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Hello and welcome to The Money Stuff podcast, your weekly podcast where we talk about stuff related to money. I'm Matt Levie and I are at the Money Stuff column for.
Bloomberger Painton, and I'm Katie Greifeld, a reporter for Bloomberg News and an anchor for Bloomberg Television.
What are we talking about today?
Arbageddon? I hope I said that right, and then.
We're currently spelled it because it's not a real word. I'm not going to correct this.
That's good. There's an upside there. We're going to talk about securities fraud in the burrito market, and then we're going to talk about leverage. Warren Buffett. Let's see how it goes. I didn't look at anything, so I don't know if I did that. I don't know if I did that in the right order, but I did it.
In order of your own interest, which is interest. Yeah, that's what we need, all right.
I am intoxicated with power anyway. Merger arb arbageddon, Arbageddon.
I think arbageddon is a term that has applied to like something that happened in my twenty fourteen It doesn't matter, but yeah, does the.
Term arbageddon apply here. No, yeah, So why are we saying it's an arbageddon?
Oh no, we're not. So what happened is that there have been over the years bad things that happened to merger arb firms, most recently when the handbag deal blew up, which is what is it a tapestry in Capri or the companies that it's like a very narrow market segment definition which is like expensive but not very expensive handbags as.
Far as I can affordable luxury.
Afordable luxury, something like that. And so those companies dominate the market for affordable luxury. And so they announced the merger merger arbit treasure is loaded up on Capri stock, I think, and then the Federal Trade Commissions sued to block the deal. A judge agreed at the FT and blocked the deal. Capri's stock fell like forty nine percent,
and some merger ARBs they lost a lot of money. Yeah, and more generally, like in the last few years, the FTC has been gung ho on sewing to block deals. Sometimes it has succeeded, and the result of that is bad news for merger arms, and some number of them have lost their jobs. According to a Wall Street Journal article that was published earlier this week.
Yeah, I was messy. The headline of the Wall Street Journal article is that basically arbageddon potentially is over.
Yeah, the Arbageddon's have occurred, but like the assumption is that Donald Trump will and least animal spirits in the merger market.
That is the region consensus right now. I don't know how many we're so back memes that you've seen over the past week, but that is most of my social media right now.
M and A Bankers.
Yes, me. I didn't know that I followed so many financial meme accounts, but apparently I do. And in light of that, it was interesting to see the tapestry and could pre deal fall apart. We're recording this on Thursday, and the headline crossed this morning that they're walking away
from the deal. And the reason that the companies gave was that it's in the best interest of both companies as the required closing condition of receiving necessary US regulatory approvals was unlikely to be met by the outside date of February tenth. By February tenth, of course, there will be a new administration, at least in the White House.
Yeah, it's cutting Yeah, it's a little close. Yeah, once you have a judge ruling that your deal is an antitost violation, it's like hard to walk that back. It's not completely impossible, but it's hard and it's harder to do. And you know, three weeks after, you know, the new administration is inaugurated. So there, and it's a lot of uncertainty between now and then. Yeah.
Yeah, So I just I liked this story because it was a little bit of reality that there are going to be some lost causes when it comes to the deal landscape right now. After the election last week, you saw so many potential deal stocks just shoot up. I'm thinking about like Capital One and Discovery in particular, and I'm not commenting on those odds, but not all of those deals are going to go through. Some of them will die on the vine before things actually change, right, There's.
Like so much of a like immediate psychological shift in how people see the new administration, like even before it's in place, and my general sense is that the wheels grind kind of slowly and it is hard to reverse course. Now, this is clearly an administration that is not you know, a respector of norms and procedures, and so the wheels will grind a little faster than they usually do. But right, like,
once you have a court decision, it's pretty tough. The other thing that I think is weird is like everyone kind of assumes that this will be a far more merger friendly administration, and the backing of all these business people and bankers suggest that there's some reason to assume that.
But like Jennie Vance has praised Lena co On, the head of the FTC, who's been very relatant about blocking big mergers, it's not obvious that a sort of heterodox populist Republican administration will actually be that much more pro merger, or that they'll be pro merger in all the ways that people want them to be. Yeah, but you know that is everyone's assumption, so we are.
Yeah, it's a good point. I do wonder, and I don't want to talk about politics, but I do wonder. You know how much of us, say jd Vance, is going to happen.
Oh, none, none, But but but I'm not you know, I'm not sure anyone.
It's like a, yeah, there's going to be.
