Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
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Speaker 3: All right, well, one stock this down about fifty percent
Speaker 3: is b Riley. It's facing a wider probe on some
Speaker 3: risk disclosure disclosure. So we want to get a little
Speaker 3: bit more into this with David Viacos. He is Bloomberg
Speaker 3: Legal reporter. Can you just explain to me, David, what's
Speaker 3: going on here? What this probe is.
Speaker 4: The Security and Exchange Commission has been investigating for several
Speaker 4: months the accuracy of the financial disclosures from b Riley,
Speaker 4: which is a Los Angeles based investment firm, and we
Speaker 4: reported this morning that they're also looking into whether they've
Speaker 4: adequately disclosed the risk in some of the assets, and
Speaker 4: they're looking at possible improper trading by insiders as well.
Speaker 4: The company today announced that it's likely to miss its
Speaker 4: earnings by a good bit and so I think the
Speaker 4: poor earnings announcement, combined with the SEC news, is punishing
Speaker 4: the shriffs.
Speaker 5: Down fifty four percent over the trailing twelve months. That
Speaker 5: really does suggest that the stock market is really concerned
Speaker 5: about this thing. Is there a solution here? Is there
Speaker 5: a restructuring out there? Is there just is there something
Speaker 5: out there that can save this company and shareholders and
Speaker 5: bond holders?
Speaker 4: I guess, well that's the question. I mean, Bryan Riley,
Speaker 4: the founder and CEO, said today that they're refocusing their
Speaker 4: business on their core operations, and I guess we'll see
Speaker 4: how investors react. Their problem is they have a lot
Speaker 4: of problematic debt that they're going to have to work
Speaker 4: through now. And they also, uh, it's unknown just the
Speaker 4: precise nature of their relationship with a guy named Brian Khan,
Speaker 4: who be Riley helped take his company, Franchise Group public
Speaker 4: and then help him take it private, and so there's
Speaker 4: a lot of interlocking relationships between the two of them,
Speaker 4: and there's a criminal investigation that's caught up Brian Khan.
Speaker 3: So why would anyone own the stock right now? I mean,
Speaker 3: what's in it for investors to hold onto the stock?
Speaker 3: Like how soon will this legal worries be resolved or not?
Speaker 3: Like how drawn out? Could this be?
Speaker 5: It?
Speaker 4: The company is contracting pretty rapidly. If you look at
Speaker 4: its market share, it's down considerably. So this could go quickly.
Speaker 4: And I guess it's a matter of whether investors still
Speaker 4: have faith in this company to right itself.
Speaker 5: You know, I'm just looking at you know, when you
Speaker 5: think about these investors, banks, these brokers, firms, it's in
Speaker 5: the marketplace, it's all about trust. We saw that with
Speaker 5: Lehman Brothers, bear Stearns, much bigger firms. But if you
Speaker 5: lose that counterparty trust, you're done. Everybody just walks away
Speaker 5: from you. Is that kind of It feels like we're
Speaker 5: kind of at that point right now.
Speaker 4: It does feel like we're at an inflection point, you know,
Speaker 4: whether investors will continue to trust and so I guess
Speaker 4: we'll have to see how the investigations play out as well.
Speaker 5: All Right, David, thank you very much for that reporting.
Speaker 5: It looks like a brutal day for b Riley and
Speaker 5: A shareholders down fifty percent. Here David Orriaco's Bloomberg legal reporter,
Speaker 5: talking to us about b Riley. R I l Y
Speaker 5: is the ticker.
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Speaker 3: Thirty, Malex Steel Paul SWEENI will be back momentarily. This
Speaker 3: is the Bloomberg Intelligence Radio. We bring you all the
Speaker 3: top news in business and finance and economics. There are
Speaker 3: lens of our Bloomberg Intelligence folks. They cover two thousand
Speaker 3: companies and one hundred and thirty industries worldwide. We also
Speaker 3: take you outside the Bloomberg Intelligence universe to get the
Speaker 3: read on what people are doing with their money, and
Speaker 3: for that we go to Christina Hooper, a chief Global
Speaker 3: market strategist at Invesco. She joins us. Now, Christina, you're
Speaker 3: one of the best about putting situations in the market
Speaker 3: into context, into perspective. So just let's start broad. How
Speaker 3: would you categorize the last couple weeks within the within
Speaker 3: the market.
Speaker 6: So Alex, I would characterize it this way. We have
Speaker 6: seen valuations get stretched. Let's face it, We've seen a
Speaker 6: very very strong rally over multiple multiple months without much
Speaker 6: of a pullback, So it makes sense that when stocks
Speaker 6: are closer to being priced for perfection, jitters enter the
Speaker 6: market environment, especially when we see some cracks appearing in
Speaker 6: the economy at the same time that the FED is
Speaker 6: holding rates at very high levels. What I would argue
Speaker 6: is very restrictive given the level of disinflationary progress we've
Speaker 6: seen thus far. So I think of it as something
Speaker 6: of a small but almost perfect storm that caused a
Speaker 6: sell off. Certainly that was the case in the United States,
Speaker 6: of course, greatly exacerbated and initially triggered by what happened
Speaker 6: in Japan with the carry trade. The banker Japan gave
Speaker 6: a somewhat surprising rate hike, and that triggered an unwind.
Speaker 6: And so we had several different events that came together
Speaker 6: to cause the sell off. But just as quickly as
Speaker 6: at occurred, we saw a retracing of much of it
Speaker 6: because those proximate causes dissipated. And by that I mean
Speaker 6: we heard from the Bank of Japan that in fact,
Speaker 6: they're going to be a lot more cautious with any
Speaker 6: more rate hikes if there is market turmoil or instability.
