucker, and I think that's the issue, is that at a time where Tesla and SpaceX need Musk more than ever, you don't just want to see him sitting there third floor of Twitter headquarters just tweeting So.
When did the Tesla story become a margin story as opposed to just a great cool growth.
Story starting this year once they started cut prices. I mean, you've got six price cuts, and I think that that's where margins ultimately company.
Want it to be there or they don't even care, do they, because I mean, like for example, Facebook slash Meta, they've kind of tried to transition people from getting away from subscriber growth numbers and all that kind of stuff and focus on the profitability and a free cash love of our business. I mean, that's they're trying to drive the investment narrative. Tesla doesn't really care about.
Looking twenty two billion of cash right and I think they're viewing it is like, we don't care what you think for now. You gotta trust us in terms of the last decade and right now we are looking to go on the offensive, not defensive in terms of margins and cutting prices. That's sort of their strategy. Look, and some investors love it, some investors won't. That's what you see right now. In terms of Bulbear debate, we.
Have a question, the Question of the Day, which has been up on the Bloomberg television screen has Tesla started a price war.
What do you think, Oh, I think the price war has begun, and I think in China it's already started. And ultimately it's here in the footsteps of gm Ford. You have Mercedes, you have others that are coming because they're Look, they're no longer the only game in town. Now clearly it's their world. Everyone else pays rent in terms of electric vehicles. But now with competition increasing, they
can't just sit there on their high horse. They need to cut prices and that's that's really what's happening here. But again it comes down to the managing team, the guidance. You know, I think there's more questions and answers, which is why the stocks reacting the way.
And now, if you want to buy an electric are there's so many other choices you could get. If you want to get something cheap, you could pick up a Chevy Bolt. If you want to get something cool, you could get a Kia EV six GT. If you want to get something expensive, you could go with a BMW I X and on that that's built with hand laid carbon fiber and Washington tament.
That's awesome stuff.
So Tesla, you know, they had these ten year old products. Is the cyber truck gonna come out this year? Are they gonna do anything that's awesome and new?
Yeah, I think by Howween we should have the cyber truck announcement. And that's important because as you've talked about for a long time in terms of new automobile, new models, I think the sub thirty k comes out next year.
But look for Tesla right now.
It's that supercharger network. It's the Musk DNA, I mean supercharger network. It's the Musk DNA, and it's the cachet of owning a Tesla. And I think that continues to be there. But no doubt you gotta cut prices in that's sense of what they're doing.
So, but Kevin Tynan and our auto ational supple more intelligence, he says, the Choice does have come out with a ton of cars if they're not making money on them. You know, they've even paired back the four pairback the Mustang mock e because a certain prece just won't just saw mock e hearse. Yeah, you see that. Somebody made it. Mock e hearse.
They're coming out with new cars, dude, that's the only thing they're gonna make from now on his electric cars. You can argue that that's a horrible strategy, a big mistake. They're putting all their eggs in one basket. Pretty much all car makers are, but they're all gonna come out with new electric cars. It's gonna be from twenty thirty either electric, all electric, or hybrid. Really, that's the only
that's the only choice. Almost every single car maker has has vowed that they will no longer make solely internal combustion engines after twenty thirty.
And to your point, must knows that bulls eye in their back and that's why they, Okay, guess what, We're just gonna keep cutting prices in flipting the pen. And that's a say it's dreve demand. But from an investor perspective out it's like, okay, at what point? And that's really what the stocks are?
So can I buy Tesla here? I mean because if typically I don't want to own a company who's in a price war, much less initiating one.
Sure I view it if this was something that was going to continue to go on, then obviously that's the concern I view a more transitory in terms of this price war dangerous word. And ultimately, you know it's really the next two to three quarters you see this price war, then you really start to see I think stabilization. That's really the story for tests. In terms of the bull case, I continue view this in Apple as the two most transformational names in the market.
What is the Apple call today?
I mean, look Apple Call today, it's rocket Gibralter and that I mean if you look units holding up just by many yelling fire and a crowd theater. Cook's a tactician. That's why a Hall of Famers CEO. And that's the stock that continues to sort of rerate even in this environment because they have something that no one else does install Base, that's the golden two billion Eyess devices. And even in India, I mean they just decided, hey, we'll
try to penetrate that market. That could be an incremental fifteen to twenty billion next few years.