Some random television personalities, but in charge of the FTC, and who knows what that person thinks, right, Like, who knows? Oh, Katie is pointing to herself. Kat Katie as a television personality, should be put in charge of the FTC. That's a that's a good uh.
It would be an honor to serve my country. Specific to Tapestry and Capri. Though you point out that it's a quick turnaround. Two weeks is not a lot of time.
But also I wonder, Yeah, one thing that could happen is that, like a deal gets dropped and it goes away, and then like six months they start negotiating again. It circumstances the change. You have an argument that I was not anti coompetitive now and like you have much friendlier de FTC and you know it all works out, But that's pretty risky for you know, a jilted merger target.
At that point, it does seem like Tapestry shareholders do not want this deal to happen.
There sure, I mean, like if both sides wanted this deal to happen, like you say, well, appeal and you know there's a deadline at February time, that doesn't matter. You can you can mutually get together and wave the deadline. But if you don't want to mutually get together, then it deals off, you know.
But also, this isn't eighteen month saga, like this deal has been going on for a long time. Things have been pretty good at Tapestry. Their earnings have been solid. They recently raised guidance for the year. Apparently the Coach brand is popping off, and it seems like things have kind of been deteriorating at Capri during that time. So maybe there's a sigh of relief here.
Oh yeah, definitely. It is often the case that when a deal is blocked and people are like, ah, it was blocked. Often what that means is that one side is kind of relieved it was blocked, right, like circumstances of changing, you know, like or want to do the deal, and you can't just back out of the deal. But if there's some regulatory impediment, you can do things like not agreed to extend the deadline.
And then there you are, Yeah, we gave it the good college trial. It's not going to work out, you guys, You know, you have.
An obligation to give it a words or like use you know, all reasonable best efforts. But then once you do that, you're done. Yeah, I do think that. Like there's just the more general point of like the you know, the merger ARB business, which has been difficult but lucrative in the last few years. Right, So like merger IR right, think of as like being sort of almost like market making business, where like you're doing a lot of trades.
Each trade is like kind of a small spread you make the spread and expectation and every soft and you like absolutely run over on a deal like tap a stry Capri, where like you lose you know, fifty percent of your investment or whatever. In this scenario where like Lena Khan is running the FTC and the FTC sues to block a lot of deals that then they lose
in court. Like that's a really fun environment for merger ARB because you can do things like buy Target stock after the FTC sues and like the stock has gone down, and then the FDC loses and the stock goes up and you make a lot of money. Right, it's anything else Like if you think of like merger ARB as a market making business, then market makers make more money in volatile periods, right, And so if you have a volatile period where some mergers don't go through, some mergers
do go through. Some mergers get sued and they go down, and then like they go through and they go up. You can make a lot of money in this like sort of liquidity provision business where you buy stocks when the merger's announced and sort of sell them into the merger when the merger closes. So it's a good lucrative business, but it's also a business where you can get blown up, right, and if you just make a couple of the wrong bets, you get blown up and you're you're out of the business.
Whereas the assumption is that in a TRUBI administration, you know there'll be a lot of mergers, so you'll have a lot of volume. You know, if you think of it as a market making business, you'll have a lot of deals to do and they'll all go through, so you won't really have a lot of risk and you won't get blown up. The flip side of that, it spreads will compress and you'll just make a sort of more modest profit and not make tons of money and h deal, but like you'll have an easier life.
What a pleasant and sedate landscape that sounds like I kind of like the high octane.
Yeah, I think that almost everything about financial markets and the world will be like less sedate under a Trump administration. But like you know, mahade your arb, it'll be like yeah, they all they all go, they all close, yeah or not or not right or there will be you know, a confounding expectations and they'll suit a block every deal.
Let's get to the good stuff. What's that burritos and how little meat is in Chipotle burritos?
The lost suit that we're going to talk about also points out that some of these burritos skimp on the rice and beans.
Unbelievable.
It's not just the expense of it's it's everything.
I haven't been to a Chipotle in like fifteen.
Years when I worked at deal Breaker, my job before this, we were upstairs from a Chipotle, and there was a period right at Chipotle like three times a week for months on end, and probably never since then. I don't like a burrito with like a like a regular burrito.
Yeah, regular guy, I.
Think I got. I don't even remember what I what meat I had of my.
Probably was it a true burrito, not a burrito bowl.
I don't think I've ever eaten neverat a.
Ball Wow, we're different people.
I don't know. I found it off putting. It's like a very wrong salad.
Yeah, it's like a salad but more fun, with less carbs than a burrito, but still a lot of more carbs than a salad because there's rice.
The tortilla is so thin.
How many who would shock you?