Speaker 6: And number two, we got a data point in labor.
Speaker 6: The initial jobless claims that was better than expected because
Speaker 6: in the US, the trigger, of course for concerns about
Speaker 6: a heightened probability of recession came from the July jobs report,
Speaker 6: and that increased in unemployment. So we've seen something of
Speaker 6: a recovery. I think we're going to continue to see
Speaker 6: investors walking on eggshells in the near term because there's
Speaker 6: still a lot of uncertainty out there. But I think
Speaker 6: it definitely was an over sold situation.
Speaker 3: So then how does that set us up into CPI
Speaker 3: this week? Although I might say initial jobless claims before CPI,
Speaker 3: for example, more important, and then Jackson Hole, if position
Speaker 3: is kind of cleaned out a little bit, if we've
Speaker 3: kind of delevered enough, if technically we've already sort of stabilized,
Speaker 3: how does that set us up?
Speaker 6: So I think we certainly will have jitters around, not
Speaker 6: just initial jobless claims, but clearly CPI, But we have
Speaker 6: to take it with a grain of salt, right because
Speaker 6: we are seeing other signs of disinflation. In fact, I
Speaker 6: thought the most important data point from the July jobs
Speaker 6: report was wage growth, which has fallen to three point
Speaker 6: six percent year over year. But certainly we'll have markets
Speaker 6: hypersensitive to the data this week, especially CPI, and then
Speaker 6: of course we'll have a lot of sensitivity around Jackson Hole.
Speaker 6: Now I look to history and say that typically that
Speaker 6: is used as an opportunity for central bankers to signal
Speaker 6: shifts in monetary policy, and I would expect that to
Speaker 6: happen at Jackson Hole, not in every speech, but I
Speaker 6: think we should get some sense that the Fed will
Speaker 6: cut in September. Now, I don't think we're going to
Speaker 6: get an emergency cut before then. I don't think we're
Speaker 6: going to get bigger than fifty basis points because the
Speaker 6: Fed seems to be very confident in their approach. And
Speaker 6: keep in mind, they did a similar thing back in
Speaker 6: twenty twenty two. Many thought they were behind I think
Speaker 6: they thought they might be behind it, but they still
Speaker 6: only started with twenty five basis points, and I think
Speaker 6: we'll see the same in September.
Speaker 3: So to that point, how does the FED signal cuts
Speaker 3: when the market's already pricing in one hundred basis points
Speaker 3: of cuts? So it's like if they go too far
Speaker 3: and then all of a sudden, we're going to be
Speaker 3: looking at what fifty again are being priced in.
Speaker 6: Well, I think it's a reiteration that we're going to
Speaker 6: be gradual, that we are going to start cutting, but
Speaker 6: don't expect it to be at the level you think
Speaker 6: it is, because we're very comfortable with where the economy
Speaker 6: is right now, although monetary policy is too restrictive, so
Speaker 6: I think that's going to be the approach. So certainly
Speaker 6: not not hawkish, but not the dubvishness that markets are
Speaker 6: pricing in at this point.
Speaker 3: Do you feel, then, from that perspective that the carry
Speaker 3: trade unwine blow up thing that we saw is that over?
Speaker 3: Because the funny thing is if the FED cuts more
Speaker 3: than we think, that's actually worse for the carry trade
Speaker 3: blow up. Do we think that that part of the
Speaker 3: market turmoil is done?
Speaker 6: I think it's largely done. I would say it's entirely
Speaker 6: but I do take comfort in the reassurances from the
Speaker 6: Bank of Japan and frankly, I don't think they need
Speaker 6: to hike again for some time. But yeah, certainly there
Speaker 6: could be wrenches thrown into it if the FED, for example,
Speaker 6: is more dubbish. I just don't see that on the
Speaker 6: very near term horizon.
Speaker 3: All right, fair enough, what do you think we are
Speaker 3: going to see for CPI? On Wednesday.
Speaker 6: I think we'll probably see it somewhat in line with expectations.
Speaker 6: But I always take a step back and say, Okay,
Speaker 6: let's say that the month over month number is higher
Speaker 6: than we'd want to see. At the end of the day,
Speaker 6: the FED is looking at a mosaic of data, and
Speaker 6: more important to the FED, of course, is forre PCEE.
Speaker 6: And also I think we often overlook that an important
Speaker 6: part of the Fed's calculus is consumer inflation expectations. We'll
Speaker 6: get the Michigan numbers on Friday, and I think that
Speaker 6: plays a role. Keep in mind that back in June
Speaker 6: of twenty twenty two, when the FED decided to hike
Speaker 6: rate seventy five basis points rather than fifty, they gave
Speaker 6: as their argument in the press conference a couple of
Speaker 6: different data points that they had received, not just CPI
Speaker 6: but inflation expectations. So I think that's an important part of.
Speaker 3: The Calculus's such a good point. And it's also like
Speaker 3: the trend, you know, the directionality to be important there too.
Speaker 3: So when my husband texts me and says, oh my gosh,
Speaker 3: look at this market, what are we doing here? We
Speaker 3: have to do something. What do I tell him like,
Speaker 3: calm down, stay in your positions, or are we going
Speaker 3: to buy the dip? Here?
Speaker 7: Like?
Speaker 3: How do you deal with it as a market participant?
Speaker 6: Well, I look at it this way. If we had
Speaker 6: been sparn enough to turn off our.