All right.
They have three hundred and like three hundred and sixty million people in the Indian middle class. Yeah, three hundred and sixty million people that can afford the product right out of one point five billion in total.
Yeah, and they really stepped it up. All right, Dan, thanks so much. For coming out. I really appreciate you coming into the studio here despite the wardrobe. So good luck walking down the street with that before twenty yeah, before twenty There you go. Dan Ice, he's a senior equity analyst, So what Bush Security is one of our real top go to names. And we want to talk technology when we want to talk Apple, Tesla. He's all over that stuff, so we appreciate getting a few minutes of his time.
You're listening to the team Ken's are Live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg dot Com, the iHeartRadio app, and the Bloomberg Business App, or listen on demand wherever you get your podcasts.
I want to talk real estate. I think we need to talk real estate investment trust and you want to go there. You got to do a couple of things. One, you got to get somebody who worked at Green Street Advisors. Those are the big folks in the reed business. We take that box with David Auerback. He's a managing director at Armada ETF so he did a stint to Green Street. And the second place you got to go is Jeff Langbaum.
He covers the reats for Bloomberg Intelligence, and we've got both of these gentlemen in our Bloomberg Interactive Brokers studio. Here's my thing. I'm walking around Midtown. I'll walk to Penn Station today. I'll walk by these gleaming office towers. Now they'll be kind of full today because it's a Thursday. But let's face it, nobody's coming back to work here in this You mean in terms.
Of people, people, but they're not full in terms of stores, right, there's no lot.
Well, there's no people, there's no stores. There's nobody going to the deli's. It's a Thursday. It'll be better. David auerback, what do you do from a real estate perspective? What's the call here from a real estate perspective when you look at office reads and just office space.
Well, Paul Matt, it's great to be with you guys today. I just came from the NYU Shack Reads and Posium conference yesterday, and this is a big topic that came up in conversation. And what you're noticing from some of the big reed institutional buyers that are out there is, after being opportunistic, they are starting to tiptoe back into some of these really distressed sectors here and realizing that, you know, we might be in for more short term pain,
maybe over the next year or two years. But on the other side, they do feel like there are compelling opportunities. I was walking over here with Jeff and we just noticed like seventy five thousand square feet of vacant retail space right here at this intersection in Roenberg headquarters. And you know, I asked them, like, hey, what tenants were here. Oh, this was Container Store, and here was this you know, innovation.
M We had a Victoria's Secret, We had like a J Crew or a J Crew.
Brand I think Banana Republic maybe.
But yeah, there were a ton of stores here that are just gone.
And I fall back on my you know comment I always like to say is that, you know, there's only one New York City. Eventually, it may take some time, but it is going to bounce back. I think the landlords are you know, some of these guys are I think rolling to maybe kind of lower the rental rate
just to be able to bring some people in. Instead maybe saying to have let's say thirty thousand square feet available, will put a wall in, have two fifteen thousand foot spots in and so hopefully they'll be able to target that next generation of retailer tenants or the next generation
of office tenants to come in. I mean, we'll talk about sau Green's earnings yesterday, and they had a massive, great first quarter of leasing, like well above what analysts were expecting as far as how much they were looking to get back in the office. And so I think we're starting to see some pockets of strength that's out there, but overall on the bigger picture, yes, they're still weakness.
It's really the return to office thing that's the problem.
Right, And Jeff, you know, I'll ask you because David mentioned NYU for this conference.
If you're in student housing, you're golden, right.
If you're in a medical office buildings, no problem. The problem is, you know, workers like us, me and Paul are the only people who come to this building. And that's why you know, we don't do enough shopping at Victoria's Secret and the Container's Store to keep those stores afloat.
Right.
So, but office is really the only problem.
Are the other parts of the real estate market in the US still going strong?
Every other one, I don't want to say every other one.
I'm sure, there are pockets of weakness, and certainly within segments there are going to be individual circumstances. But yeah, I mean, multifamily is strong, Warehouses are strong. Certain aspects of the healthcare real estate are very strong. Office is the problem child. And and you know, Paul, you talk about how many people are in the building, that's not the entire focus for a company making the decision to
sign a lease for office space. Right, you still need space even if you only have fifty or sixty percent of your people in at any given time. And today's point es still Green announced yesterday at least over five hundred thousand square feet of space in New York office.
