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Speaker 2: Let's go back to the housing market. Here. Drew Redding
Speaker 2: joins us. This is his job.
Speaker 3: We hired him to be like the housing analysts. We
Speaker 3: had an housing analyst like the very early first days
Speaker 3: of Bloomberg.
Speaker 2: He's not very good, so we had to upgrade. So
Speaker 2: we got Drew reading.
Speaker 3: You brought Drew in and he's been a great homebuilders analyst.
Speaker 2: Drew, thanks so much for joining us here.
Speaker 3: Give us kind of a snapshot of what you're seeing
Speaker 3: out there in the US housing market.
Speaker 4: Sure, so the US housing market continues to be a
Speaker 4: tail two markets. We had some data on the existing
Speaker 4: home sales front this morning. We saw which were roughly
Speaker 4: in line with expectations at about four point one nine
Speaker 4: million on an analyzed basis. Keep in mind, we're still
Speaker 4: down about thirty five percent from you know, the peak
Speaker 4: back in twenty twenty one, So this is a market
Speaker 4: that is still extremely depressed. The other thing you have
Speaker 4: to remember with the numbers we saw today is that
Speaker 4: they represent closings. So these are contracts that were signed,
Speaker 4: you know, thirty sixty days ago when rates were more
Speaker 4: in the six and a half to seven percent range.
Speaker 4: So we think that going forward, you're going to continue
Speaker 4: to see a little bit of weakness on the existing
Speaker 4: home side of things.
Speaker 5: On existing homes, are we seeing it a buyer's market
Speaker 5: or a seller's market? It basically, are the sellers willing
Speaker 5: to finally come down in price.
Speaker 4: Well, you know, surprisingly we haven't seen all that many
Speaker 4: price corrections. We're still seeing medium prices rise. You're actually
Speaker 4: seeing prices in the new home market come down a
Speaker 4: little bit because builders are adjusting square footage and they're
Speaker 4: also you know, trying to meet the market in order
Speaker 4: to move their image, but not so much on the
Speaker 4: existing home front. And you know, at the same time,
Speaker 4: you know, one of the key stories on the existing
Speaker 4: side has been that there's just not a lot of
Speaker 4: inventory out there in the market. We are starting to
Speaker 4: see that flip a little bit more recently, so that'll
Speaker 4: be something to watch if we start to get a
Speaker 4: lot of inventory coming to the market, you could see
Speaker 4: more price adjustments from sellers, but.
Speaker 2: I guess the reality is drew.
Speaker 3: I mean, everybody thinks they're an expert on the homebuilding business,
Speaker 3: so it must be frustrating for you because you actually
Speaker 3: are an expert. But I mean the reality is house
Speaker 3: comes on the market, boom, it's it sells in like
Speaker 3: fifteen minutes. I mean, because there's nothing out there and
Speaker 3: it doesn't really matter where the mortgage market is.
Speaker 2: It seems like.
Speaker 3: But you know, is that in fact the case where
Speaker 3: you're seeing across the country or is it regional?
Speaker 4: Yeah, it's a good question. I mean, the market is regional.
Speaker 4: We had, you know, when we started to come out
Speaker 4: of that initial interest rate spike in the back half
Speaker 4: of twenty two, we saw that markets in the East,
Speaker 4: which didn't rise as much during the boom time, we're
Speaker 4: a little bit more stable, and markets on the west
Speaker 4: coast California, Washington, the Southwest were comparatively harder hit. What
Speaker 4: we've seen now is that the increase in themand has
Speaker 4: started to be more broad based as buyers have kind
Speaker 4: of started to get more accustomed to higher rates. I think,
Speaker 4: you know, to some extent, if you need to move.
Speaker 4: There's not a whole lot you could do. You start to,
Speaker 4: you know, fine tune, you know, maybe what you can afford.
Speaker 4: But at the same time, if you have to move,
Speaker 4: you're gonna find a way to make it work. Now,
Speaker 4: it's interesting that you said, you know, despite high rates,
Speaker 4: homes are flying off the shelves. We had earnings results
Speaker 4: this morning from d R Horton and they actually said
Speaker 4: that despite the higher rates, they're still seeing a pretty
Speaker 4: solid demand environment in early spring, which is encouraging.
Speaker 5: What do you mean, I'm not a home building expert
Speaker 5: because I look at Zillow and Street Easy all the
Speaker 5: time in Brooklyn, exactly. Okay, that's just rude. That's just rude.
Speaker 2: Paul.
Speaker 5: Hey, Drew, I'm glad you brought up d R Horton
Speaker 5: because you've also mentioned concessions that we've been seeing with
Speaker 5: some of the new homes. What did R Horton say
Speaker 5: about that?
Speaker 4: Yeah, so their commentary was pretty much in line with
Speaker 4: what it was last quarter, and that's that sales incentives
Speaker 4: are going to remain at elevated levels over the near term.
Speaker 4: And you have to keep in mind, you know, when
Speaker 4: they started this quarter back in January rates for six
Speaker 4: and a half. We're almost seven and a half now,
Speaker 4: so their goal and builders as a whole are generally
Speaker 4: trying to maintain a spread in mortgage rates versus you know,
Speaker 4: what you see out there as a headline. So if
Speaker 4: we're looking at seven and a half, they're trying to
Speaker 4: offer their buyers something one hundred to one hundred and
Speaker 4: fifty basis points below what you would get in the
Speaker 4: resale market. So they do expect rates to remain elevate it.
Speaker 4: You know, that was one of the main things coming
Speaker 4: into the quarter is how would these elevated rates impact
Speaker 4: the use of incentives and ultimately their gross margins, you know,
Speaker 4: and encouragingly, their gross margins. Looking out into the third quarter,
Speaker 4: we're only a touch below what consensus was looking for,
Speaker 4: you know. And I think the fact that the bar
Speaker 4: has been lowered, I mean, if you look at what
Speaker 4: the stocks have done over the last month, the bar
Speaker 4: was lowered coming into the print. So I think investors
Speaker 4: were comfortable with the commentary they heard today.