Anyway? I've never had a burrito bo but I've had hundreds of or at least dozens of Chipotle burritos. I'm pretty good.
What were the portion sizes?
Like, I don't remember, but this is more than a decade ago, and so I think they were ample. I think this was.
Before chip Well, apparently things have deteriorated since then. If you spend any time on social media, this has been a long running issue. By long running issue, I mean at least a couple of months.
Yeah, it's been like a thing this year.
Yeah.
Maybe maybe last year too, but I think it was like really sort of took off and like Spring Suwheer of twenty twenty four. Like people on social media, I'm not on the YouTube channels where people are.
Like YouTube like wherever TikTok, Yeah, wherever people are going to like post videos about their disappointment with their burritos.
I'm not on those channels, no, but they exist and they're hugely influential, and I guess some people have posted serious complaints about the size of Chipotle burrito balls, to the point that Wells Fargo equity research analysts went and did a study where I remember this, They ordered seventy five quote like for like burrito bowls across eight locations of Chipotle in New York City and found the smallest bawl was thirteen point eight ounces and the largest was twenty six point eight ounces.
This had to be interns, I don't know, sending them out to various locations and having them.
Pick up I hear you, but like I mean sounds.
Like a summer project or something.
Yeah, that's probably right, but didn't they fun? But also like I don't know, like like what a fun that you're an equity researchology, Like I'm going to get out of the building and order seventy five burrito balls like that's funny. I don't know. I don't know.
Wells Fargo stock should fall because this is how their analysts are spending their time.
But what I was supposed to spend their times.
A groundbreaking conclusion.
Did they find the biggest bowl is the twice as big as the smallest ball.
That's pretty bad.
It's pretty bad. Yeah, and it prompted endless, endless soul searching from Chipotle. Yeah, the CEO and the July Ironers call said, before I give an update on our five key strategies, I want to take a minute to address the portion concerns that have been brought up in social media. First, there was never a directive to provide less to our customers. Generous portion is a core brand equity of Chipotle.
Okay, I know what that means.
It always has been and always will be. With that said, getting the feedback caused us to relook at our execution across our entire system, with the intention to always serve our guests delicious, fresh custom burritos and bowls with generous portions.
Was this still Brian Nicol Yeah. Yeah. By the way, if they make the Starbucks drinks smaller, I am going to riot sure.
Well you'll see. Yeah, we're getting away from the point, which is that. Okay, I feel I have complained about various small consumer indignities on the internet forever, but like there's this incredible modern technology, the securities road lawsuit that allows you to turn this into a multi billion dollar lossuit. Right, You're like, oh, the portions of my burrito are too small. What can you do a you're gonna sue because you're burritos too small. You don't have a class action. We
get everyone else's butos too small. It's crazy, right, But Like, what happens here is that these reports come out and the stock goes down a little bit. Chipotle actually announces earnings, like most recently, like their earnings for Q three, which i'd like just a couple of weeks ago, and their earnings have like an increase in cost of good sold
because they're putting more meat in the burritos. They're like, like, we did a throw audit of our portions and we found that some stores were not putting enough in and so we're putting more in everything. That's not exactly what they said, but like they're putting more in everything. Yeah, And so the stock goes down. Why is this not go down? Well, it's earnings released. There's a number of reasons that stock could go down, and one of them, you know, might be that the future cost of good
sold is higher. And another one might be that you worry that you've lost some brand value by you know, yeah, getting yelled at for skimping on portions. All we know is the stock goes down, right, and the stock goes down by like a single digit number of percentage points. That translates into billions of dollars of losses, right, And so if your securities are you just like slapped that in a lawsuit, you're like, they said the portions were big.
In fact, the portions were small. They were lying. It's frawed. The stock went down when the fraud came out, so everyone who bought the stock was defrauded out of you know, billions of dollars. And then you sue and then you know, it's like kind of ridiculous, but like maybe you settle it for like, you know, pennies on the dollar and you collected you know, multimillion dollar legal fee for bringing this lawsuit. It's amazing, it.
Is amazing, and I'm excited to see how this turns out.
I read all the time everything is security is fraud. It's like an amazing like use of the American legal system to go after like really incredible complais You.
Want to speculate on how it might shake out. Do you think that they're actually going to settle?
I don't, Actually, I don't. I always like write out these people. When people file them, A lot of them do not go very far. Some of them settle.
Yeah, I don't know.
It takes you like an hour to write this complaint. It's so funny. And then like maybe they said it and you get a few million dollars.
Well, if it does go that route, I wonder, like, does this set any precedent for what you could sue for?