Building really in the first quarter.
Okay, so it's not it's not dead, it's certainly challenged.
Rents.
The rents on the five hundred thousand square feet that they least, we're five percent higher than the expiring rents on those leads. Now, granted those quality buildings, these are the are you know, top of the going to It's not Third Avenue, Midtown US in yards will sell.
Third Avenue is not going to sell?
Is that right?
I mean kind of is that kind of what we're seeing?
Well, the other thing to remember also is you know these are you you're re signing leases that were last signed ten years ago. So even if we're kind of falling off to the peak, your mark to market is elevated, and so you know, it's it's it's there's still activity happening. You know, their portfolio is about ninety percent occupied. So you hear stories of you know, occupancies tanking. It's not.
Like I said, it's not dead, it's just a struggle.
I got a viewer, a listener writing in here.
He's maybe he's also a viewer.
Maybe he's just looking at his radio right now and he wants to know, David, how worried are you about the CRI maturity wall of five hundred billion a year for the next couple of years.
Is it?
Is it a huge headwind?
It's definitely something to take note of. I think you need to take a look at it on a case by case, company by company basis, because a lot of our you know, especially the publicly traded reads, they're working with some of the largest banks in the world, the Goldman's, the JP Morgan's, and so you know, one of the biggest conversations is how we how are we going to refinance our debt stack? Looking out in the future, you know, we're past COVID, We're not in a one and a
half percent operating environment. The blended extent is kind of gone. But in that same breadth, if we're able to you know, piecemeal our stacks over the next couple of years of restructuring it, I think we'll be able to weather the storm.
Now again, if you're some of these other trouble companies that are out there, you might have a longer runway than you know, somebody that's a class A you know, retail operator or apartment guy where it's not really you know, Freddie Fanny is always there to refine.
It's not a problem.
But there are going to be people who do have problems refinancing. There is going to be a storm to weather. Is there going to be real consolidation you.
Think, I think we're going to see some consolidation. I mean, we talked about yesterday. You're not really seeing much public to public MNA transaction based off the discounts of a lot of these guys are trading. But you know, one key thing, and Jeff and I are talking about it earlier. You know, there's sovereign wealth funds that are out there. You got Government of Singapore, You've got QYA, you got
Candidate Pension. A lot of these big sovereign wealth funds are out there and they've got capital, and they're looking at that long term opportunity. Not just five years. We're talking twenty five fifty years out. Like you know, are we gonna tear down the GM building anytime soon? No, that's just going to continue to you know, the met Life building another good example. They're ready to come right, sit down, write a check, and you know, focus on
this long term investment. So I think that there are good capital partners that are out there.
I actually think that's going to be the key.
Right.
So you ask about refinancing and that maturity wall. There are going to be properties that have a problem refinancing, and it's probably going to be mostly concentrated in the office space. Who is willing to step up and put
a loan on these properties? What kind of additional equity is required to fill any gap if loan to value, if values come down and loan to values have to have to kind of shrink accordingly, and if there is distress, who's willing to step up and write a check to buy these properties.
When do you think we'll get to that point? Is that something that's just gonna roll over the next couple of years. It's going to be an extended time frame.
And right now we are in a massive information void because there are no data points on assets trading. Nobody's nobody's willing to step up and buy because sellers aren't yet forced to lower their asking price. You've got, you've you've got the only data points that you're seeing. Our people are companies that are defaulting on loans, and so it's you've got plenty of bad news into this information void.
But but you need we need to start seeing data points on properties trading and loans getting under rid.
By the way, it's not all about New York, even though we think.
Yeah, I need to think, I need to get on the road a little more. Is it all about New York?
No, you're from Austin, right, so Dallas, you're from Dallas. Sorry, but you went to ut I did. I was just down in Austin and it was sick and there were cranes everywhere. Right, they're just putting up buildings left and right. They can't build them fast enough. So I'm not saying specifically there, but there are places around the country where it's still very busy, very popular, and people may even want to go to an office.