Speaker 2: Drew.
Speaker 5: I have a super dumb question, but if the housing
Speaker 5: market is still so tight and there is so much demand,
Speaker 5: why do they need to offer incentives.
Speaker 4: Well, there's not a lot of inventory in the resale market,
Speaker 4: and they're trying to make their product more attractive. So
Speaker 4: part of the business of a home builder is that
Speaker 4: you need to turn your inventory over to make your
Speaker 4: business work. So they're seeing a lot of demand for
Speaker 4: spec homes. They want to move those speck hones because
Speaker 4: the longer they say in inventory, the more likely they
Speaker 4: are to come down in price or come down even
Speaker 4: more significantly in margin. You know, just because there is
Speaker 4: demand out there, it doesn't mean that affordability is not bad.
Speaker 4: Affordability is still the you know, at some of the
Speaker 4: worst levels in history, and a lot of buyers are
Speaker 4: struggling out there, and they need these incentives to kind
Speaker 4: of get buyers through the door and make the math
Speaker 4: work for them.
Speaker 3: Any markets showing signs of kind of peaking, and I'm
Speaker 3: trying to I'm thinking of the Miami's of the world,
Speaker 3: the Austin's of the world, of those markets peaked.
Speaker 4: Yeah, those are two good names that you point out.
Speaker 4: Florida has been one of the strongest markets. But interestingly,
Speaker 4: what we're starting to see now is that inventory, particularly
Speaker 4: in some of those Southwestern and you know, Western markets
Speaker 4: like Tampa all down the coast, we're starting to see
Speaker 4: pretty significant increases in inventories now by and large. You know,
Speaker 4: across the US, inventories for the most part, are still
Speaker 4: below where they were in twenty nineteen. But I think,
Speaker 4: you know, as a builder, that's really been your advantage.
Speaker 4: So every time inventories increased five ten percent, you're starting
Speaker 4: to lose a little bit of that advantage. So one
Speaker 4: of the main places we're seeing it is Florida. We're
Speaker 4: also seeing it in Austin, as you mentioned. And you
Speaker 4: know what's interesting with the Florida market is it's an
Speaker 4: area where you've had a lot of single family housing
Speaker 4: converted to short term rentals, so you're starting to see
Speaker 4: maybe some of those come back to the market. But
Speaker 4: you're also seeing a market that's suffering from high insurance
Speaker 4: costs with you know, the storms and things like that.
Speaker 4: HOA fees are going up, so it's becoming more unaffordable market.
Speaker 3: Yeah, I mean, I don't know, It just seems like
Speaker 3: some of those markets have to peak, if not now,
Speaker 3: and we're gonna go down in June. We're gonna go
Speaker 3: down to another hot market in Nashville, Tennessee. So Alex
Speaker 3: and I will do some on the ground reporting home
Speaker 3: builder analyst, Yes, exactly, how hard can it be? And
Speaker 3: you just predict her into interest rates are going. Drew
Speaker 3: Reading he is our top notch home building analyst at
Speaker 3: Bloomberg Intelligence. Again, a significant upgrade from the first guy
Speaker 3: we had in there, So very good for Drew Reading there.
Speaker 3: Talking about the hazard market again, d R. Horton had
Speaker 3: some some good numbers out this morning.
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Speaker 5: We did have some data coming out. We had housing data,
Speaker 5: but also we had the conference board US leading in.
Speaker 5: I'm not one hundred percent sure I know what that
Speaker 5: even is. It came it was down by about three
Speaker 5: tenths of one percent. That was worse than estimated. The
Speaker 5: prior month was revised up to two tenths of one percent,
Speaker 5: So it feels like that's a really big dip. Luckily,
Speaker 5: we have Dana Peterson. She joins us now from the
Speaker 5: conference board. This is her data. She can talk us
Speaker 5: through it. Dano, what is this? How do I read
Speaker 5: this information?
Speaker 6: Sure?
Speaker 5: Absolutely so.
Speaker 7: The US Leading Economic Indicator is a measure that's been
Speaker 7: out for a long time, and lots of people look
Speaker 7: at it and see it as a gauge for where
Speaker 7: the economy's going, whether there's a recession that's going to
Speaker 7: happen over the next six to twelve months or not.
Speaker 7: And basically, this measure did dip in the month, and
Speaker 7: when we looked at what was actually good, it was
Speaker 7: very little, just Leading Credit Index and also the stock index.
Speaker 7: Everything else was either negative or flat. And indeed, when
Speaker 7: we look at this gauge over the long run, it
Speaker 7: has signaled recession. But the thing is that it's signaling
Speaker 7: weakness in some parts of the US economy, but it
Speaker 7: doesn't capture all parts.
Speaker 3: All right, So talks about what we're seeing here again,
Speaker 3: The Leading Index came in at negative zero point three
Speaker 3: percent today. Consensus was a negative zero point one, so
Speaker 3: weaker than expected. What's driving it?
Speaker 8: Sure well?
Speaker 7: Things that were down in the month were job as claims.
Speaker 7: This is for March, not for April. So job as
Speaker 7: claims were down, consumers expectations for business conditions was down. Also,
Speaker 7: the yield curve was more negative, so you had a
Speaker 7: lot of things that just weren't really working well, and
Speaker 7: also permits weren't doing well. And certainly we know that
Speaker 7: the housing sector remains weak, as mortgage rates have actually
Speaker 7: ticked back up and are quite high relative to what
Speaker 7: people experienced during the pandemic. And of course that's because
Speaker 7: the Fed has raised interest rates and is keeping them
Speaker 7: pretty elevated for some time.