Like I've been writing this for years. You can see for anything if it's a public company. Anything.
If a company sells marbles, for example, and it says like, oh, people are loving the green marbles, and then on their earnings call they have to say, actually, people didn't love the green marbles that much. You can sue for that. Of course, wow, for anything.
Not all these cases win, but like enough make money that Like it's a lucrative business for a plaintiffs, for security layers.
Well, I don't know. Maybe if I don't, you know, become the next FTC head. This is something I could do. Brian nicol knew that people were upset about the Chipotle portion sizes. There was this amazing article by Fortune in late May. The headline is, Chipotle, our portion sizes aren't getting smaller, but you can get more food with a secret look. Do you remember this? Did this enter your sphere of knowledge? Okay, I'm so excited to tell you
about this. In an interview with Fortune, Nicol said portions have not gotten smaller and offered disappointed customers seeking an even bigger burrito or bowl a pro tip. Give the workers a secret look. This is a direct quote. One of the things I think is great about Chipotle is if you come into the restaurant and you want a little more rice, or you want a little more pico de gallo, Nicol told Fortune, who then widened his eyes slightly and did I say that wrong? What did I say?
Did I really sorry? I said that? Okay? If you want more cheese on your case adilla, or you want more gilapanos, this is a direct quote. One of the things I think is great.
She's gonna play the tape of himself.
One of the things I think is great about Chipotle is if you come into the restaurant. If you I'm gonna start saying that though we used to call it that in my family. One of the things I think is great about Chipotle is if you come into the restaurant and you want a little more rice, or you want a little more Pico the gayo, I say, what is it? Wait? How do I say it? Now? I'm in my own head Pico to Gio, Nickel told Fortune, who then widened his eyes slightly and nodded his head.
Usually our guys and women give them a little more scoop, so he was aware of the complaints. And I just love the suggestion of giving like a secret nod and like maybe a wink to one of the Chipotle workers.
I just think it's like, you know, it is not a factory produced product should have exactly the same way each time. It's like you're talking to a person who's like using a spoon, right, Like you can you can do that, You can give it. You could even say, could get bet a little more on that. I don't know, I haven't done this in ten years, but it does
seem like a thing you could do. And you know, then like Wells Fargo is going out, and like I wonder if Wells Farger like controlled for like the books, right, Yeah, like there's maybe the big the twenty six ounce ball was like they like I looked at the worker a little bit too intensely, and the workers like, all right, here's it more.
Yeah, we do need to know the methodology, like did they.
Make right Like one intern like was making more eye contact than the other intern and got.
More smile perhaps or or glare. Yeah, all of these kind of influenced results. Maybe this is a good case for AI. You know, maybe if the robots made your bowls, then you get a perfect measurement every time. But humans still rule this planet and this is just a byproduct of that.
I think that said everything we did say about this.
I think I said too much poorly.
I hope we're keeping most of that.
We can keep some of it. I don't wantn't sound too much like a blubbering idiot. It's really hard being on TV because my worst instincts when it comes to pronunciation, always win, always win. What do you think Warren Buffett's.
Doing leveraging now?
What He's probably not thinking about this strange etf filing based off of Berkshire Hathaway. Tell me, okay, so one of South Korea's largest retail Brokeaches has teamed up with this white label issuer named Title to create a double leveraged fund that will track, if approved, Class B shares
of Berkshire Hathaway. So this is another leverage single stock ETF And I know that we've talked about them a lot, maybe more than the listeners want, but listen, this one is weird and interesting just because Berkshire Hathaway shares are so boring that this is like antithetical to the single stock leveraged wrapper.
What is the purpose of the single stalking leverge rapper? To me, it is just marketing, right, and so.
Like it's fun, yeah, but like.
If you have some like snazzy thing, you can be like, yeah, a snazzy thing, and then you get money and then like you yeah, well, like this is not as snazzy as like Tesla being is not that valuable, but it's like, yeah, like weren Buffett over there, It's like being Warren Buffett.
I don't know if that's snazzy.
Snazzy is not the word I think, but like has some retail appeal to someone.
Someone, maybe to South Korean investors, because in this article it is pointed out that individual investors from South Korea do follow and hold a lot of Berkshire shares, and they also love leverage single stock ETFs, namely the tessel ones. But this one is strange because, okay, you have the snazzy marketing thing, but like the fun in it is watching it go up and down a lot. If you look at some of the numbers behind Berkshire, it's just
not very exciting. The stocks ninety day volatility is like nineteen percent. You compare that to in video in videos is fifty nine percent, and then micro strategy, which is very popular in these wrappers, is like ninety eight percent. So it's not going to be exciting.
Okay, So a couple of things, first of all, come on, like making it a levertytf makes it more exciting, right, Like there's some no like twice is exciting. There's some level of volatility and expected high returns from Berkshire othay, and.
You get twice as much in the instead of seven tenths of a percent, it went up one point four percent.
Sure. The other thing though, is that you know, when we talk about these levertytfs, I like very vo little stocks. They are a great one day gap link product, but they're a mess to hold for a long time because you have the volatility drag of like if you hold them over time, you don't get necessarily two times of the return or three times the return of the underlying You get like some weird, horrible thing that is often
lower than the returns on the underline. Not always, but often lower than like two times the returns on the underline. With a not very volatile stock, you get less volatility drag. And it's a little bit I'm sure they're not like this is a buy and hold forever product, because it's you know, it's a risky way to buy and hold forever.
But it's like you could hold it for longer and probably get closer to two times the returns of Berkshire Hathaway than you would if you were holding you know, a two x micro strategies for a year.
Yeah, that's true. I mean I was thinking about it, like could it make sense as buy and hold, and then I was remembering all of our conversations about volatility drag.
Right, it's just less so it's not you know, eliminated, but it's it's just less so here because it's a less volatile stock.
If I had that much conviction about Berkshire Hathaway. And I'm a journalist, so I don't have any opinions, but I would just buy more shares of Berkshire Hathway. Like instead of spending buying one share, maybe I would buy two shares. That's what I would do.
Well, this is a way to buy two shares.
Yeah, but that's going to cost me some money. This is a plan ETF. We should note that it hasn't been launched and TVD if it does launch.
Sure we talked about talked about that.
Hey I Warren buff Yeah we did.
That's like a vague gesture in the direction of Warren Buffett. And also, this is just buying two shares of Berkshire Hathaway.
Yeah, I will know this has been done before. Sure there's a two times no, no, no, there's a two times Warren Buffett ETF in Europe. It launched in twenty twenty two and it has about two point three million dollars in assets, which is not very much. And I don't know you think about the marketing. And obviously Warren Buffett is a name, but it's a name that doesn't seem to appeal to the cohort of individual traders who buy single stock ETFs.
But maybe maybe this is like broadening that audience. Maybe this is like you think you don't like levered single stockings because they're on crazy stocks, but here is a levered single stocky up and a nice little stock, a nice or nice big stock, a nice Calm Warren Buffetty Value Eddy Eddie.
Yeah, yeah, I don't know.
I'm not it's not my head.
I'm excited to with so many with so many of these products. I am excited to see them launch, and I'm excited to then check on them in like six months.
I just feel like technology and like, know, how are going to progress to the point where you can like viably run a five million dollar ETF. Right, you can just be like, we offer a suite of twenty thousand ETFs, and you know, if each of them raises five million dollars, it's fine, And then you have whatever dune thing you want in an ETF. You can have heard two times every single stock and if someone wants it, they can
buy it. And like this is like the sort of thing it's like less appealing than like Tesla and Nvidia for this thing, but like more appealing than like some stock you've never heard of. But they're going to keep going down the list.
Yeah, we are approaching the point where there's going to be more US listed ETFs than US listed companies, which will be fun.
And all should It's like the power set of you has listed companies. It's like every possible combination of companies is going.
To be averaged to end in verse.
Every possible single stock two stock, three stock.
Pir trades, seven stocks, YEAHWY three stock, any number. Oh my god, this sky's the limit. But I was chatting with some of my colleagues on my print team who cover ETFs with me at Bloomberg News. I don't know why it's such a preamble, And we chat to a lot of white label issuers because they're really interesting. They work with a lot of different clients. And we were
talking about what it costs to launch an ETF. Costs have come down mightily, and depending on what your strategy is, you can launch an ETF for like fifty grand And I heard that and I was like, why you have an ETF? Why don't I have an idea? And that also explains why we've just seened so many launches. It is just silly season out there.
It's like barely a product. It's like a It's just a combination of stocks, and they can just you can just any combination you can dream of. You pay a small fee and then you can offer it and maybe a litle bike side of it. There is we're not there yet. We're getting there.
There is some break even level of asket.
Shure s show shure. We're not there yet where this is like the future.
The future is right. We're gonna have a ton of MM and A every deal is going to go through, and boy, we're just gonna have thousands of ETFs and so much meat in our burritos.
And that was the Money Stuff Podcast.
I'm Matt Livian and I'm Katie Greifeld.
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