So mass we've discussed. You know, we run the Residential ret Income UTF Ticker's House ha US and one of our focuses is look yet where the migration trends are happening. And as a result, you've got Redfin, Solo, Coast Star, all these data sources that are telling you here's where the demand is Nashville, Charlotte, Austin, Tampa, Jacksonville. And as a result, look at the city skylines and you see all the cranes and the question is where are all
these people going to live? And so it's these residential riek guys because of how crazy the home ownership market is right now, they're the ones that are in the driver's seat to inherit all that potential office worker demand in those aftermarkets.
Jeffany, you talk to institutional investors, where in the reach space do they really want to be these days?
Not office other than house h a U S.
Honestly, you know, there there has been a kind of sector wide push down on prices, and I think that that's just you know, rising rates have have impacted across the board, fear of you know, that maturity wall that that you know, this kind of cre fear. But some of the sectors that I mentioned up front are kind of still going strong. Warehouse is a multifamily, medical office, life science.
Necessity based retail, grocery, the grocery anchor shopping center, the Starbucks, the CBS, Dwayne Reed, Walgreens. People are out there spending Madison Square Garden, Madison Square Garden for Fish concert.
Fish is coming back to town. There's where you're going. Are you going, Jeff? This is where I drop out of it. He drops out of the conversation. All right, guys, thanks so much for coming in. We had a cool,
cool roundtable talking about all things real estate. Here we did with Jeff Langbaum, he is the senior read analyst a Bloomberg Intelligence and David auerback managing director, are Maadi ETF Advisors talking about the real estate biz, and yeah, office real estate a little tough, particularly in some of those coastal cities like New York and San Francisco, but other areas doing well.
You're listening to the tape cans 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. You can also listen live on Amazon Alexa from our flagship New York station. Just say Alex, it's play Bloomberg eleven.
Let's talk the legal weed business. Cannabis. It continues to roll out across the country on a state by state basis, and it's rolled out here in New York City. But it's kind of been I don't get. I mean, there's only a handful of stores that are approved, yet they're on every street corner. I don't know, Matt how this whole thing it is an absolute mess.
But on a day like today, four twenty, that is, I think, you know a lot of consumers are going to be like.
Blessed this mess. Bless this mess. George Arcos he joins and he's the CEO, chairman, and co founder of cannabis company Verano. George, give us an overview. You've been in this business since you co found a Verano in twenty seventeen. Just give us an overview of where the legalized cannabis business is today in US.
Hey, good morning, pleasure to be here today. Legal cannabis business is thriving, doing well, you know, despite a little negative sentiment at the moment to safe banking and didn't happen last year, and there hasn't been much subtle reforms. You know, we've built our business to be able to sustain and survivee in times like this, and you know, today's the super Bowl of cannabis in an exciting date for all of our consumers, our employees, and all of our shareholders.
Yeah, it's I mean, I think it's very exciting.
You have a billion dollar market cap, but it has been much higher?
Is it?
You think the disappointment in safe banking or the lack of the Safe Banking Act that has had shareholders kind of running for the exits?
I do.
I mean the biggest issue is the type of shareholders to be attractorally, not being able to you know, bring in institutional shareholders has affected our industry. We'll mostly case on the detail and you know, trade the stock exchange and company like ours, with the revenue the profitability that we have, we should be in a smater change and we should have a legal business that doesn't is the subject to to ade and all these onerous laws that hinder our capability.
Will george any any any expectation. Yeah, in terms of fighting the fight, I mean, are you guys lobbying? Are you banding together with other cannabis businesses to send people to Congress to send money, let's face it, to send money to congressmen and congresswomen to get them to vote the way you want them to.
You know, we're doing everything we can. Unfortunately we're not you know, we're not as put together as pharma and big alcohol, so the lobbying dollars aren't as substantial as some of those larger industries. But we're doing the best we can. You know, there's a lot of new interests to the space, coachal equity applicants, et cetera. So we have to fight the fights for so many then there's only a handful of us that have the capability to
do so. But we're doing the best we can, and the more we speak and the more we talk about it, hopefully it gets some change here soon.
So in the interim, how do companies like yours finance themselves on a day to day basis, on a longer term basis, how is how have you and your your peers kind of evolved in terms of capitalization and financing, so.