Speaker 8: Bloomberg terminals, this is so true, and turned on the
Speaker 8: TV and just watched the Olympics since the start, and
Speaker 8: then turned back everything on today, it wouldn't seem like
Speaker 8: anything dramatic, very dramatic had happened while we were enjoying
Speaker 8: the Olympics, including the break dancing section.
Speaker 6: And yet that is not what we as humans tend
Speaker 6: to do. We fixate on every move and every data point.
Speaker 6: So I think to a certain extent, putting blinders on
Speaker 6: and thinking about the long term trajectory of where inflation
Speaker 6: is going, where the FED is going, can be helpful.
Speaker 6: I think we get so caught up in the short
Speaker 6: term data and market moves when we often as investors,
Speaker 6: we typically have much longer time horizons.
Speaker 3: It's true, it's such a good point. I knew that
Speaker 3: double tasking here well on my terminal with my little
Speaker 3: TV up on the screen was the right call. Thank
Speaker 3: you for validating me, Christina. So does that mean that
Speaker 3: it's it's still going to be sort of growth or quality.
Speaker 3: Maybe you go out with quality quality over cyclicals or something.
Speaker 3: Is that a good way to also think about it.
Speaker 6: Well, probably in the near term it's going to be
Speaker 6: quality because there is a nervousness. There still is some
Speaker 6: risk off sentiment, even though I think certainly conditions became
Speaker 6: over sold. Having said all that, if the FED begins
Speaker 6: to cut and we start to see an improvement in
Speaker 6: economic data, then I think there's this assumption on the
Speaker 6: part of markets that there will be a reacceleration. That's
Speaker 6: my base case, and we'll see. In my opinion, markets
Speaker 6: anticipate that in advance, discount that in advance, which we
Speaker 6: would mean small caps and cyclicals are likely to outperform.
Speaker 3: All right, Christina, did you like break dancing? Like? How
Speaker 3: do we feel about that? In the Olympics so no
Speaker 3: one else will talk about this with me in radio?
Speaker 3: How did you feel about it?
Speaker 6: Well, I was very curious about it. I have to
Speaker 6: say that's something that I think of fondly as a
Speaker 6: out of the eighties. But I'm not sure I've seen
Speaker 6: breakdance moves like the ones I saw at the Olympics,
Speaker 6: so I didn't know if there were different rules in place.
Speaker 3: This is fair enough. John Tucker has something he wants
Speaker 3: to say, sport. No, it's not a whatever. Skate Do
Speaker 3: you think skateboarding is a sport?
Speaker 2: Yes?
Speaker 3: Okay, So what's the difference because they're on a board? Okay,
Speaker 3: I don't know. I don't know about that. I loved it.
Speaker 3: I'm so sad it's over all getting into a curmudgeon.
Speaker 3: By the way, I'm not turning you into anything. I'm
Speaker 3: just setting you up with certain questions. All right, Christina,
Speaker 3: thanks a lot. We appreciated Christina Hooper, chief Global market
Speaker 3: strategist at Invesco, to be totally fair to John Tucker.
Speaker 3: I'm not entirely clear on the break dancing thing either,
Speaker 3: but I support winners and that's all fine.
Speaker 2: You're listening to the Bloomberg Intelligence Podcast. Catch us live
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Speaker 2: wherever you get your podcasts, or watch us live on YouTube.
Speaker 3: The headline in a good way is Gocha Bank buying
Speaker 3: about fourteen point nine percent of Key Corp for about
Speaker 3: two point eight billion dollars. Now, remember Key Corp was
Speaker 3: one of the regional banks that was hit pretty hard
Speaker 3: in the tumult of twenty twenty three. So naturally, who
Speaker 3: do we go to? Herman Chan Bloomberg Intelligence senior analyst
Speaker 3: for US regional banks. Usually we call on him when
Speaker 3: things are going poorly. But this feels to be a
Speaker 3: good thing for Key Corp. Can you walk us through.
Speaker 3: Let's walk us through what Key Corp actually was before
Speaker 3: a Scochia bank decided to get in here.
Speaker 9: Sure, so Key Corp regional bank based in Ohio Cleveland,
Speaker 9: strong presence in commercial ending and has a really robust
Speaker 9: investment bank and capital markets capability for its size. On
Speaker 9: the flip side, the bank was really has been really
Speaker 9: pressured by the higher interest re environment. It got caught
Speaker 9: off sides a little bit by both its hedging strategy
Speaker 9: and its investments in lowly yielding securities when interest rates
Speaker 9: were near zero. So it's it's margin and profitability has
Speaker 9: lagged the peer group over the past couple of years.
Speaker 9: That being said, things were improving and didn't require any
Speaker 9: additional capital infusion. There was on a path to self help.
Speaker 9: Margin had already reached the bottom. But now the with
Speaker 9: the two point eight billion capital infusion from Scotia Bank,
Speaker 9: they can accelerate that earnings profitability improvement story.
Speaker 3: How long does it take to get something like this done? Like,
Speaker 3: has this been in the works for a while or what?
Speaker 9: Yeah, it seems like based on both the calls that
Speaker 9: that Key Corp. And Scotia Bank conducted earlier this morning,
Speaker 9: the CEOs had ongoing conversations about a potential investment. From
Speaker 9: what I understand, Scotia Bank wanted to expand in the
Speaker 9: US and had done a lot of due diligence in
Speaker 9: looking at opportunities, and Key Porp was their top choice.
Speaker 9: So it adds a great earning stream and exposure to
Speaker 9: the US for Scotia Bank and for Key Corp. It
Speaker 9: really improves its capital and liquidity and really puts them
Speaker 9: on offense rather than playing defense for the past couple
Speaker 9: of years.