Speaker 5: Danny, before we let you go, can you overlay a
Speaker 5: five percent two year and a talk of a five
Speaker 5: percent ten year onto this kind of data.
Speaker 7: Well, the thing is that we know that the two
Speaker 7: year yield is probably you know, it's reflecting what's going
Speaker 7: on more so in the FED funds rate. Meanwhile, you
Speaker 7: still have an outsized balance sheet and uncertainty kind of
Speaker 7: weighing on the ten year and so that's why the
Speaker 7: yeal curve is still negative. And for some folks that
Speaker 7: signals recession, but it's not the only measure. And certainly
Speaker 7: we don't think a recession is going to happen in
Speaker 7: the US, but certainly we could see some moderation and
Speaker 7: growth as consumers kind of pull back after spending tons
Speaker 7: of money and pulling up a lot of debt. But
Speaker 7: we don't think that the labor market's going to crash.
Speaker 7: It's probably still going to do well, and the Fed
Speaker 7: is still going to be looking at inflation gauges to
Speaker 7: see can they get back to two percent and can
Speaker 7: the Fed start cutting interest rates this year?
Speaker 3: All right, Dana Peterson, thank you so much for joining us.
Speaker 3: Data Peterson chief economists at the conference board, breaking down
Speaker 3: some of the data coming out of the board. The
Speaker 3: leading Economic Innator indicator came in a little bit weaker
Speaker 3: than expected.
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Speaker 2: Let's talk a little airlines to air.
Speaker 3: Alaska Airlines had some good earning stock US up four
Speaker 3: percent today. You know, for the longest time, until just recently,
Speaker 3: when I looked at an Alaska Airlines plane in the
Speaker 3: tail the tail fin have the image of an individual.
Speaker 2: You know who I thought that was, until just recently,
Speaker 2: Jerry Garcia.
Speaker 4: Who is it? Well?
Speaker 3: I was sitting Okay, so Alaska Airlines on the tailfin,
Speaker 3: go google it. There's an image of an Eskimo. Up
Speaker 3: until just recently, I thought that was Jerry Garcia. And
Speaker 3: I was sitting in a Seattle airport talking to a
Speaker 3: pilot from Alaska Airlines. I said, boy, you guys are
Speaker 3: so cool. You have image of Gerry Garcia on every plane.
Speaker 3: He says, no, numb nuts, it's not Jerry Garcia. It's
Speaker 3: an Eskimo or a Lesque Airlines.
Speaker 2: How stupid can you be? So that's something My bubble
Speaker 2: was bopped. Pop. George Ferguson, he covers all the airlines
Speaker 2: and airspace companies. So I guess, George, we.
Speaker 3: Look at Alaska Airlines, the Jerry Garcia airline, what's happening?
Speaker 2: And they have some good numbers?
Speaker 6: Yeah, so pretty nice, you know, very nice numbers. Actually
Speaker 6: pretty surprised. It's all about strength and revenue right now.
Speaker 6: The surprises we're seeing, like United in Alaska, if your
Speaker 6: revenue line, you know, has coming better than expected, yields
Speaker 6: are doing better at these airlines, and again we expected
Speaker 6: going in, then you're getting a nice beat on earnings.
Speaker 6: And Alaska cited return of corporate travel, continued, strong leisure trends,
Speaker 6: and you know, we were kind of looking for a
Speaker 6: slightly down yield number, and you know, they had a
Speaker 6: definitely with the adjustment for the panel blowout from Boeing,
Speaker 6: they would have had five percent unit revenue increase, so
Speaker 6: very strong, very impressive.
Speaker 5: So I'm confused. I thought that the business airlines were
Speaker 5: like United, An American, and Delta, not Alaska air.
Speaker 6: So Alaska does have premium you know, premium seats in
Speaker 6: the front of the airplane, so they are business airline.
Speaker 6: I don't see them as sort of a big corporate
Speaker 6: airline because they're they're pretty regional right there, very West
Speaker 6: coast focus, very Alaska focused, as it seems like Paul's
Speaker 6: become more aware of recently. Then they do a bit
Speaker 6: of transcon right into the East coast. You've got to
Speaker 6: be able to provide your customer service into the other
Speaker 6: important population center of the US, but they lack a
Speaker 6: lot of i would say, the middle of the country routes,
Speaker 6: and they don't have any international. They partner up or
Speaker 6: they have a little bit of international. They go into
Speaker 6: Mexico and some of those leisure markets, but they partner
Speaker 6: up with the other airlines to provide that international. And
Speaker 6: it's hard to be a big business airline if you
Speaker 6: can't get your customers all the way around the world,
Speaker 6: So that kind of keeps them to smaller businesses.
Speaker 3: Hey, George, John Tucker was just telling me that gasoline
Speaker 3: prices to fill up his hummer. They're up almost seventy
Speaker 3: percent off of those lows three cfty at the wall
Speaker 3: wall exactly.
Speaker 2: How about jet fuel prices? Is that an issue for
Speaker 2: the airlines here?
Speaker 6: It is, It's going to be an issue in two
Speaker 6: Q So in one queue it was a tailwind compared
Speaker 6: to the one queue last year. But if it stays
Speaker 6: on this trajectory or just stays up these levels, it's
Speaker 6: going to be a bit of a headwind. Question will
Speaker 6: be you know, if demand is so strong, i'd expect
Speaker 6: the airlines to be able to push it through in
Speaker 6: pricing to the customers, and we're going to see that.
Speaker 6: I think the other big question here too is, you know,
Speaker 6: we're kind of into earning season. We've seen Delta, we've
Speaker 6: seen United, we've seen Alaska, We've seen airlines with again
Speaker 6: premium product in the front of the airplane. We still
Speaker 6: have to see the low cost carriers come through, because
Speaker 6: I'm not convinced that this strength is in the back
Speaker 6: of the airplane.
Speaker 8: But we're going to see right.
Speaker 6: As we start to see the real sort of low
Speaker 6: cost leisure carriers report, then we're going to know how
Speaker 6: broad based this strength is.
Speaker 5: I mean, having to be buyerpurcated would make sense because
Speaker 5: that's what we're seeing in the broader economy.
Speaker 8: Right.
Speaker 5: One part of the economy is doing well and the
Speaker 5: other this is not. Delinquency's are rising for credit cards.
Speaker 5: You're seeing more money being spent on credit cards, et cetera.
Speaker 5: We heard that from banks in terms of charge offs,
Speaker 5: So that were the case. Where are we in terms
Speaker 5: of valuation for say the front of the plane back
Speaker 5: of the plane carriers.
Speaker 6: Well, I mean, first of all, airlines are always sort
Speaker 6: of valued lowly, right, They're not there if you go
Speaker 6: for a pe multiple, you're in the mid single digits. So,
Speaker 6: I mean airlines are kind of perennially a pretty cheap,
Speaker 6: pretty cheap stock. But I mean what we saw with
Speaker 6: United the other day, that big jump. Part of that
Speaker 6: is them starting to close that gap with Delta, which
Speaker 6: is an upper single digits, you know, kee valued airline.
Speaker 6: So but again they're always kind of they're always kind
Speaker 6: of cheap because when things go bump in the night,
Speaker 6: airlines have a hard time with demand. Right, if we
Speaker 6: had a geopolitical problem, like the war really raged up
Speaker 6: in the Middle East, you probably start to see less
Speaker 6: demand going internationally all of a sudden. You can't feel
Speaker 6: airplanes a lot of operating leverage in this business, and
Speaker 6: so when that demand falls off hard.
Speaker 8: It really hurts.
Speaker 2: All right, George.
Speaker 3: On the YouTube feed, I can see that you are
Speaker 3: in yet again another hotel room, which reminds me you're
Speaker 3: at another boondoggle that we are financing here. You're at
Speaker 3: the corporate I guess aircraft kind of thing out there
Speaker 3: in Arizona. If I want to go out there and
Speaker 3: get the latest golf stream, I don't know, six.
Speaker 2: What's that going to set me back? Is a competition
Speaker 2: out there. How is that market?
Speaker 6: So the latest is going to be the seven hundred
Speaker 6: and the eight hundred pace and you're going to be
Speaker 6: up in the seventy millions.
Speaker 8: Range to own one of those. They're very long range.
Speaker 6: You sorry, seventy five million US.
Speaker 4: Yes.
Speaker 6: And what we're hearing out here from these folks is, look,
Speaker 6: private aviation was very, very strong in the pandemic. Right
Speaker 6: as the very well healed. Some of them were flying
Speaker 6: in the front of the airplane for Delta and United.
Speaker 6: They moved to private aviation. And what we're starting to
Speaker 6: see is some of those you know, those people that
Speaker 6: were flying private, unfortunately, they're moving back to the airlines.
Speaker 6: And that's part of the trend. Those poor folks have
Speaker 6: to get back on a tube for the rest of
Speaker 6: us other people in the world. So that's part of
Speaker 6: the trend too. That's helping the airlines, especially in the
Speaker 6: premium seats. They're seeing a little bit of an ebbing
Speaker 6: of demand of some of that really that those high
Speaker 6: end travelers. But this business is still pretty strong. Backlogs
Speaker 6: are two years for most of the manufacturers, better than
Speaker 6: they've been in a long time. Pricing was pretty good
Speaker 6: in the pandemic. It's softening a little bit. So maybe
Speaker 6: you're getting that golf stream now for I don't know,
Speaker 6: seventy two.
Speaker 5: Hey no, So I mean he's gotten excited.
Speaker 3: Bloomberg televisions are putting up there on our YouTube feed,
Speaker 3: isn't that, Jerry Garcia? If you look at Alaska Airlines,
Speaker 3: I mean.
Speaker 2: It's got to be we don't call them.
Speaker 5: Yeah, all right, Paul still focused on that.
Speaker 2: I just feel bad, Jerry Garcia.
Speaker 5: I just feel bad that those people who fly private
Speaker 5: now have to come back. I mean, that's that's a
Speaker 5: tough stuff. That's a tough rating on that. George. I
Speaker 5: couldn't help, but notice that your backdrop is the same
Speaker 5: as yesterday, which means you've clearly been working really hard
Speaker 5: in and out of that hotel room. What else are
Speaker 5: people talking about right now?
Speaker 6: Well, I mean there's always talk in the marketplace about Boeing.
Speaker 6: Right we've had this whistle blower go through DC. I'm
Speaker 6: not sure you know what we're learning there yet, but
Speaker 6: we're still kind of waiting on the Boeing report on
Speaker 6: how they're going to stabilize their manufacturing. So that's one
Speaker 6: of the things we're talking about. Everybody in the industry
Speaker 6: is talking about supply chain. These folks are talking about
Speaker 6: supply chain here too as well. Supply chain is still
Speaker 6: in a deficit for workers. That means that, you know,
Speaker 6: in the aerospace business, there's aspirations for a number of
Speaker 6: building increases every year. Those aspirations are always harder to
Speaker 6: achieve given these supply chain labor problems, and there's inflation. Right,
Speaker 6: So again the very real, well healed. They're finding out
Speaker 6: that pilots cost more because the airlines paid them more.
Speaker 6: So now for their private jet they got to pay
Speaker 6: pilots more. So, pity them as well. There the front
Speaker 6: of their airplanes costing them some fuel prices, arising, interest
Speaker 6: rates are higher. A lot of these people don't finance airplanes,
Speaker 6: but some of them do. That effects end a little bit.
Speaker 6: Same sort of problems are seeing throughout commercial aerospace, right, George.
Speaker 3: If you know all this stuff, if you were to
Speaker 3: go out money in the object and you were going
Speaker 3: to buy a private jet for yourself, what would you get?
Speaker 4: Wow?
Speaker 6: Wow, you know, I think I would be one of
Speaker 6: those golf streams seven hundred, eight hundred folks, right, because
Speaker 6: that aircraft the ticky across the Pacific without a stop,
Speaker 6: and so the world is kind of truly your oyster
Speaker 6: at that point.
Speaker 5: So are you asking for a friend or asking for
Speaker 5: a friend.
Speaker 2: Yeah, I don't know. I mean, you know, you know,
Speaker 2: it's interesting. I mean there's a lot out there.
Speaker 9: I'll stick with the Falcon jet. You like the Falcon
Speaker 9: If you go up to Teeterborough in New Jersey, the
Speaker 9: work at airport there, that's that's where many many Falcon
Speaker 9: jets aren't. Well, we go, It's Taylor Swift jet too.
Speaker 2: Is that what Swift?
Speaker 4: Now?
Speaker 5: You got?
Speaker 3: Now you got your Atten Swift is flying that. But
Speaker 3: you can got the Marshtown as well. I hear some
Speaker 3: private jets out there as well.
Speaker 5: So I flew on one once like twenty years ago.
Speaker 5: It was cool.
Speaker 2: We'll let George go.
Speaker 3: George Ferguson covers all the airlines and aerospace for Bloomberg Intelligence.
Speaker 3: Back in the day on Wall Street, it was so
Speaker 3: crazy that these aircraft companies were giving us aircraft to
Speaker 3: try out and just take on road shows and giving
Speaker 3: it to us for a week.
Speaker 2: And we're like, sure, thank you.
Speaker 5: Just don't want to be Paul Like sometimes past.
Speaker 2: I say the nineties, particularly the early with us.
Speaker 3: I mean you would get a plane. Hey, Paul, do
Speaker 3: you need a plane for a week. I call up
Speaker 3: on my companies and we'd go out and see clients
Speaker 3: for a week in europeor and the West Coast.
Speaker 2: Okay, crazy time me up. That's why I was asking George.
Speaker 2: I mean, if you're gonna go out and buy one,
Speaker 2: what would it be. Yeah, I guess it would be
Speaker 2: a coult.
Speaker 5: Oh George, all right, you go buy that plane. You
Speaker 5: can borrow, let us borrow it.
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Speaker 5: thousand companies and one hundred and thirty industries around the world.
Speaker 5: We're back live in our interactive broker studio right here
Speaker 5: at Bloomberg Headquarters in Midtown Manhattan, and Lisa was just
Speaker 5: talking about Netflix and password crackdowns, sharing and all that.
Speaker 5: They're also do the sports thing, right or maybe are
Speaker 5: they doing any gambling stuff or no, no, I don't know.
Speaker 5: Maybe video games. You'll do the video games. So there's
Speaker 5: opportunities here. So we wanted to get more with Mark Douglass,
Speaker 5: President and CEO of Mountain to get a perspective of
Speaker 5: what to look at. Mark, what are you looking at
Speaker 5: when Netflix reports today?
Speaker 8: Well, I think everyone's expecting it to be great news
Speaker 8: because Netflix gave great guidance, So the near term looks
Speaker 8: like it's going to be spectacular. I think they'll probably,
Speaker 8: you know, really beat on earnings. That the thing about
Speaker 8: Netflix right now, virtually all their growth is flowing directly
Speaker 8: at the bottom line. So this is a where it
Speaker 8: used to be a company I never made money. Now
Speaker 8: it's a company that's just spitting off profits, and I
Speaker 8: think that's going to actually start to take over as
Speaker 8: like the key thing investors look at rather than just
Speaker 8: looking at subscriber growth.
Speaker 3: So Mark talked to us about some of these revenue
Speaker 3: drivers that I know the street's been talking about for
Speaker 3: the last couple of years. One of which is passwords
Speaker 3: sharing cracking down on that. The other one is the
Speaker 3: ad supported aspect of the vision. To what extent are
Speaker 3: those two issues contributing well?
Speaker 8: I think the password sharing, clearly, it's easy. It is
Speaker 8: highly leverage. You just give a few engineers in a
Speaker 8: room and they just make it harder to use it
Speaker 8: to share passwords, and it creates huge amount of growth.
Speaker 8: And I think Netflix always knew they had that in
Speaker 8: their back pocket. The part about it where they're doing,
Speaker 8: you know, kind of discounted memberships in order and you
Speaker 8: get ads with them, that part is working well in
Speaker 8: terms of selling the discounts. I think in terms of
Speaker 8: selling the ads, it's going a lot slower for them,
Speaker 8: but they do have a ton of upside there. So
Speaker 8: I think again that that is I think where you
Speaker 8: should be looking the future growth is how do they
Speaker 8: actually monetize those ads as opposed to just looking at
Speaker 8: subscriber numbers.
Speaker 5: Here's my question, what is already priced in? Like you
Speaker 5: mentioned the whole they guided it to be good. So
Speaker 5: are we in like buy the rumor sell the news
Speaker 5: kind of thing at this point, which is unusual for
Speaker 5: what we would think is like a mag seven company,
Speaker 5: even though it's not technically in the mags, even.
Speaker 8: Yeah, they I'm not sure it would sell the news,
Speaker 8: but I certainly wouldn't expect the password sharing to be
Speaker 8: you know, it's not an endless number of people that
Speaker 8: was sharing passwords. At some point that that's going to
Speaker 8: start to tail off. And so what kind of has
Speaker 8: to happen is the AD revenue has to come on
Speaker 8: strong at some point. Right now, it's it's pretty weak.
Speaker 8: I think people see numbers and they're over a billion,
Speaker 8: but you know, given the number of people watch Netflix,
Speaker 8: it's not actually a huge number. So it's a lot
Speaker 8: of upside, but there's a lot of execution for them
Speaker 8: still to do. So if I you know, actually I
Speaker 8: was gonna say if I were holding stock, I do
Speaker 8: actually hold Netflix stock. I've done very well on it
Speaker 8: the last few years, and I would continue to hold
Speaker 8: the stock. I think it still has a way to
Speaker 8: go in terms of growth.
Speaker 3: Hey, Mark, I'm just looking at the financials here and
Speaker 3: for county year twenty four, the street's got almost you know,
Speaker 3: almost forty billion of revenue, EBO margins twenty six percent,
Speaker 3: free cash flow six point three billion. That is a
Speaker 3: good good business model. How about the rest of the
Speaker 3: streamers out there? How about the rest of them? I mean,
Speaker 3: how many streamers can have a similar type of performance
Speaker 3: in the streaming business Because you look at the stocks
Speaker 3: of the traditional media companies other than Disney, it's it's
Speaker 3: a disaster out there.
Speaker 8: Yeah. So you know, there's two things that work here.
Speaker 8: One is you have to reach a break even point,
Speaker 8: which Netflix is clearly done, where you know, kind of
Speaker 8: the costs of the content and the number of users
Speaker 8: then you know kind of really line up. And then
Speaker 8: every incremental user is incremental profit and incremental cash flow.
Speaker 8: And so for Netflix, they're there. I mean we're talking
Speaker 8: over a quarter billion world wide, and by the way,
Speaker 8: I mean, why can't that be a half a billion worldwide?
Speaker 8: So so you know, they're there, and for everyone else,
Speaker 8: they're just not quite there yet. I mean they struggle
Speaker 8: to keep the SUBSCRIBERSFLI I always said is like when
Speaker 8: you turn on your TV, it's the first place you go.
Speaker 8: It's like it's like the new cable guide. Let me
Speaker 8: go see what's on Netflix, rather than let me just
Speaker 8: see you know, what's scrolling on the cable guides. And
Speaker 8: it's something to watch and they can't lose them, and
Speaker 8: people just won't let go of that, And so I
Speaker 8: think the other folks what's going to happen is going
Speaker 8: to be a lot of consolidation. If you don't know
Speaker 8: why you would go to c like I could. If
Speaker 8: you go Netflix, gonnay have everything. Go Disney because they
Speaker 8: have children's d to tame, and you go ESPN because
Speaker 8: of sports. Why do you go to CBS? Like nobody
Speaker 8: can name that? And if you can't name it, it's
Speaker 8: not going to exist. It's going to be consolidated and
Speaker 8: just just essentially bought for as a library to fill
Speaker 8: Netflix essentially and maybe Disney.
Speaker 5: Wait, do you really have a TV Guide subscription? Tucker?
Speaker 9: No, I don't, but I will tell you that I
Speaker 9: was cleaning out the attic and I found my TVO
Speaker 9: and it's just like, I don't what to do with it.
Speaker 5: I don't want to throw it out, but I think
Speaker 5: you're going to throw it out. Yeah, yeah, if.
Speaker 9: Anybody wants a free TVO, Caul John Tucker.
Speaker 5: Here's my very silly question, Mark, is that who is
Speaker 5: actually a true competitor to Netflix. We can name a
Speaker 5: bunch of the streamers, right, but they have so many
Speaker 5: other business models too. Like, if I'm an advertiser and
Speaker 5: you're pitching me, why would I go anywhere but Netflix?
Speaker 8: Well, I think the consolidation that you kind of start
Speaker 8: to see happening with you know, Paramount being on the block,
Speaker 8: I think what you have to do is you have
Speaker 8: to build a big library and they and have a
Speaker 8: lot of original content and the ability to match that exists,
Speaker 8: but you have to piece together the right assets, like
Speaker 8: you need HBO combines with buying you know, everything from
Speaker 8: CBS and ABC that they have in their old library,
Speaker 8: and like you kind of have to piece that together.
Speaker 8: So the question is who has the ambition to do
Speaker 8: it at the moment, no one, But I don't think
Speaker 8: that will lasts forever. I think someone will step up
Speaker 8: to the plate. They're gonna have to do it with
Speaker 8: a lot of money.
Speaker 4: Though.
Speaker 3: All right, Mark, let's just step away and take a
Speaker 3: look at TV advertising in general. Is does any advertiser
Speaker 3: merit even go on broadcasting cable television anymore? Or is
Speaker 3: it just the healthcare advertisers telling me some selling me
Speaker 3: some drug for some ailment I didn't even know existed.
Speaker 8: Well, you know, the linear TV it's broadcasts. I think
Speaker 8: a lot of advertisers. The industry has split. Let me
Speaker 8: say another way, the industry has split in the two sections.
Speaker 8: So in one you have reaching frequency. That's why people
Speaker 8: like the Final four, the NBA Finals, you know, the
Speaker 8: NFL and stuff like that, and you just want to
Speaker 8: reach a big audience at once. The Olympics and that
Speaker 8: still plays a role. And there are you know, twenty
Speaker 8: five percent of this market is not going to let
Speaker 8: go a cable anytime soon at least. And so if
Speaker 8: you're an advertiser and that reaching frequency is your goal,
Speaker 8: that's still attractive. I think for everyone else, you know,
Speaker 8: they want to do digital advertising, targeted, measured things like that.
Speaker 8: That's what my company does, Mountain. You know, we have
Speaker 8: more customers advertising customers than Netflix. You know, we're at
Speaker 8: and so you know, that's what everyone else wants, and
Speaker 8: there's room for both of them. But clearly you can't
Speaker 8: sustain a TV network just on linear anymore. And that's
Speaker 8: you know, that's why Prior Mountain is on the block
Speaker 8: and because they can't get the viewers on streaming that
Speaker 8: they need to.
Speaker 5: All right, great stuff, really appreciate it, Mark, Thank you
Speaker 5: very much. Mark Douglass, President and CEO of Mountain just
Speaker 5: looking at the stock here doing some coick math. We
Speaker 5: can look to the October low and Netflix is up
Speaker 5: seventy eight percent.
Speaker 2: Yeah, yeah, just amazing.
Speaker 3: I mean the volatility in that stock and the volatility
Speaker 3: of the stock around earnings is always a good one.
Speaker 3: So you feel like a plus or minus eight nine
Speaker 3: percent on when that release earned. It's a big volatility,
Speaker 3: it's a little bit less so because it's become, as
Speaker 3: Mark was saying, a little bit less of a subscriber story,
Speaker 3: maybe a little bit more of a profit.
Speaker 1: You're listening to the Bloomberg Intelligence podcast. Catch us live
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Speaker 2: Blackstone m M.
Speaker 3: I just I kind of don't remember just how huge
Speaker 3: they are, and I go look at the market cap,
Speaker 3: I look at their assets on their management So but anyway,
Speaker 3: we spoke with a Blackstone COO, Jonathan gray Lader today.
Speaker 3: He's concerned about higher rates are headwind for Blackstone's key
Speaker 3: business units, limiting evaluations and making borrowing costs more costly.
Speaker 3: And Blackstone COO Jonathan Gray thinks that the FED may
Speaker 3: not be as quick to cut rates as investors hope.
Speaker 2: Let's listen in. I think the FED has had some
Speaker 2: real success on inflation.
Speaker 8: You know, we had inflation north of nine.
Speaker 3: The pace of disinflation has slowed, but the path is
Speaker 3: still downward.
Speaker 5: That was Jonathan Gray, Blackstone COEO. But all the hubbabaloo,
Speaker 5: the stock was down like five percent earlier. Pre market
Speaker 5: trading collected more fees from big retail funds and credit
Speaker 5: strategies during the first quarter and that really helped to
Speaker 5: compensate for that slower pace of deal exits. But like
Speaker 5: some of those numbers are huge. Distributable earnings increased one
Speaker 5: percent from a year earlier to one point two seven
Speaker 5: billion dollars. Yep, that's a ginormous kind of number.
Speaker 2: Let's get all they paid executive as well.
Speaker 5: I understand I've heard such things. Yes, Joining us never
Speaker 5: more is Paul Goldberg, Bloomberg Intelligence senior equity analyst. He
Speaker 5: covers all these big asset managers as well as golobal banks. Hey, Paul,
Speaker 5: what did you make of the numbers?
Speaker 10: I thank you for having me the numbers. I would
Speaker 10: break them up in three buckets. One the fee growth,
Speaker 10: which was fairly decent, but not the double digit Bracknate
Speaker 10: growth that we've seen in years prior to the painful
Speaker 10: twenty twenty three in late twenty twenty two. The second
Speaker 10: one is key themes and those things are getting better.
Speaker 10: So you do get a private credit business that was
Speaker 10: working pretty well. You have a wealth management business that
Speaker 10: you mentioned that's working pretty well. They've reached two hundred
Speaker 10: and forty billion dollarsand assets in the wealth management with
Speaker 10: their goal of to fifty, so they're pretty much at
Speaker 10: their goal. And lastly, the painful part is the deal
Speaker 10: activity in terms of deployments and particularly realizations that produce
Speaker 10: performance fees, and that sort of becomes still a pain
Speaker 10: point for Blackstone and that's a drag on their earnings.
Speaker 2: What's Paul, what have they been saying about that?
Speaker 3: Because again, you're right, we haven't seen a lot of
Speaker 3: M and A activity, we haven't seen a lot of
Speaker 3: IPO activity, the you know, types of exit events that
Speaker 3: would allow them to realize some returns on their investments.
Speaker 3: What are they saying about the next six to twelve months.
Speaker 10: Well, I would actually look a little bit beyond that,
Speaker 10: because on the call they were really talking about twenty
Speaker 10: twenty four and before they were really hopeful for the
Speaker 10: second half of twenty four to get better. But then
Speaker 10: Jonathan Gray was actually on plumber Tivity a little bit
Speaker 10: after the call in the last hour or so, and
Speaker 10: he kind of mentioned the more activity, return of activity
Speaker 10: is probably going to be more of a late twenty
Speaker 10: four and into twenty five matter. So I would, yeah,
Speaker 10: I would look a little bit beyond the next six months,
Speaker 10: maybe the next twelve, nine to twelve.
Speaker 5: If they have a hard time exiting investments, how do
Speaker 5: they then raise more money for new funds? How does
Speaker 5: that work?
Speaker 10: Well, I think it's the issue not just we're kind
Speaker 10: of very focused on the private equity when we talk
Speaker 10: about that, but the third of their business is private equity.
Speaker 10: The third of their business is real estate, and there
Speaker 10: are still there are some opportunities, and performance in real
Speaker 10: estate gotten a little bit better. So the fundraising came
Speaker 10: back to some extent, the b read b cred the
Speaker 10: retail funds. The outflows kind of stopped there so perpetual
Speaker 10: vehicles are doing pretty well for them. And the last category,
Speaker 10: the credit category, that has just been a very strong
Speaker 10: grower and that's reached out about a third of their
Speaker 10: assets at.
Speaker 3: This Paul, Yeah, you mentioned real estate, and of course
Speaker 3: historically Blackstone's been a big, big player in the real
Speaker 3: estate business. What is their call on office A? Do
Speaker 3: they have a lot of exposure there? And B how
Speaker 3: concerned are they about it?
Speaker 10: That there was nothing discussed in terms of office really
Speaker 10: on the cold this morning. They have about one or
Speaker 10: two percent of total assets in commer in office space,
Speaker 10: maybe even less than that, so it's a fairly small amount.
Speaker 10: They are super focused on the multifamily. During the quarter
Speaker 10: they made it ten billion dollar deal for air communities
Speaker 10: that take private deal, so they're still very focused on that.
Speaker 10: That've been for over the last ten fifteen years. They
Speaker 10: also tooked gave some specific numbers around the logistics and infrastructure,
Speaker 10: So there's about fifty billion dollars of investments in that
Speaker 10: already we're talking about that's five percent of the total
Speaker 10: assets just in that.
Speaker 5: So I have brought up the how did they raise
Speaker 5: more money they can exit? Did you read the big
Speaker 5: take article, Paul uh Sweeney, it was about this. It
Speaker 5: was basically that private equity executives have had all the
Speaker 5: power in terms of fundraising, and then now the tables
Speaker 5: have turned a bit and the dealmakers are being told
Speaker 5: to put more of their own assets on the line
Speaker 5: as they struggle to ring cash from their increasingly wary backers.
Speaker 5: And that did some of the junior guys have to
Speaker 5: like put up a home or like you know, put
Speaker 5: up a car their second home or something in order
Speaker 5: to get these loans with like very high rates in
Speaker 5: order to do that. Paul Goldberg, did you read that?
Speaker 5: What did you think of that?
Speaker 10: I did read that. There are some of that, But
Speaker 10: on the that basis, there's still a lot of demand
Speaker 10: for all sorts of alternative investments, especially in the areas
Speaker 10: if you go into wealth where the growth is much
Speaker 10: faster and the opportunities bigger. Because the wealth is a
Speaker 10: portion of the private investments, the portion of alternatives is
Speaker 10: much smaller, So there's a lot of opportunity there, and
Speaker 10: I think there's not as much power from the investors
Speaker 10: in those areas.
Speaker 2: There's a lot of.
Speaker 10: Demand coming from insurance companies. Blackstone has about two hundred
Speaker 10: billion dollars of their assets are coming from insurance, they
Speaker 10: earn them a little bit of extra spread. So I
Speaker 10: think there are different areas of fundraising and different areas
Speaker 10: of assets and clients that come to them, rather than
Speaker 10: just what we've kind of got from that article.
Speaker 3: Private credit, Paul, what's Blackstone say about this business?
Speaker 2: It's obviously just a booming business.
Speaker 3: Assets under management is skyrocketing. There's some calls for maybe
Speaker 3: some greater transparency, maybe in some regulation of the private
Speaker 3: credit business.
Speaker 2: What's the Blackstone take on that part of the business.
Speaker 10: It's been very strong. As I mentioned, it reached about
Speaker 10: third of their assets three hundred plus billion dollars. They
Speaker 10: do have a lot of different vehicles there that do
Speaker 10: a lot of direct lending, but they're also have the
Speaker 10: largest business develop company which is geared towards retail b
Speaker 10: cred so's that's a huge vehicle for them. There was
Speaker 10: a lot of growth first quarter. There are actually some
Speaker 10: questions because you had a syndicated loan market with blending
Speaker 10: from the banks. Come back to some extent reclaim in
Speaker 10: some of the module that the private credit got last year.
Speaker 10: But it's a long term game. So over time, there's
Speaker 10: still a lot of opportunity for private credit. We ran
Speaker 10: some numbers, but think if you think of investment credit
Speaker 10: potential for replacement, especially for those insurance companies, it could
Speaker 10: be a forty trillion dollars addressable market. When private credit
Speaker 10: is we're talking about one point six one point seven
Speaker 10: trillion right now, So there's a lot of opportunities still
Speaker 10: to take the incremental one two three percent of that
Speaker 10: market still before we.
Speaker 2: Let you go.
Speaker 5: So Blackstones at the tone, what do you think the
Speaker 5: other big asset managers are going to come out with.
Speaker 10: It's a little bit difficult because the earnings for them
Speaker 10: kind of idiosyncratic to some extent because these private investments
Speaker 10: they're large and sometimes they move in different different directions.
Speaker 10: There's about two weeks until the next one report, so
Speaker 10: there's most of them reports over the end of April
Speaker 10: and early May. I think from what we've seen from Blackstone,
Speaker 10: the private credit is going to hold fairly well, which
Speaker 10: is a positive for companies like Apalla and Aarris. Private
Speaker 10: equity realizations exits is still a little bit more difficult,
Speaker 10: so it might give some pain to the guys like
Speaker 10: Carlisle KKR. They actually pronounced their realizations a few weeks
Speaker 10: before the end of the quarter, so we know the
Speaker 10: numbers were pretty light, so that's not going to be
Speaker 10: a surprise. But on the other hand, rates has stained
Speaker 10: higher for longer. They brought out the Global the rest
Speaker 10: of the business from Global Atlantic, so the insurance business
Speaker 10: is going to do well and provide them some earniences
Speaker 10: in that area.
Speaker 2: All right, Paul, thanks so much for joining us.
Speaker 3: Paul Gilberg, he's a senior equityanas of Bloomberg Intelligence, following
Speaker 3: all the alternative asset managers then in our Princeton, New
Speaker 3: Jersey office. So Blackstone is just so huge and the
Speaker 3: private credit business has just been an amazing business. No
Speaker 3: surprise that Blackstones got a big presence there.
Speaker 5: You know, I was thinking about it. I was like,
Speaker 5: I don't know if I'm one hundred percent clear of
Speaker 5: what Blackstone is anymore. Yeah, Like, because it's so big.
Speaker 2: I used to have a lot of luncheon remember Blackrock
Speaker 2: used to be a part of that. To give you
Speaker 2: a sense of how big it originally was.
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