We've all taken different paths. For us, profitability has always been a key point of our business, so we've continued to grow through our cash flow. This year, we'll have a substantial amount of cash flow from our business as our capex is doing those the majority of our projects are done, so we're excited about that. A lot of our acquisition liabilities are done, so we'll have very strong cashrow this year to be able to continue to grow the business paid on debt, and it gives us a
lot of optionality. Some others might not be so fortunate. You know, they were building their business and hoping for safe banking to pass, to be able to access the public markets and additional banks, and you know, there might
be some turbulence ahead for some operators. But for Verano, we were built four times like this, like I said earlier, and we're going to continue to thrive and hope well, we foresee some opportunistic m and A opportunities and we're going to continue to go down the road and be successful. And we have a great team, great people, great product, and we're excited about the future.
What do you think about the way Americans feel about the product?
I mean, is it.
Becoming more mainstream stream?
Is something I guess I can talk about on the radio sure days.
You know, is it becoming more accepted? Are we going to see many more states legalize it?
You will? I mean Connecticut converted over January this year. Maryland should convert over hopefully in July of this year. I think Florida, Pennsylvania, and Ohio will be coming up the next couple of years. You see multiple more markets converting over to medical use. You see Alabama and North Carolina's got some things moving Texas. So the polling that you look state by state has been trending very strongly for positive, you know, on the positive side of cannabis.
So it's something you can't ignore and it's something the politicians can't be. So as long as we continue to do a great job provide a consistent and state products for both our medical and ALUs, consumers will continue to grow and positive things will happen for our company and others like us.
What about innovation on the product side, You know, there are people out there who say Matt. You know, I love weed, but it just makes me eat like a pint of hogandas every time I consume it.
Is there any possibility of altering.
The product so that you can do it in a more nutritious way.
There are? You know, there's multiple cannabinoids in the plant and they all do different things. So there's ongoing research not only in our own companies, with other companies as well, and we're continuing to fight find cannabinoids that affect the body in different ways. And there's even appetites of pressments in certain cannabinoids. So the con formulations will continue to change, products will continue to develop, and will continue to roll them up.
George, What's what's the growth drivers for your company? I'm looking at some of the analysts consensus and they've got double digit top line growth for you guys. Is that How much is that as just the market growing versus you guys doing company specific things to drive the top line.
It's both. I mean, the biggest driver of our business is to flip from medical to adult use. I mean we had a pretty big driver last year from New Jersey. Illinois was a big, big jump for ours big lifts. This year we had Connecticut. We'll also have Maryland here hopefully the summer fall. So those are the biggest drivers by far. And then you know the medical markets, although this year that's declined a bit because of the economy.
Normally have nice continuous growth, right, So it's a combination. They're up. And obviously you have to do a great job and you have to provide great products, rate service, and state reliable products. So those those all things for mine will continue to drive our company forward. There are multiple states are out the US that don't have medical and ORLT use programs, so there's growth for many years I had.
All right, it is for twenty the Super Bowls. You said of cannabis. What are you guys doing at your stores, your retail us today?
You know, today's almost like a massive customerreciation day. We have all types of promotions. We do food trucks, music events throughout the country and all of our different locations, our wholesale partners. You tried them with promotions, et cetera for the consumers. So it's a fun day for all not only our consumers, but it's a fun day for our employees as well, right, the day for them to be thankful for what we have and what they've been
given and what we've been given. And it's just a good, good vibe day for us.
Good vibes. What it's all about. What it's all about, Man George Arco's CEO, chairman, co founder of Verano. Verano is a public trade of cannabis company trades over the counter tickers v r n F. It's kind of market cap just under one billion dollars over.
That was it?
Just over okay? Just over one non is very good. Talking about the legalized cannabis market, it is a growing market and again also looking at some of the analysts forecasted revenue growth a double digit ten eleven, twelve percent, so pretty interesting growth story there, but still lots of legalities to be negotiated, including safe banking is probably the key one for the growth of that business.
You're listening to the team Ken's are Live program Bloomberg Markets weekdays at ten am eastering on Bloomberg dot com, the iHeartRadio app and the Bloomberg Business app, or listen on demand wherever you get your podcasts.
And let's turn to those banks. It's been a busy day for earnings and a busy day for the regional banks. And this is important because it's been a busy month for Herman. It has been a herbin Chen who covers the regional banks. I mean, you know, you couldn't pick this guy out of a lineup a month ago. Now he's like star, stage and screen and radio.
I actually, I actually the other day I was in the car switched on Bloomberg Radio mid sentence and I was like, oh, that's Herman.