Speaker 3: How are the banks like Key Corp doing as interest
Speaker 3: rates may fall somewhat soon.
Speaker 9: Yeah, I guess I would contrast it with the tumult
Speaker 9: of March and April of last year. The banks had
Speaker 9: largely been very defensive pretty much up to the end
Speaker 9: of last year. Reducing its lending capacity, trying to improve
Speaker 9: its capital and liquidity ahead of both fears about deposits
Speaker 9: leaving and also higher regulatory burden. Right now, it seems
Speaker 9: like they're in a much stronger position. Capital has been
Speaker 9: built up, they're back to lending. The only issue is
Speaker 9: there's not a lot of demand, and the banks are
Speaker 9: positioned for potentially or interest rates that can improve some
Speaker 9: lending going forward. They've had a lot of the potential
Speaker 9: rate decline, so they're in a fairly good position to
Speaker 9: really prosecute the opportunity.
Speaker 3: What about deposits? Has deposit flight stopped, particularly if rates
Speaker 3: wind up coming down. I'm just waiting for my market's
Speaker 3: account all of a sudden started to tick lower and
Speaker 3: yield where are we here with that?
Speaker 9: My high savings account is already ticked down in anticipation
Speaker 9: for Rencooks, so American Express, I'm not a big fan
Speaker 9: of that. I would say that the posits have really stabilized.
Speaker 9: There's no real rush to build the posits now because
Speaker 9: as I said before, there's not a lot of demand
Speaker 9: for the lending side, so you don't need a lot
Speaker 9: of deposits to really fuel that that you know, the
Speaker 9: muted demand appetite out there for loans. That being said,
Speaker 9: the positle cards aren't rising either, and they're pretty stable
Speaker 9: because the Feds stabilized there the Fed funds rate for
Speaker 9: a bit now, and we'd expect, you know, some stable
Speaker 9: margin depending on the bank, some could be upcome, some
Speaker 9: could be down over the next year just based on
Speaker 9: their balance sheets.
Speaker 3: Are there other potential targets for investments from other banks
Speaker 3: in this kind of scenario.
Speaker 9: Yeah, from what I understand that there's a unique way
Speaker 9: of accounting for the Canadians where some small portion of
Speaker 9: investments in financial institutions has a as a positive capital calculation,
Speaker 9: So it might be more focused on the Canadians in general.
Speaker 9: But that being said that we have seen some pickup
Speaker 9: in traditional M and A activity in the United States.
Speaker 9: Discover Capital one is the biggest one that we're still
Speaker 9: waiting for regulatory regulatory approval, and then there's some smaller
Speaker 9: banks that have done some deals as well. So it
Speaker 9: seems like that the the activity is going to rebound
Speaker 9: even more once we get rate cuts.
Speaker 3: All right, really good stuff, Thank you so much. Herman
Speaker 3: chan He is so happy when he comes in and
Speaker 3: doesn't have to talk about banks blowing up, so exactly.
Speaker 9: I'm no longer the grim Reapers.
Speaker 3: It was like Sam Fizzelli for a while with COVID,
Speaker 3: and it was Herman Chan with the bank blow up,
Speaker 3: and now you know, we're in a different places. Herman
Speaker 3: Chan Bloomberg Intelligence, senior analysts for US regional banks. We
Speaker 3: very much appreciate that.
Speaker 2: You're listening to the Bloomberg Intelligence Podcast. Catch us live
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Speaker 2: Just Say Alexa, Play Bloomberg eleven.
Speaker 5: Thirty, Alex Stee, Paul Swinny live here in our Bloomberg
Speaker 5: Interactive Broker's studio. Also streaming video on YouTube ahead over
Speaker 5: YouTube dot com and search Bloomberg Podcast. That's where you
Speaker 5: will find us. Boy, if you think back a week ago,
Speaker 5: right now, the market was panicking. It felt like, I mean, people,
Speaker 5: we're selling everything across the board, and it is a
Speaker 5: real confluence of events there that really spooked the market.
Speaker 5: The market stabilized kind of midday and into the afternoon
Speaker 5: on Monday, and then kind of clawed back some of
Speaker 5: that selling later in the week, which brings us today
Speaker 5: kind of a mixed market, red and green on the
Speaker 5: screen here. But let's see where we go from here,
Speaker 5: and we do that with a professional. Sarah Ponzik, Financial Advisor, UBS,
Speaker 5: Private Wealth Management, full disclosure. That's where the Sweeney pile
Speaker 5: of cash is at UBS. So they have a whole
Speaker 5: wing just taking care of me. That's nice. Yes, I've
Speaker 5: heard that Tonio c He does it just because he
Speaker 5: likes me. All right, Sarah, what were you What kind
Speaker 5: of conversations were you having with your clients last week?
Speaker 5: It must have been Monday. Must have been a little dicey,
Speaker 5: it was.
Speaker 1: And what a difference just a couple of days makes
Speaker 1: On Monday, if you woke up and you looked at
Speaker 1: the headlines, then you saw what had happened overseas, and
Speaker 1: then you looked at futures markets, and then the market
Speaker 1: opened at nine thirty am and it was just a
Speaker 1: sea of red.
Speaker 10: It felt like the world was falling apart. And I did.
Speaker 1: I mean I had incoming calls all day long from
Speaker 1: clients asking what is going on?
Speaker 10: Do we need to be concerned?
Speaker 1: Should we be selling our stock portfolio, and the answer
Speaker 1: was emphatically no, because as we saw by the end
Speaker 1: of the week, what a difference a couple of days makes.
Speaker 1: And if we think back to why why did Monday happen?
Speaker 1: Last week, there was a confluence of events. Yes, we
Speaker 1: saw the yen carry trade unwinding. It was, you know,
Speaker 1: just more concerns about recession posts that jobs report, and
Speaker 1: just also consider the fact that we had seen almost
Speaker 1: no volatility this year. We were due for some volatility,
Speaker 1: and then it just took a couple of days an
Speaker 1: initial job as claim suport, which showed maybe the labor
Speaker 1: market isn't as dire as the prior Friday had really suggested,
Speaker 1: which usually doesn't move markets, but it did. And then
Speaker 1: by the end of the week, if you had fallen
Speaker 1: asleep the entire week, you would have never known Monday happened.
Speaker 1: The S and P five hundred was unchanged by the end.
Speaker 3: I so wish that I had done that. I sleeping
Speaker 3: as my superpower. I could definitely have done that for
Speaker 3: like a whole week. So, Sarah, I guess the question
Speaker 3: then is, so if someone says, oh my gosh, I'm panicking,
Speaker 3: do I change what I do. You're like, no, just
Speaker 3: hang tight, But can you rotate kind of within that
Speaker 3: and take advantage then of some of the opportunity that
Speaker 3: came about.
Speaker 1: Absolutely last week presented opportunity. So especially if you're someone
Speaker 1: who's been sitting on cash and it's been great, you
Speaker 1: can sid in a money market, you're earning you know,
Speaker 1: five and a half percent in cash, fantastic.
Speaker 10: But now we're closer than.
Speaker 1: Ever to really believing that that's not going to be
Speaker 1: the case in quite some time. We're going to see
Speaker 1: interest rates coming down. So what do you want to
Speaker 1: do with that cash? Obviously, if you're conservative, you could
Speaker 1: go by high quality fixed income. But last week really
Speaker 1: presented an opportunity in the stock market. If you were
Speaker 1: someone who's been waiting for an entry port, entry point,
Speaker 1: last Monday presented that self, you know, start putting that
Speaker 1: cash to work, getting invested, putting a plan in place
Speaker 1: to get invested in the equity market, And when you
Speaker 1: think about certain pockets of the market, I mean, we
Speaker 1: just saw tech absolutely hammered last week, and tech is
Speaker 1: still a place that we're really still optimistic about. And
Speaker 1: if you look at US tech valuations last month, they
Speaker 1: were trading around thirty two times twelve month forward earnings.
Speaker 1: Now they're down to around twenty seven, so more reasonable
Speaker 1: and again an opportunity to get invested in a place
Speaker 1: that had been so high flying and many were just
Speaker 1: scared chase returns in the beginning of the year.
Speaker 5: So aside from technology, which again a lot of folks
Speaker 5: are saying, stick with it, stick with it, where else
Speaker 5: do you guys see opportunities at there? Because there are
Speaker 5: again a lot of people that are thinking about if
Speaker 5: interest rates are coming down, this might be a time
Speaker 5: for me to think about doing take on more risk Bres.
Speaker 10: Yes, absolutely so.
Speaker 1: We've still been very much pushing at the top of
Speaker 1: our list, I would say high quality growth, which you
Speaker 1: know at the top of that list is tech. But
Speaker 1: when you think about more so tactical trades, maybe looking
Speaker 1: to small caps.
Speaker 10: You know, we did see a big.
Speaker 1: Rotation to small caps in July when we started thinking
Speaker 1: about interest rates potentially coming down. When we think about
Speaker 1: interest rates moving lower, small caps are going to be
Speaker 1: that prime beneficiary of that. They have a lot of
Speaker 1: debt on their balance sheets. But at the same time,
Speaker 1: if you're someone who is concerned about a recession, and
Speaker 1: I will say for now a soft landing is still
Speaker 1: our base case. But in the case of a recession,
Speaker 1: small cap small caps.
Speaker 10: Is really not where you want to be overweight, so.
Speaker 1: Finding that balance but small caps potentially, and then also
Speaker 1: you can look at some other cyclical industries like industrials.
Speaker 1: If we do start to see you know, growth continue
Speaker 1: to move forwards, interest rates come down, maybe balancing out
Speaker 1: that high growth exposure with a little bit of cyclicality.
Speaker 1: But again, if we do see more concerns that a
Speaker 1: recession might be on the horizon cyclicals and small caps,
Speaker 1: that's where it can get a little bit dicey.
Speaker 3: It was interesting though, I'm just looking at a one
Speaker 3: month comp chart of the S and P and the
Speaker 3: rustle and they didn't really diverge that much. Like small
Speaker 3: caps didn't tank in relation to the S and P.
Speaker 3: They sort of moved in tandem. Today they're a little
Speaker 3: bit off, maybe a little bit more than but like
Speaker 3: not that much.
Speaker 1: No, it really was when we think about the rotation
Speaker 1: we saw in July, it was a one week major
Speaker 1: snap in which we saw small caps outperform. And now,
Speaker 1: like like you mentioned, Alex, we really haven't seen a
Speaker 1: continuation of that, and we are actually of the belief, Look,
Speaker 1: you should have diversification, you should have a little bit
Speaker 1: of small caps mid caps in your portfolio.
Speaker 10: But when we think about where, where is really where
Speaker 10: are we going.
Speaker 1: To see the bulk of the growth and the bulk
Speaker 1: of returns and outperformance in the years to come. We
Speaker 1: still believe that's high quality growth, large cap tech, and
Speaker 1: large part because look, we went from talking about great
Speaker 1: economic projections to talking about maybe a recession, and frankly,
Speaker 1: if there are recession concerns, where do people go. They
Speaker 1: want high quality, they want growth, they want earnings, and
Speaker 1: nowadays that has become megacap tech.
Speaker 10: So we still are optimistic there.
Speaker 1: Yes, you want diversification, but we're not huge proponents of
Speaker 1: a major rotation, just quite yet.
Speaker 5: All right, you're in South Florida. It seems like everybody
Speaker 5: and your brother's coming down there.
Speaker 3: Yeah, sure, she's from there.
Speaker 1: So well, that's actually what I say all the time,
Speaker 1: alex Is, Look I did. I moved down to Florida
Speaker 1: twenty twenty one, when the entire world living in Florida,
Speaker 1: everyone's still moving there. But I say, in defense, look
Speaker 1: I was here first.
Speaker 10: I grew up here. I promise I'm not an outsider.
Speaker 5: Is it still is it? Are they still coming? Do
Speaker 5: you think? I mean, I know you and your office
Speaker 5: and all the other folks down there are welcoming everybody down.
Speaker 1: It's Look, it's it's not twenty twenty one, twenty twenty
Speaker 1: two anymore. It's definitely slowed. Even if you look at
Speaker 1: the real estate market by US prices haven't come down,
Speaker 1: but they are not, you know, sky continuing to skyrocket
Speaker 1: at ridiculous, ridiculous paces. So I would say, yes, every
Speaker 1: now and then, I'm still meeting people on the street
Speaker 1: you say, oh, I just moved here from New York,
Speaker 1: I just moved here from New Jersey. I just moved
Speaker 1: here from California. All the time, but it has slowed
Speaker 1: from you know, the breakneck pace at which we were
Speaker 1: seeing just a couple of years ago.
Speaker 3: All those stories that like there's not enough schools, like
Speaker 3: not a private schools, not enough highways for all the traffic.
Speaker 1: Like I know, yes, there's traffic has gotten a lot worse.
Speaker 1: And at the same time, anyone who has kids, not
Speaker 1: yet me, but thinking about if you're moving down here,
Speaker 1: you've got to get your kid on waitless for school.
Speaker 1: Public schools are all overcrowded for trying to get you know,
Speaker 1: a young child into daycare. They're the first person you
Speaker 1: have to tell that you might be having a child,
Speaker 1: because you know, you have to get on the weight load.
Speaker 1: All my neighbors are telling me this. But yeah, I
Speaker 1: know it's it's it's definitely different.
Speaker 10: It's very real.
Speaker 1: All those stories that you hear, they come from a
Speaker 1: place of truth.
Speaker 5: It's just you wonder how, I mean, how long that
Speaker 5: economy can support all that? I mean, I.
Speaker 10: Wonder the same.
Speaker 1: No, we have seen a slowing it's it's not the same,
Speaker 1: but we're still welcoming people down there.
Speaker 3: With Florida taxes, like, you don't pay a lot of tax, no.
Speaker 10: State income tax.
Speaker 3: Wait, doesn't that change because you got to like build
Speaker 3: the stuff like or just.
Speaker 5: Get its revenue.
Speaker 1: Property taxes are higher, Okay, so are higher property taxes,
Speaker 1: you know, real estate taxes. But yeah, no state income tax,
Speaker 1: of which I would also say, you know, I have
Speaker 1: a lot of clients up here.
Speaker 10: That's why I'm in studio today.
Speaker 1: I'm right here visiting clients, a lot of people trying
Speaker 1: to change residency for that very reason really, So it's
Speaker 1: definitely a factor that comes into play, you know, with
Speaker 1: the alert.
Speaker 5: So that's that's why if your financial advisor, like Sarah,
Speaker 5: you have to be up on the municipal bond market buying.
Speaker 5: See we're going to get Alex into the municipal bond market.
Speaker 3: Hey man, I have to handle all those segments when
Speaker 3: you're out. On Friday, I started sending prep messages to
Speaker 3: our producer.
Speaker 10: Great tax free income, Alex, Great tax free.
Speaker 3: No, it's just it hurts my brain. But before we
Speaker 3: let you go, though, I had a question about the
Speaker 3: cash so money market fun cash, right, that's sitting there,
Speaker 3: You're like five percent that's going to go away. Is
Speaker 3: there like a level where you guys think about where
Speaker 3: you're like, if it hits three percent, that's when the
Speaker 3: cash really moves, Like I've been thinking about that with
Speaker 3: say my high savings account.
Speaker 10: That is a good question.
Speaker 1: I don't know if there's really a level in which
Speaker 1: people are going to say, oh my gosh, now I
Speaker 1: need to start moving cash. I think that mentality, that
Speaker 1: psychological shift needs to start happening now because look, interest
Speaker 1: rates are going to come down. We more so think
Speaker 1: about it, especially if you're someone who's living off of
Speaker 1: your portfolio, think of it, Okay, how much are you
Speaker 1: spending every year off your portfolio?
Speaker 10: Maybe you still want to keep.
Speaker 1: That in cash or cash like securities like a CD
Speaker 1: or a Treasury bill, so you know that even if
Speaker 1: there's volatility in the market, you don't have to sell
Speaker 1: your stocks at a discount. You're not worried about that
Speaker 1: you have enough cash on hand anything beyond that unless
Speaker 1: you have something that that cash is Earmark tour, you
Speaker 1: probably want to get that invested.
Speaker 5: So in a typical you know, ubs account that that
Speaker 5: you handle. Have your clients been holding more cash because they,
Speaker 5: in fact can make a decent return.
Speaker 10: I would say yes.
Speaker 1: Over the last year we've been trying to encourage them
Speaker 1: to get invested, and most of the time, look, we
Speaker 1: like to put an entire plan in place and say look,
Speaker 1: especially if you're someone look work, we work with a
Speaker 1: lot of business owners. You come at a liquidity event
Speaker 1: and all of a sudden, you have a lot of
Speaker 1: cash on hand. That's scary. You would control over your business,
Speaker 1: you don't have control over the capital markets. How do
Speaker 1: you think about investing that? So it's not as though
Speaker 1: you were going to go ahead and you're going to
Speaker 1: get all of that cash invested in a month. You're
Speaker 1: going to take time to get that invested, but maybe
Speaker 1: locking in yields and fixed income now before yields come down,
Speaker 1: and then on the stock side, figuring out how much
Speaker 1: risk are you comfortable with and maybe dollar cost averaging
Speaker 1: over six months, twelve months, even eighteen months, depending on
Speaker 1: your risk tolerance. But that's really where the psychological psychological
Speaker 1: shift takes place, when you go from running a business
Speaker 1: where you have so much control over your income to
Speaker 1: all of a sudden being subject to volatility in the
Speaker 1: capital markets. It's working through that change.
Speaker 5: Interesting, all right, Sarah, thank you so much for joining us.
Speaker 5: Always great to see you. Sarah as a former reporter
Speaker 5: here at Bloomberg.
Speaker 3: Now she's doing I haven't seen you since Kaley's wedding.
Speaker 1: It's fine, right, I just saw Kelly. She's in town
Speaker 1: just for the day, so I was so lucky I
Speaker 1: got to say hi.
Speaker 5: All right, Sarah Pinzac. She's a financial advisor ubs private
Speaker 5: wealth management down there in Boca Ratona, Florida. This is
Speaker 5: hot in the summer.
Speaker 3: But why do you go to California? From to Florida. Well,
Speaker 3: they're like the same for me.
Speaker 10: No, no, no, it's in the taxas.
Speaker 5: The weather in California is not warm. I guess that's
Speaker 5: true unless you're inland and then it's crazy hot. But
Speaker 5: on the coast it's cool. They have instead of having fog,
Speaker 5: you know what, they have marine layer.
Speaker 10: Marine layer.
Speaker 5: It's not fog. It's a marine layer. That's how they
Speaker 5: do in San Diego, Carmel. It's just fog. So we'll see.
Speaker 2: You're listening to the Bloomberg Intelligence Podcast. Catch us live
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Speaker 3: Bloomberg Intelligence Radio. We are live from the INTERACTI Broker
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Speaker 3: on YouTube. The Big Take story are always the best stories.
Speaker 3: They dig into different topics that not only Wall Street
Speaker 3: but also Main Street can kind of sync their teeth into.
Speaker 3: And today's big story, A Big Take story is no different.
Speaker 3: The title is Hedge Funds Smell Blood as lenders turn
Speaker 3: on each other. The title was so good I read
Speaker 3: the whole piece before I even knew I was doing
Speaker 3: this segment. Eliza Reynolds Hannon joins us. She's senior debt
Speaker 3: reporter and she's standing by, so Eliza, before we get
Speaker 3: into the nuts and bolts of the story. The way
Speaker 3: I think of it is, Okay, you're a company, you
Speaker 3: need money, you go, you go to lenders, you take
Speaker 3: out some loans, and there's a capital structure, and that's it.
Speaker 3: And if I default, then the person on the bottom
Speaker 3: end of the capitol structure doesn't get a money, doesn't
Speaker 3: get the money, or it gets a reduced payment. And
Speaker 3: that's normal, right, That's not where we are anymore in
Speaker 3: this world. No, it's not.
Speaker 7: It's like the security that you thought you once enjoyed
Speaker 7: as a lender, especially as secured lender or a top
Speaker 7: priority lender, just kind of can disappear right before your.
Speaker 6: Eyes these days.
Speaker 7: And that's because the lender protections on these leverage loans
Speaker 7: or high yield bonds has just eroded over a decade
Speaker 7: of high competition for the higher yielding paper in the
Speaker 7: market in a bid to get a chunk of some
Speaker 7: of those rare, really nice, high yielding loans. Investors have
Speaker 7: agreed to waive all sorts of terms and protections that
Speaker 7: once put them in the position to be able to
Speaker 7: say not so fast.
Speaker 10: You know, I basically own.
Speaker 3: You now, which is really crazy because then it also
Speaker 3: opens the door to then a company going to all
Speaker 3: its different creditors right and trying to strike different deals.
Speaker 3: Can you walk me through that part?
Speaker 4: Right?
Speaker 7: So what happens is the company needs often at least
Speaker 7: a majority, bare majority, of lenders to agree to pulling
Speaker 7: some of these maneuvers, like stripping assets from the collateral
Speaker 7: package of one loan and moving them into a new,
Speaker 7: unrestricted subsidiary, in order to all of a sudden have
Speaker 7: new collateral that it can raise that against. So it
Speaker 7: goes to lenders and says, hey, if you agree to this,
Speaker 7: you know, you and a few friends who all together
Speaker 7: hold fifty one percent of this loan. Sometimes it's a
Speaker 7: higher percentage, we will let you actually skip ahead of
Speaker 7: the rest in the new capital structure. We'll let you,
Speaker 7: for instance, be the funds who can put in the
Speaker 7: new debt that we're asking for, which we'll be backed
Speaker 7: by the old assets that you used to think you
Speaker 7: already had as collateral, and for that reason, you actually
Speaker 7: won't have to write off this whole investment. You'll have
Speaker 7: another chance at collecting even more yield and eventually getting
Speaker 7: repaid on everything.
Speaker 3: So how do hedge funds come in on this?
Speaker 7: Then, well, the hedge funds have you know, distressed investors
Speaker 7: are no stranger to underhanded tactics or kind of just
Speaker 7: rough strategies, but nevertheless you have sort of seen them
Speaker 7: go through stages of grief, it seems, with regard to
Speaker 7: this new order. So in the beginning, somewhere in denial,
Speaker 7: you saw them say not my not my company, not.
Speaker 6: My private equity sponsor.
Speaker 10: They wouldn't do me like that.
Speaker 7: And as it's happened, even more and more they started saying, Okay,
Speaker 7: we need to go on the defensive. We need to
Speaker 7: organize to you know, almost protest that this that this happened,
Speaker 7: and say, already, you know sixty percent of us have
Speaker 7: gotten together and said we're not going to work with you,
Speaker 7: and so you can't actually pull this off. And that's
Speaker 7: we talk about in the story, that's the co op
Speaker 7: agreement phenomenon. But others are now saying forget defensive. We
Speaker 7: need to get offensive, And so they are piling up
Speaker 7: on cash so that when indeed the company does say,
Speaker 7: whoever here can give us new money, We're going to
Speaker 7: put you in the prime position and you can kick
Speaker 7: all your peers down in the repayment line. You know,
Speaker 7: we're going to give you the actual the new claim
Speaker 7: to that collateral as long as you top us off
Speaker 7: with some new financing. So the way to play this
Speaker 7: new phenomenon well and when is to always have cash
Speaker 7: on hand that you can and say, hey, put me
Speaker 7: in the best position and I'll give you a little
Speaker 7: more financing.
Speaker 3: Man, this makes my head hurt. I mean, this is
Speaker 3: a dumb question. But if I'm a senior debt lender,
Speaker 3: why do I want to get involved in this at all?
Speaker 3: If I don't know if I could go to bed
Speaker 3: one night and feel very secure in my investment and
Speaker 3: the next morning wake up and have like thirty cents
Speaker 3: on the dollar, Like, why would I even do that?
Speaker 6: Well, you kind of don't have a choice.
Speaker 7: There's not anywhere else to go in the market up
Speaker 7: until now to get those high returns that will keep
Speaker 7: you employed as a portfolio manager or keep you getting
Speaker 7: new money in. It's a little bit of a you know,
Speaker 7: an immediacy bias that you want. You're only looking to
Speaker 7: the next quarter or the quarter after that. You need
Speaker 7: to be churning out these high yields for your investors
Speaker 7: to stay happy, and you really are just kind of
Speaker 7: crossing your fingers and hoping it doesn't come to your company.
Speaker 7: But then when it does, these liability management exercises, so
Speaker 7: they're called, or the instances of violence, are often designed
Speaker 7: to actually give the company another chance at a turnaround.
Speaker 7: So if the obstacles to the company are a bit
Speaker 7: macroeconomic based or you know, supply demand, there's some sort
Speaker 7: of phenomenon that's not totally secular. They say, you know what,
Speaker 7: we can take on a little bit more of an
Speaker 7: interest burden, and if we can just get to next year,
Speaker 7: when all of a sudden this or that regulation will change,
Speaker 7: this company can actually turn it around. We avoid filing
Speaker 7: for bankruptcy, and then everything will work out fine. So,
Speaker 7: you know, the hedge fund managers who go to sleep
Speaker 7: and decide to keep investing in this are kind of
Speaker 7: feeling like they don't have anywhere else to turn to
Speaker 7: generate the iells that they need to generate.
Speaker 3: How many of those companies actually do survive, though.
Speaker 7: That's the important question, and so some of that data
Speaker 7: is really trickling out now, and we do analyze it
Speaker 7: in the story. Some of them survive, but we have
Speaker 7: seen increasingly the companies that do one of these exercises
Speaker 7: in say twenty twenty one, by twenty twenty three, they
Speaker 7: ended up having to file for bankruptcy anyway, and that's
Speaker 7: where you see. You might think that that means the
Speaker 7: whole exercise was meaningless, but in a way, it becomes
Speaker 7: all the more meaningful because that's where the removal of
Speaker 7: collateral or the transfer of collateral really becomes relevant. Because
Speaker 7: in a bankruptcy, and say the company is getting liquidated,
Speaker 7: or even if it's not, all those creditors got pushed
Speaker 7: down and their collateral was taken away from them. They're
Speaker 7: recovering zero cents on the dollar or one or two
Speaker 7: or three cents we show in a chart.
Speaker 10: And those who.
Speaker 7: Frogged them by putting a new capital.
Speaker 10: They come out pretty well.
Speaker 7: They get ninety cents on the dollar, ninety five seventy
Speaker 7: Just you see the devastating impact that the original asset
Speaker 7: Shift has on creditors. When all is said and done
Speaker 7: in the company needs to hand out its assets in
Speaker 7: order to give people recoveries.
Speaker 3: Eliza really appreciate it. I also heard it's your day
Speaker 3: off and you're doing this anyway. That shows dedication. Thank
Speaker 3: you very much, Eliza, Roynald Hannah and a senior debt reporter.
Speaker 3: Really great story is today's Big Take. You can check
Speaker 3: it out. You can read more of this story on
Speaker 3: the Bloomberg and at bloomberg dot com slash Big Take
Speaker 3: again that headline hedge funds smell blood as lenders turn
Speaker 3: on each other. Definitely go ahead and check that out.
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