But now I recognize his voice on the fly. That's how bad it's gotten. So Herman, thanks so much for joining us yet again here in studio. Talk to us about some of the banks that reported today. What do we kind of take away here?
Yeah, mixed trends.
Over all.
I would say that the issues that are facing banks is not a liquidator or solvency issue. It's more of an earnings issue, with deposits starting to continue to face some attrition and higher banks are having to raise their deposit pricing. So all that means that netedgor's margins are going to be narrower and banks will sort of muddle through. But the valuations for these companies has already reflected with
banks are trading at around tangible book value. So everything's been priced in, but the stocks continue to So when I.
Look at valuation for a regional bank, give me the where it trades at the bottom and where it trades kind of at the top of kind of where are we?
Yeah?
Sure, so during the financial crisis, banks are trading below tangible book value because there was a lot of concerns that if banks would survive, they.
Ran European books.
European banks, by the way, sat at below book value for a decade.
Right exactly, So that was an elongated issue there. And on the top range, you know, you're you're talking about something like around two times, so it's.
Okay, and right now we're just about tangible book fag. So one could argue, as if you're a value investor, I'm gonna go buy some banks here.
You could argue, if you're a long term investor, some of these issues will will go away, and but you're gonna have to wait a while because we're not even at the recessionary type scenario where banks are facing higher net charge off some bad debts, so that part of the story hasn't played out yet.
But well, they pay me dividends. I'm looking at your old employer, M and T Bank, I got a four percent dividend, Yet I'm getting paid Wait a little bit here, get paid the way point?
Maybe, Yeah, that's right, You're you're getting paid a weight. You have to face some volatility, Buy it and forget it for a few years and you should be fine.
Has anybody ever have we seen some of these hedge fund managers come out and say I'm buying the banks. Have we seen any of that? Not quite yet.
We're still in a bit of uncertainty mode. But but I think what the one Q earnings has has demonstrated is that the contagion fears are off the table, where the banks are just going to mouddle through and face some weaker earnings.
But yeah, that's the key, right, because we don't know how weak they're gonna be. Right, you said they haven't repriced deposit rates, so you're still looking at minuscule rates on the money you put in the banks. Competition could flare up, right, and they could have to start trying to out outprice each other, and then you know, next quarter's earnings could be worse, the third quarter earnings could.
Be even worse. And how bad does it get.
Yeah, the hope is things that are starting to stabilize, and the banks are talking about that. There's been about two three percent at the average to climb in deposits for the regional banks, and they're talking about things stabilizing in the third court in the second quarter and beyond. So that's helpful. And then the issue is that you're gonna as you mentioned, the posit costs are arising. It's going to be a case where the banks need to
pay up to retain the deposit relationships. So it is aheadwind.
And what are they saying about loan growth, because again my concern about the macroeconomy is if I want to go if I see a vacant store in some of New Jersey and I've got a great idea for a store to put in there, and I go to my local bank, I either can't get the loan or they're they're it's too expensive, and that slows down the economy overall. Yeah, that's right.
The overall take away from a lot of the management commentary is that the things are tightening in terms of credit availability and the banks are being a bit more cautious with who they're lending to. And second, they've also mentioned there's caution from the borrowers as well, so business
borrowers in particular. Huntington just mentioned that their business customers are being a bit more cautious and not doing as much M and A as they probably would have been without some of the disruption that's happened so far.
That's how Ohioans are. Ohioans. We're a cautious bunch. Cautious bunch. Yeah, well you're also a hearty bunch, right, we are hardy, big football players, all right. Are what do we look at going forward? Herman? I mean we are we still focusing on deposits? Are we still focusing on loan growth? Are those still the metrics I need to pay attention.
Yeah, that's right. Deposit growth, loan growth, and what's happening with deposit repricing and what are the effects to the men ander's margin. Those are the things we're talking about. We're not talking about borrowing from the Federal Reserve discount window and that's the sort of thing anymore, because that's that's not an issue across the region.
And I'm looking at crisis over crisis averted, Yes, exactly, I'm looking at just the earnings for M and T Bank again kind of my little poster child for a high quality regional bank. And I'm just looking at the street consensus and it's kind of got, you know, earnings flat year of a year twenty four to twenty three, right, right, So and then maybe some growth kicking in.
Then twenty billion dollar bank trading at one point four times tangible book value.
Right.
The benefits from interest rates really happened last year, and so they're giving back some of the benefits with higher deposit repricing. But overall things still look pretty decent for a bank.
Like we had a great story on the Bloomberg terminal overnight about corporate debt, you know, investment grade corporate debt. The spreads are so tight to treasuries, and when you factor in the cost of funding for banks, they're just not getting the kind of risk premium that they need, and so they're no longer going to be able to
buy that debt. Now it's only I think banks make up about seven percent of the ownership, but how much is their cost of funding and what are they going to put their money in now that we're also freaked out about the whole the maturity portfolios and commercial real estate.
That's right. The bank securities portfolio will start to shrink because they need to balance the balance sheet with the decline and deposits, and they'd rather park their assets into any sort of lending that's still available to them. So that's one of the things that it's critical with what's going to happen with how the BRAKE leaders come in in and sort of push some of new regulations in terms of how they manage the balance sheet with with
the issues with the unrealized losses. So overall, I think going forward for the next few quarters, we'd expect securities portfolios to decline.
All right, And the next big issue to watch for the regional banks will be First Republic Bank the report their earnings Monday after the close. Look at this stock, brutal man. I know down eighty year two.
You should have got a mortgage from them because they were giving interest only at zero rates for like where was it years and then it finally kicks in, yeah, at three percent.
About finance. My love that story. Finance my mortgage. Don't you worry. I'm going to get a four handle on it when I refinanced in twelve to eighteen months time. How about that. Herman Chan, he's the regional banks analyst for Bloomberg Intelligence. He's been doing Yeoman's work really over the last month or so. Get it keeping us up to date on what is going on with the bankside automaph I know exactly. He's a player. We're gonna have more coming up. This is Bloomberg.
You're listening to the tape kens our live program, Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in app, Bloomberg dot Com, and the Bloomberg Business App. You can also listen live on Amazon Alexa from our flagship New York station. Just say Alexa play Bloomberg eleven thirty.
Well, there are a lot of cross current score investors to negotiate these days. What with the Federal Reserve, is it going to stop hiking? How when will stop hiking? Will start the cut rates? We've got, certainly geopolitical issues, We've got economic issues as it relates to recession, How deep, how shallow, how long, all those types of things. And
then oh yeah, we're negotiating earnings as we speak. So it really helps if an investor can take a long term focus that might make things a little bit easier. I think that's what our next guest is going to focus on. Heather Brilliant, she's the CEO and president of Diamond Hill joining us on the phone, and Hender, thanks so much for joining us here. How do you guys approach investing given all the cross current out there that investors have to navigate?
Thanks for having me. Yeah, I mean at Diamond Hill, we're really trying to take a multi year perspective. We try to look out really the next five years into the earnings power of the businesses that we own, and it really helps navigate environments like this where we see
a lot of volatility. There's certainly a tremendous amount of economic uncertainty, as you were just mentioning on that news flash with the data of today even but that matters a lot less when you're looking for businesses that you think can generate cash flow well into the future and return capital to shareholders.
So what types of sectors does that lead you to? I mean, it's a lot of folks, you know, look at some of these, whether it's semiconductors for example, there are such long cycles and you get a little bit spooked by it. But what sectors do you guys tend to focus on feel scary?
I mean, I think we tend to really look for businesses that in any sector can compound returns over time. So one example of that would be even in the property and casualty insurance market, we look at all State as a company that is likely to benefit from a lot of the changes going on in property casualty. We're seeing a lot of changes in pricing there as that's become a more challenging market with more claims. But with all of the companies really taking a fresh look at pricing,
it really gives a tailwind to this industry. And All State has been valued as a business that historically had life and annuity as well as property casualty, and they sold their life an annuity business a couple of years ago, and we don't really think that's reflected in the valuation. As well as some of these business improvements that will really start to come through in the next couple of years.
What are some of the other business improvements talk to us about. The company ticker is al L.
Yeah, So essentially their focus is on being as omni channel as possible within property casualty. So they're looking to add some more ancillary lines of insurance and things like roadside assistants, which are more voluntary. Right generally property and casualty is required, and so that's one of the reasons why we think it's such a good fundamental business even
in an economic environment like this. But over the next couple of years, they're really looking to focus on some of those new areas that I think will be a little bit more discretionary and could benefit on the other
side of you know, coming out of a recession. Also, they are essentially you know, across the US and also distributing Canada as well, which gives them a scale benefit because you know, when they're doing marketing, they can really think about how they reach people across the country instead of having to think nit more narrowly about their market.
So, Hea, do you also have Lear Corporation on there? When I think of Lear, I think of just kind of you know, they work with the automobile industry, and there's an industry that's undergoing tremendous amounts of change as of airplanes, I think, but that's Learjet. I think this is Lear Corporation. So if they make seats. I don't know. Let's ask why do you own Lear? L Ea.
Yeah, so Lear is essentially a automotive seating business. That's about seventy five percent of their revenue today, and we think it's interesting for a couple of reasons. First of all, their focus has been on the luxury side of the automotive market, and that means that they're really at the
cutting edge of technology when it comes to seats. And you know, you might laugh about the thought of, you know, how innovative can a seat really be, but we all know from you know, driving our cars that we want them to heat up and be able to be cooled, and have all electric mechanisms for moving them around. And these days you can even get massages.
I want them to massage exactly. No, I want to be I don't. I don't laugh.
By the way, I once trecked all the way out to Detroit to make an entire package about the kid who designed the seats for the Corvette.
Yeah, and what'd you find? He was awesome, Sean Mauger.
He designs like everything, but and the seats were amazing and it's an incredibly important part of the automobile now.
So you have to be able to drive a German car. There's no heat, no no whatsoever because it's Germans. The Germans don't care about that.
So no, Lear does work with Audi and BMW, so they've got some German clients. So eventually maybe some more luxuries coming to your seat.
Do you, guys at your firm, how do you think about valuation? Is that a big, big driver of what you own? Or are you just looking for a good story and you know you can make the valuation work or do you have a how do you think about that?
I really appreciate that question because valuation is critical to the way we think about investing. Every business can be attractive at the right price and can be unattractive at the wrong price. And so we really start by looking at what we believe to be the intrinsic value of the business, and we do that by building a discounting cash flow model and really taking a look at the
underlying drivers of the business. Not only does that help you, I think, really fundamentally understand what the future cash flows of the business are worth, but it also gives you a good grounding to be able to look beyond, you know, the near term when it could be a weaker economic environment to the real earning's power of the business.
By the way, I look at a lot of these charts are choppy, leer and all state.
But I look at HDFC Bank, which you also like.
The ticker is HDB, and not only does the chart just go up into the right like it's amazing, it's also a one hundred and thirty billion dollar company that I've.
Never heard of in India. Where how do you pick this? How do you screen for these kind of stocks?
Well, we do have an international team and strategy that are really looking at ideas outside the US, and they identified HDFC Bank as an opportunity for a couple of reasons. First of all, it is in India, as you point out, and it's a private bank in India, which means it is privately held as opposed to public you know, owned by the government, which is different than of course how we define private banking here in the US. So important
to note that. But by being private, they've been able to invest in their business and really be able to to be at the forefront of technology, and that is really critical for a couple of reasons. First, obviously there's a lot of growth in the middle class in India, which is a huge tailwind for this business. But second, because digital transactions were literally less than twenty percent of the market a mere five years ago and are now
over eighty percent of the market in India. So they've really been able to benefit from the customer base in India moving more and more to digital while they're at the forefront of the technological revolution going on within banking.
There.
All right, interesting story there, Heather, thanks so much for joining us.
There.
Heather Brilliant, CEO and president of Diamond Hill. She is all in Chicago. By that, I mean she got her undergraduate degree in economics from Northwestern then she figured, hey, this is good town. I'll stick around. She gets her MBA from the University of Chicago, and I know a lot of Chicago Booth graduates, and they're all comfortable with the math. I sense that Heather grew up around. I can hear the Chicago. You ken in here, boys, the Illinois.
I hear it, the Illinois. Yeah, okay, all right, interesting, but yeah, all in in Chicago again, Universe Chicago NBA. I'm a huge fan of the Graduate School of Business now called the Booth School at Chicago. A lot of the great professors at Duke came from University of Chicago.
Thanks for listening to the Bloomberg Markets podcasts. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller nineteen seventy three.
And I'm Paul Sweeney. I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio.