Speaker 1: This is Bloomberg Business Wait inside from the reporters and
Speaker 1: editors who bring you America's most trusted business magazine, plus
Speaker 1: global business finance and tech news. The Bloomberg Business Week
Speaker 1: Podcast with Carol Messer and Tim Stenebeck from Bloomberg Radio.
Speaker 2: We're looking at the impact of the bank collapses that
Speaker 2: we've seen this year on the startup world. For that,
Speaker 2: we want to bring in Jack Selby. He is the
Speaker 2: managing director over at Teal Capital. He joins us on
Speaker 2: the telephone from Phoenix, Arizona. Jack, great to get some
Speaker 2: of your time today. We've had a couple months to
Speaker 2: digest the the the collapses from Silvergate and SVB to
Speaker 2: Signature and First Republic. A lot of these banks obviously
Speaker 2: very tech focused, and a lot of startups and UH
Speaker 2: and VC's count counted on their funding. How is it
Speaker 2: playing out thus far, you know, two and a half
Speaker 2: months out.
Speaker 3: Yeah, Paul Matt, thanks again for having me. I appreciate it.
Speaker 3: You know, I think there's some there have been some
Speaker 3: really interesting takeaways, especially from the SVB collapse. So I think,
Speaker 3: on the one hand, to do the discredit, I would
Speaker 3: say of Silicon Valley and the tech world overall. It
Speaker 3: was pretty amazing after the fact for us all to
Speaker 3: learn that we had so much concentration risk with one institution.
Speaker 3: And so, you know, the analogy I would give you, like,
Speaker 3: imagine if every corn farmer in Iowa had money at
Speaker 3: you know, the first Bank of Des Moines and then
Speaker 3: you know, there was a dry season that obviously would
Speaker 3: be an exceptional crisis. And that's effectively what has happened,
Speaker 3: you know, with us in Silicon Valley having so much
Speaker 3: exposure to one to one bank and so, you know,
Speaker 3: shame on us from a fiduciary responsibility perspective, and I
Speaker 3: think it's a really eye opening outcome, and I think
Speaker 3: going forward, we will definitely pay a lot more attention,
Speaker 3: you know, to kind of the sleepy world of treasury
Speaker 3: and how we manage our cash, both within you know,
Speaker 3: our various funds and how our portfolio companies manage the
Speaker 3: cash as well.
Speaker 4: So Jack, we're trying to move on from that. I'm
Speaker 4: sure the VC community is trying to move on from that.
Speaker 4: In your world in Arizona, I know you've got a
Speaker 4: fund there that focuses on Arizona gives us give us
Speaker 4: kind of like the the pros and cons of the
Speaker 4: VC environment community in Arizona.
Speaker 3: Sure. So yeah, I started one hundred and fifteen million
Speaker 3: dollars fund AZBC here in Arizona that launched last August.
Speaker 3: And so you know, really what I'm trying to do
Speaker 3: is fill what I think is the biggest void in
Speaker 3: the local Arizona ecosystem. So, as an example, Phoenix is
Speaker 3: the fifth largest city in the United States. We have
Speaker 3: people moving here every single day. Americopa County, I believe,
Speaker 3: has been the largest growing or the fastest growing county
Speaker 3: in the United States for the last decade, and so
Speaker 3: we're growing by leaps and bounds. But at the same time,
Speaker 3: to give a balance, you know, this has not been
Speaker 3: historically a top tier capital market city. So as an example,
Speaker 3: you know, like when we were doing our PayPal Ipo
Speaker 3: roadshow many years ago, you know, you would never stop
Speaker 3: through Phoenix on that road show. You'd go through smaller
Speaker 3: cities like Minneapolis and Philadelphia and Boston certainly, but Phoenix,
Speaker 3: you know, for whatever it's worth, has just not been
Speaker 3: a top notch capital marketplace. And so having lived here
Speaker 3: since we sold PayPal, you know twenty plus years ago,
Speaker 3: I wanted to figure out a way to solve that void.
Speaker 3: And so I figured that after kind of studying the
Speaker 3: market here and trying to figure out the best way,
Speaker 3: you know, my end result was to do it myself.
Speaker 3: And so that's why we launched the fund. And I
Speaker 3: think there's a great opportunity here just because again this
Speaker 3: is a population center that again has not had the
Speaker 3: capital capital of the match.
Speaker 2: By the way, tell us about how you made that decision.
Speaker 2: I mean, you killed it as a member of the
Speaker 2: PayPal mafia.
Speaker 5: I hope you don't.
Speaker 2: Mind that term, but I love it. And then and
Speaker 2: then you pick Phoenix, which is an awesome place. I've
Speaker 2: been there a couple of times.
Speaker 3: Wait.
Speaker 4: Wait, it's one hundred degrees today. Tomorrow it's going to
Speaker 4: be one hundred degrees and it's gonna be one hundred
Speaker 4: degrees jack until I come from my annual holiday in
Speaker 4: mid November when it's a lovely eighty eighty five degrees.
Speaker 2: But it's still it's such a cool place.
Speaker 4: Have you been to Phoenix, Paul, all the time we
Speaker 4: go to I love it too, sir, I mean Scottsdale.
Speaker 2: You can get to Tempe Flagstaff, Like, what made you
Speaker 2: pick Phoenix.
Speaker 3: Well, first, of course, I have to say as a
Speaker 3: good Arizona and it's a dry gentleman.
Speaker 2: Yes, of course I knew that was go.
Speaker 3: That aside. You know, it was really a family reason
Speaker 3: for me. My dad was a mad Men era advertiser
Speaker 3: who worked for Jay Walter Thompson.
Speaker 5: Some stories.
Speaker 3: We moved, Yeah, we moved a ton during my childhood.
Speaker 3: We moved seven different times. And actually the summer time
Speaker 3: was in the middle of my senior year of high
Speaker 3: school and my dad came down to Phoenix to take
Speaker 3: a job, and so I stayed where I was, which
Speaker 3: was in suburb Detroit, to get through high school and
Speaker 3: get through graduation, I should say, but my dad moved
Speaker 3: out here. My younger brother, as sensibly, grew up here
Speaker 3: in Scottsdale, And so if you fast forward today, my
Speaker 3: dad lives five minutes away from me. My brother has
Speaker 3: a house here, and so it was just a really
Speaker 3: easy choice to come back and be New York family
Speaker 3: because I knew the place pretty well, and I you know,
Speaker 3: and I still have to go back and forth to
Speaker 3: California quite a bit, but proximity matters, and so I
Speaker 3: think that's one of the big things that Arizona is
Speaker 3: going to benefit from because you know California. You know,
Speaker 3: one of our favorite sports here in Arizona is to
Speaker 3: California Bash. So I won't get on that that topic
Speaker 3: too much, but I think the exodus out of California
Speaker 3: has a long way to go. And not everyone's moving
Speaker 3: to Austin, certainly, not everyone's moving to Miami. And if
Speaker 3: you can drive to Phoenix in five and a half hours,
Speaker 3: or if you can fly there on a forty five
Speaker 3: minute Southwest flight, proximity makes a big difference. And that's why,
Speaker 3: again another bullish reason, I think for our techncosystem, we've
Speaker 3: got a long way to run, all.
Speaker 2: Right, So tell us about some of the coolest businesses
Speaker 2: that you're into. You know what, what's coming out of
Speaker 2: Phoenix that's going to change the game for America.
Speaker 3: You know, it's a great question. And so I think,
Speaker 3: you know, as I look at the fund that we've
Speaker 3: raised here, we have, I think aid investments so far,
Speaker 3: there's really no rhyme or reason in terms of the
Speaker 3: different sectors that we've invested in to date. And I
Speaker 3: think it's just because the ecosystem here is so nascent,
Speaker 3: and if you ask me, the same question in five years,
Speaker 3: I could probably give you a much more sector specific answer,
Speaker 3: just based on where we've deployed capital. But frankly, I'm
Speaker 3: just looking for rockstar entrepreneurs and if I can wrap
Speaker 3: my head around what they're doing, then we'll take a look.
Speaker 3: And I think what Arizona will be good at is
Speaker 3: that where traditional industry is meeting technology for the first time. So,
Speaker 3: for example, you know, think about the biggest outcome that
Speaker 3: we've had here in terms of a publicly treaded technology company.
Speaker 3: So that company's Carbona, and so what is carbona? Carvana
Speaker 3: is a used car marketplace. That seems like a perfectly
Speaker 3: reasonable type of technology company to come out of Arizona.
Speaker 3: To put it conversely, do I think the next Open
Speaker 3: AI is going to come out of Phoenix? You know? Frankly,
Speaker 3: I don't. I think that's going to be the domain
Speaker 3: of the Stanford pal Alto Boston crowd. And I don't
Speaker 3: think there's anything wrong with that. But I think we
Speaker 3: just have to understand here in Arizona what we have
Speaker 3: a stripe then, and and where we may not.
Speaker 2: All right, Jack, great spending some time with you. I
Speaker 2: hope we can get you back on the show again.
Speaker 2: Maybe we'll take it on the road. Yeah, we'll head
Speaker 2: out there and get down there.
Speaker 5: Hold back.
Speaker 4: Yeah, it's nice out there.
Speaker 2: It's fantastic. Jack Selby, managing director at Teal Capital, talking
Speaker 2: to us also about ac VC, which is the one
Speaker 2: hundred and fifteen million dollar fun that kicked off last
Speaker 2: August in the heart there of Arizona, and looking forward
Speaker 2: to seeing what they can come up with because it
Speaker 2: is an incredible region of the United States and a
Speaker 2: great place to visit and probably to live as well,
Speaker 2: if you're down with the dry heat.
Speaker 1: This is Bloomberg Business Week with Carol Messer and Jim
Speaker 1: Stenebek on Bloomberg Radio.
Speaker 2: Every Way, all right, Jerry Smith is taking care of
Speaker 2: business as the CEO of ODP Corporation, that is the
Speaker 2: parent company of Office Depot, which is why I mentioned
Speaker 2: that as a brand here. As we're throwing around some names,
Speaker 2: Paul pulls out Converse. Why why did you say Converse?
Speaker 4: Chuck Taylor's the all time classic shoe. I just bought
Speaker 4: a new pair this weekend. That's the top of mind.
Speaker 2: That's cool. So you don't wear loafers all the time.
Speaker 4: No, I don't the case go a little casual.
Speaker 5: That's interesting.
Speaker 2: I love see Paul swinging on the weekend. Well, maybe
Speaker 2: you put on those Chuck Taylors to go pick up
Speaker 2: a shredder or paper cutter or a fax machine.
Speaker 4: And it's the toner that gets you though. I mean that, yes,
Speaker 4: the print, yes, ink for the printer.
Speaker 2: It's the Yeah, the printer ink. I'm always like, every
Speaker 2: few weeks I'm back at an office depot or a
Speaker 2: best Buy looking for that, because if you don't print
Speaker 2: every day, it runs out quick. Let's get to Jerry
Speaker 2: Smith right now on Zoom from Boca Ratona, Florida. Jerry,
Speaker 2: thanks so much for joining us talk to us about
Speaker 2: the transformation. I mean, obviously people aren't gonna be coming
Speaker 2: to office Depot for fax machines anymore. I don't know
Speaker 2: why I said that, but they are gonna need the
Speaker 2: printer inc What else are we looking for at office depot?
Speaker 2: And how does office depot look different now than it
Speaker 2: did when I went there, say, ten years ago.
Speaker 6: Yeah, thanks Paul Matt for having me for I've been
Speaker 6: here about six years and let me talk about the transformation.
Speaker 6: We have a strong B two C business. Our office
Speaker 6: depot brand that you know, it's about a four and
Speaker 6: a half billion dollar company. We're going into category expansions,
Speaker 6: whether it's you know, party supplies, dorms, tech, furniture, copy
Speaker 6: and print, so we have wide range of products. Again,
Speaker 6: that's about a four a half billion dollar business. We
Speaker 6: call it our first horizon, a start cash engine for
Speaker 6: the company. But we have a four billion dollar B
Speaker 6: to B business that's growing. Are we crushed our earnings?
Speaker 6: We we we met top line. We beat both a
Speaker 6: operating income e as well as earnings per share of
Speaker 6: by forty percent and really good free cash flow as well.
Speaker 5: We also have a supply chaining.
Speaker 6: Services businesiness as well as we're creating a new category
Speaker 6: called Verrus, which is a B to B procurement platform.
Speaker 6: The team that developed the twenty five thirty five billion
Speaker 6: dollar Amazon Amazon Business Platform. Now we're here ODP, we're
Speaker 6: running virus, and we're building a direct B to B
Speaker 6: procurement relationship that will be all indirects. Ben I love
Speaker 6: hearing you guys talk about all the different products you
Speaker 6: can buy to run the business. That's exactly help what
Speaker 6: Verrus is. We launched that platform in October, just early days,
Speaker 6: but we're wrapping that now. But we're really excited with
Speaker 6: the new office depot. We think, honestly think we're super undervalued.
Speaker 6: We're less than four times even from a multiple perspective,
Speaker 6: and I've got.
Speaker 5: A growing B to B half.
Speaker 6: Our business is B to B and growing both top
Speaker 6: line and bottom line. And we have these two non
Speaker 6: valued assets we think are going to be worth a
Speaker 6: ton of money in the future as well.
Speaker 4: Hey, Jerry, When I think of office depot and I think
Speaker 4: about the growth drivers of your business, I often think
Speaker 4: about new small business formation. I got have I got
Speaker 4: to get that right. Where are we now in the
Speaker 4: economy potentially one going to recession. How do you guys
Speaker 4: think about new small business kind of formation?
Speaker 5: Great?
Speaker 6: Great question, And we saw a lot of strength in
Speaker 6: Q one. I was listening to you guys as before
Speaker 6: we came on, and we saw strength and small business.
Speaker 5: We saw both on.
Speaker 6: Our B to B business ODP business solutions as well.
Speaker 6: If we have three segments on the retail site, we
Speaker 6: have home office, we have small business and education and
Speaker 6: small business across the board.
Speaker 5: I think it's behaving stronger than the consumer.
Speaker 6: A little bit of sto office and a consumer, not
Speaker 6: a lot, but we're seeing a lot more strength and
Speaker 6: small business. We actually saw small business come out of
Speaker 6: COVID faster than the other business, so we see a
Speaker 6: lot of We still see a ton.
Speaker 5: Of strength and small business and medium business.
Speaker 6: And so why we have these four different routes to
Speaker 6: market and we think it's a big available market, but
Speaker 6: we're still seeing strength.
Speaker 5: We are being cautiously optimistic. Of course.
Speaker 6: We have a net cash positive balance sheet. We've saved
Speaker 6: over five hundred million dollars of expense over the last
Speaker 6: six years. And I'm always talking about the low cost model,
Speaker 6: So we're not going to ahead of our skis. We're
Speaker 6: going to make sure we're conservative and again having a
Speaker 6: strong balance sheet compared to some of the other retailers
Speaker 6: you were talking about before. You know, we're in a
Speaker 6: really strong position. We're a true omni channel company and
Speaker 6: so we think we're positioned well.
Speaker 5: But small business is an.
Speaker 6: Area we're focused on really hard. We're excited with the
Speaker 6: potential there.
Speaker 2: Who are your big competitors. As Paul Sweeney knows, I
Speaker 2: like to pull up a comp screen on the Bloomberg
Speaker 2: just as a standard gives me a five year look
Speaker 2: at your stock performance, and if I put you up
Speaker 2: against Home Depot and bed Bath and Beyond, which are
Speaker 2: two companies, I would think of you crushed them. You know,
Speaker 2: you doubled over the past five years, whereas Home Depot's
Speaker 2: only up seventy two percent, bed Bath and Beyond is
Speaker 2: only up eight percent. Who else are you looking out for?
Speaker 2: I mean, should I be running you against an Amazon
Speaker 2: for example? Is that your biggest competitor?
Speaker 6: Well, I think we have a pencils which space of
Speaker 6: our go to market. So we have these four but
Speaker 6: different business units from a retail perspective.
Speaker 5: I think you're I think it's good analysis right there.
Speaker 6: Obviously, Staples is private on the as a company now,
Speaker 6: so hard for a compare on the B to B side.
Speaker 5: You know it's Staples, it's W. B.
Speaker 6: Mason, both private companies as well as a little bit
Speaker 6: if you look at some of the you know, Fastenals
Speaker 6: or the Grangers of the world. From an MRO space,
Speaker 6: they come down sometimes, but it's pretty open space from
Speaker 6: a competition side. And because the fact we have our
Speaker 6: very supply chain business unit, we have nine million square
Speaker 6: feet of distribution space, six hundred trucks, we're one of
Speaker 6: the few companies that delivers next day and ninety nine
Speaker 6: percent of the ZIP codes and not just to the
Speaker 6: back dock to the desktop, which is a really competitive advantage.
Speaker 6: Only US and the other guys up in Massachusetts really
Speaker 6: can go off and have that type of delivery. So
Speaker 6: for that Fortune's five hundred account, that's our only competitor.
Speaker 6: And then from a supply chain services space, we're ramping.
Speaker 5: That business up. We have all that asset.
Speaker 6: Obviously it's traditional three pls and I want to call
Speaker 6: out Varus and we'll come back in the future as
Speaker 6: Varus wramps up more of it. This is a category recreation.
Speaker 6: No one's enter into space. We think it's a huge space.
Speaker 6: That team came over because they saw the opportunity and
Speaker 6: we think it's about a four hundred billion dollar space
Speaker 6: of indirect spend B to B across the US. And
Speaker 6: so that from a competitor space, we're really excited year two,
Speaker 6: year three, or four, that's going to be a huge
Speaker 6: value opportunity for the company.
Speaker 2: Hey, Jerry, Matt and I are probably outliers here.
Speaker 4: We come into the office every day of the week.
Speaker 2: That's just how we roll.
Speaker 4: Plus we were told to do that. We don't have
Speaker 4: a choice, but most people are kind of really embracing
Speaker 4: this hybrid thing, you know, three four days or whatever
Speaker 4: it is, home office, home office. So how did that
Speaker 4: impact your business over the last three to four years
Speaker 4: and kind of how about going forward?
Speaker 5: Yeah, great question.
Speaker 6: Obviously during COVID when everything we were shut down, yea,
Speaker 6: we you know, a bit of everyone had the dip,
Speaker 6: and we obviously focus on costswell, but hybrid's awesome for us.
Speaker 6: And so we're back to our on our traditional B
Speaker 6: to B business almost our twenty nineteen pre COVID levels
Speaker 6: before and that's that.
Speaker 5: You know, we get a lot of data.
Speaker 6: We're looking at badge swipes, so that's all about fifty
Speaker 6: to fifty five percent.
Speaker 5: But we do believe hybrid.
Speaker 6: I don't think people buy office supplies when they have
Speaker 6: a hybrid business anymore.
Speaker 5: I think they come in they're using the office supplies
Speaker 5: in the office and we love that. So obviously that
Speaker 5: helps our B to B business on the sea side.
Speaker 6: Obviously COVID was really good for that, and so as
Speaker 6: that's why we're focused on home office as well as
Speaker 6: small business on our B to C side. Varius is
Speaker 6: online and that obviously is very i'll say inflection proof
Speaker 6: in the future as we go through that. And so
Speaker 6: again having that supply chain business, they can deliver the
Speaker 6: next day, they can deliver to a store, they can
Speaker 6: deliver to it the consumer, they delivered to a small business.
Speaker 5: But we're really optimistic right now.
Speaker 6: Obviously with the return for office as a tailwind, you
Speaker 6: see more and more people going from every day I
Speaker 6: see in another company announcing I saw Delta day announcing
Speaker 6: they're going to go.
Speaker 5: Back to more of a hybrid, and so hybrid is
Speaker 5: really really.
Speaker 6: Good for our business and a tailwind, and we've adapted
Speaker 6: our business to have that flexibility. For example, our retail
Speaker 6: stores is the only one in the country that has
Speaker 6: a twenty minute guarantee when you order online to pick
Speaker 6: up in stores that we'll give you twenty dollars and
Speaker 6: so we will put a lot of work and effort
Speaker 6: by that, and we think that's a huge differentiator. People
Speaker 6: do want to go and they need something I to
Speaker 6: our store team will do a great job and we
Speaker 6: run the seventy seven Net Promoter Score, which is world
Speaker 6: class from.
Speaker 5: A customers experience perspective as well.
Speaker 6: So we're happy with the tailwinds. Obviously, if everyone returns
Speaker 6: the office, it gets even better. But we think we're
Speaker 6: in a really position well across all our routes to market.
Speaker 2: Jerry, fascinating stuff. Great to have you on the program.
Speaker 2: Thanks so much for joining us. Jerry Smith there the
Speaker 2: chief executive officer of ODP Corp. It's the parent company
Speaker 2: of Office Depot And you know, I wouldn't have known
Speaker 2: that they doubled the stock over the past five years
Speaker 2: had I not no, I know, looked up the company there.
Speaker 2: I also wouldn't have known about Varis because it's a
Speaker 2: B to B digital platform. It's not something that the
Speaker 2: public kind of sees and of course analysts will know
Speaker 2: about it. But this is why we do these kind
Speaker 2: of interviews.
Speaker 6: An.
Speaker 2: It's an exciting product obviously for Jerry, and they've got,
Speaker 2: you know, big competition in Ali Baba and Amazon, but
Speaker 2: they have it looks like the brain power, the people
Speaker 2: power to really move that market.
Speaker 4: Yeah, we have these company CEOs on I tend to
Speaker 4: cheat a little bit. I'll message the bi an also
Speaker 4: say hey, you got a couple of smart questions. You
Speaker 4: knew smart virus. I knew so Jen bartashes Bloomberg Intelligence.
Speaker 4: He's got all the research on ODP is the ticker
Speaker 4: to put in there, so interesting stuff.
Speaker 2: We're down with ODP.
Speaker 4: Sure, yeah, you know me exactly.
Speaker 1: You're listening to the Bloomberg Business Week podcast. Catch us
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Speaker 2: Now we can get to Joel and full I've been
Speaker 2: looking forward to this all day. Slash angry about it
Speaker 2: since I read the story, and you know, I moved back.
Speaker 2: A little personal note before we get into it. I
Speaker 2: moved back here from Berlin a couple of years ago,
Speaker 2: not expecting childcare to be such an incredibly expensive and
Speaker 2: frustrating proposition because in Germany. In Germany, you know, it's
Speaker 2: free and it's wonderful from the age of one. That's
Speaker 2: when you get into Kita and they have like clowns
Speaker 2: and bio organic food and field trips and it's amazing.
Speaker 2: But here it's like twenty five thousand dollars a year
Speaker 2: to put your kid in the basement of a Chinese church.
Speaker 2: So that's what I'm facing, and that's a good option,
Speaker 2: exactly the best I could come up with. Let's get
Speaker 2: right now to full of a kanibi. He is, I
Speaker 2: guess your official title is Municipal Finance Reporter and this
Speaker 2: is means Matt loves physic by the way that we
Speaker 2: can do the f and Joe Webber's editor in chief
Speaker 2: at Bloomberg BusinessWeek. So Joel set the story up for
Speaker 2: us because it's about as I kind of as I
Speaker 2: kind of talked about it for a moment.
Speaker 7: Yeah pre K like a good JV crew would.
Speaker 5: Yes, Yes, you did great.
Speaker 7: So the story is really about this thing that I
Speaker 7: think New Yorkers really quickly have taken for granted, and
Speaker 7: that is one of the very few successes of the
Speaker 7: Deblasio administration was this universal pre K program that came
Speaker 7: into being under Deblasio's watch. He gets most of the
Speaker 7: credit for putting it together, and then during the pandemic,
Speaker 7: managed to while he's almost on the way out, expanded
Speaker 7: and turn a three K program pilot program into something
Speaker 7: that was supposed to grow under Eric Adams as the
Speaker 7: new York City mayor that same pre K energy has
Speaker 7: been almost non existent. The funding that and the relationship
Speaker 7: that the program requires and the relationships with some of
Speaker 7: these small businesses that are integral to the program, they
Speaker 7: have not been paying bills and so we've seen some
Speaker 7: of these providers go out of business already, and it
Speaker 7: creates a system where we say, he is starving the
Speaker 7: city of this. I think the economic implications of this,
Speaker 7: something that we didn't totally go into here, are actually
Speaker 7: going to be really fraught and interesting.
Speaker 5: And there's a lot of parents in Full.
Speaker 7: I know you've heard from some of them already who
Speaker 7: are like, wait, what, so what is going on behind
Speaker 7: the scenes? Full And how did you get into reporting
Speaker 7: this story?
Speaker 3: Well?
Speaker 8: I got into the story just listening to some of
Speaker 8: what the administration has said about pre K and preschool.
Speaker 8: And one of the things that one of the points
Speaker 8: that they've made, you know, throughout this is that well,
Speaker 8: there's not a desire, there's not a need for the
Speaker 8: number of seats into Blasio and the previous administration set out.
Speaker 8: And you know, that struck me. It's strange because I'm like,
Speaker 8: who doesn't want free childcare? So you know, I dug
Speaker 8: in from there, and what I found was that on
Speaker 8: one end of the thing, on one end of things,
Speaker 8: their administration seems to be pulling back. They're making cuts
Speaker 8: to the three year old program right there. They're cutting
Speaker 8: five hundred and seventy million over the next few years
Speaker 8: from the preschool system.
Speaker 2: And that's on top of the bills that they're just
Speaker 2: not paying right now.
Speaker 8: Yes, and then on the other hand, yes, they simply
Speaker 8: aren't paying the contracted providers of pre K services. This
Speaker 8: program is run through contracts with daycare centers and preschools,
Speaker 8: and at a basic level, they're just not paying their bills.
Speaker 8: One estimate put the number at four hundred million dollars.
Speaker 8: And you know, I asked it administration repeatedly, how much
Speaker 8: is outstanding? How much do you owe these providers? And
Speaker 8: they wouldn't give me a number.
Speaker 2: So you call up Eric Adams, or you call up
Speaker 2: the chancellor David Banks, and you say, hey, guys, why
Speaker 2: are you not paying your bills? You owe people money,
Speaker 2: right and you need to hold up your end of
Speaker 2: the oblig and they say, or the.
Speaker 1: Providers go out of business.
Speaker 5: And that's some of what's happened.
Speaker 8: Yeah, I mean, these providers are struggling again, Like like
Speaker 8: Joe said, I mean, these are these are small businesses
Speaker 8: and and and there are folks who are who are
Speaker 8: not the highest paid folks out there, and they're they're
Speaker 8: taking care of kids, they're providing education to kids. And
Speaker 8: you know, some of the providers I talked to are
Speaker 8: taking out some some are taking out personal loans, some
Speaker 8: are some are having to take out these small business loans.
Speaker 8: Some are having to lay off teachers. Uh, and some
Speaker 8: are some have closed outright, a two hundred year old
Speaker 8: nonprofit this this past winter closed And yeah, that that
Speaker 8: those are the stakes. You know, these places are closing.
Speaker 7: So what's happening within the city government instead, Because it's
Speaker 7: a matter of priorities and that's basically what that Adams
Speaker 7: administration says.
Speaker 8: Yeah, I mean, so we've seen the administration make multiple
Speaker 8: rounds of cuts to to city agencies, and you know,
Speaker 8: it is a matter of priorities, and and you know,
Speaker 8: this program is three hundred million dollars a year. This
Speaker 8: this city budget it's one hundred and seven billion dollars,
Speaker 8: so it's it's a lot of money. But yeah, it's
Speaker 8: a question of what the administration wants to do. We've
Speaker 8: seen the NYPD has gone more than is projected to go,
Speaker 8: more than three hundred million dollars over their overtime budget alone.
Speaker 8: And I mean again, we're talking about three hundred dollars
Speaker 8: for childhood early childhood education, which you know, for all
Speaker 8: intensive purposes we've seen as a program that that works.
Speaker 2: Right. It's amazing that the city's priority isn't three year
Speaker 2: old kids, because that would be my first priority, and
Speaker 2: then I would come to police down the line. And also,
Speaker 2: we don't have to get into it.
Speaker 7: But if you take care of old kids, you're getting
Speaker 7: into it.
Speaker 2: If you take care of three year old kids, then
Speaker 2: in fifteen years, you don't need to fund the police
Speaker 2: with so much money, right because if we give them
Speaker 2: the food and education and love they need, they're going
Speaker 2: to be much better citizens down the line. It just
Speaker 2: grinds my gears, Paul, I know, it really grinds my gears.
Speaker 4: Let me let me put it this way. You believe,
Speaker 4: based upon your reporting that this is more of a
Speaker 4: political issue that this administration doesn't share the same values
Speaker 4: as maybe the Doblasio or is it economics, there's just
Speaker 4: not enough money for everybody, and so everybody's gonna feel
Speaker 4: the pain.
Speaker 8: So so to be fair to the Adam's administration, I mean, uh,
Speaker 8: this expansion into into three year olds, to have a
Speaker 8: universal program for three year olds. What build Deblasio did
Speaker 8: was he he used the federal Coronavirus Aid to fund
Speaker 8: this program, to fund the beginning of it, thinking probably
Speaker 8: that well, a previous or future sorry, a future administration
Speaker 8: would uh you know, see this program as something that's
Speaker 8: necessarily important and they'll just figure it, figure it out,
Speaker 8: They'll find the three hundred million dollars somewhere. Obviously that
Speaker 8: that hasn't been the case. Assumption, Yeah, that that that
Speaker 8: that was a bad assumption.
Speaker 7: Which worth mentioning a little bit more there, like you
Speaker 7: can't take something that could be a permanent thing and
Speaker 7: funded with temporary dollars like those are you're gonna set
Speaker 7: yourself up for something. So in typical maybe Deblasio fashion,
Speaker 7: like maybe this wasn't fully thought through and there was
Speaker 7: some enthusiasm for a good idea, but wasn't really based
Speaker 7: in a reality that was supported by long term financial
Speaker 7: backing either.
Speaker 8: Right, right, and and and at the same time you
Speaker 8: know that said the problems with paying providers. That's not
Speaker 8: a financial issue. I mean this is simply like a
Speaker 8: bureaucratic and administrative failure. I mean they're just feeling are there.
Speaker 2: Other bills that the city isn't paying? Like do they
Speaker 2: just pay the bills they feel like paying or is
Speaker 2: there a limit where they stop paying?
Speaker 8: So that's somewhere where I do want to do more reporting,
Speaker 8: because there are other places where the city does not
Speaker 8: pay its bills and where the city is laid playing
Speaker 8: paying its bils.
Speaker 4: So yeah, this is not this is not the are
Speaker 4: these providers are They supposed to be for profit entities?
Speaker 4: Like if I'm opening up a pre K facility, it's
Speaker 4: not like an academic it's a for profit business, right so.
Speaker 8: So so yeah, some of them are are for profit.
Speaker 8: I mean some of them are like one off, like
Speaker 8: like a like a daycare provider, a child childcare provider
Speaker 8: will contract with the city to provide these services.
Speaker 1: Right.
Speaker 8: Some of them are also very large nonprofit organizations.
Speaker 5: Okay, there's both.
Speaker 7: I want to play with Matt's gears some more because
Speaker 7: that's entertaining. When he gets when he gets hot about
Speaker 7: that and the machine runs a little hot, you know, well,
Speaker 7: the other interesting thing about this was New York under
Speaker 7: Deblasio really pulled this off, and it was it showed
Speaker 7: that there was some momentum for it, hence his attempt
Speaker 7: to expand and get into three K. There was also
Speaker 7: a national discussion that was happening for a second, So
Speaker 7: what does this mean on that more national scope of this.
Speaker 7: If New York can't do it, can anybody do it?
Speaker 5: Yeah?
Speaker 8: I mean the New York City program under Deblasio was
Speaker 8: seen as a model. And you know, in his first
Speaker 8: year in office in twenty fourteen, the program was pretty small.
Speaker 8: There's around nineteen thousand kids and mostly a half day,
Speaker 8: mostly in half day services. And by the end of
Speaker 8: his first year, there were fifty thousand kids and they
Speaker 8: had a full day offering. And so this was really
Speaker 8: the blueprint. This is like the largest jurisdiction to do
Speaker 8: this and to make this attempt. So this was a
Speaker 8: blueprint for how to set this up. Text, this is
Speaker 8: how to do it. And so, you know, talking to
Speaker 8: folks at the Department of Education, they were I mean,
Speaker 8: those folks are really got it, and they really care
Speaker 8: about this and believe in this program. And so for
Speaker 8: them to see it undermined in this way. I can
Speaker 8: only it's extremely First.
Speaker 2: It was something though that was floated nationally, right, and
Speaker 2: then the administration also failed to come through with that
Speaker 2: campaign PROMOMSS. Wasn't wasn't Biden also offering some pre K
Speaker 2: you know, he wanted to make pre K education important nationally.
Speaker 8: Yeah, there's about two hundred million dollars in a plan.
Speaker 8: I believe it's the American Family's Plan, I believe is
Speaker 8: what it was called. And yeah, there's money for programs
Speaker 8: like this, and it would have been a pass through.
Speaker 8: So it's like the federal government would have passed this
Speaker 8: money through to state governments and then to local governments
Speaker 8: to run their programs and so again, like because New
Speaker 8: York City had such an infrastructure in place, like they
Speaker 8: were seen as a model.
Speaker 4: Where's the State of New York in this? Do they
Speaker 4: have any role? Or is this just city money, city resources?
Speaker 8: The State of New York share some of the costs
Speaker 8: for for for you, But they're not going to come
Speaker 8: to any rescue. They're not going to come to rescue here.
Speaker 5: Yeah.
Speaker 7: Remember that whole thing that we went through with splasia
Speaker 7: and somebody.
Speaker 2: Upstate, Yeah, didn't love each other, not love each other.
Speaker 7: It was made for good headlines, yea, so full of
Speaker 7: Where does this leave the city of New York and
Speaker 7: the parents and the teachers who are all behind the
Speaker 7: scenes and intimately involved with all of this. Where does
Speaker 7: it stand now? As we head towards the end of
Speaker 7: the school year and into next school year.
Speaker 8: So you know, the programs, you know, to be sure
Speaker 8: the programs are still here and they're still available, and
Speaker 8: so you know, I guess all the parents out there definitely, uh,
Speaker 8: you sign up and try to try to get your seat.
Speaker 8: But you know, as as the dysfunction continues, I mean,
Speaker 8: and you know, our reporting shows that that providers still
Speaker 8: are not being paid. And so as this continues, you know,
Speaker 8: more providers will have to cut teachers, They'll have to
Speaker 8: in some cases fold, and that that will make the
Speaker 8: system smaller. It's just getting smaller and smaller. And then
Speaker 8: it's not a universal program anymore, is it?
Speaker 2: Like, as the two overriding issues are as a society,
Speaker 2: how much do we care about kids before kindergarten?
Speaker 6: Right?
Speaker 2: It doesn't seem like much in America, but really we
Speaker 2: should because that's the prime time to give them what
Speaker 2: they need. I mean, if we're gonna scamp on anything,
Speaker 2: we should skimp on like high school, right and give
Speaker 2: them care while they're developing at this early age. The
Speaker 2: other thing is as city officials, bureaucrats, administrators, is it
Speaker 2: okay that they're just scoff laws? Is it okay that
Speaker 2: Eric Adams and what's this guy's name, David Banks just
Speaker 2: decide not to pay bills that they're obliged to pay.
Speaker 2: If they don't have to pay, maybe I don't have
Speaker 2: to pay money that I own New York City, right,
Speaker 2: you know? And then society falls apart.
Speaker 5: The gears man the gears, the gears, the administration.
Speaker 8: To be fair to them, they have they have been
Speaker 8: trying to make catchup payments, but again there they have case, right,
Speaker 8: and they have made some ketchup payments, but again, I
Speaker 8: mean they're a year and a half almost going on
Speaker 8: two years. If you're if you're too late, you're too late,
Speaker 8: and so it's it's it's truly an administrative Is.
Speaker 1: There an event?
Speaker 4: Is there a marker mile marker?
Speaker 1: Where?
Speaker 4: Boy, when we get to this event, somebody just have
Speaker 4: to really choose what they're gonna do, Like, is it
Speaker 4: the budget time, you know, because are we just going
Speaker 4: to drift into next year with this as you described
Speaker 4: that kind of an ever shrinking pre k opportunity here
Speaker 4: in New York City.
Speaker 8: So so the City Council, so New York City right
Speaker 8: now is in the midst of a budget negotiations, budget discussions,
Speaker 8: uh Mayork Adams has proposed at one hundred and seven
Speaker 8: billion dollar budget for the coming fiscal year. And so yeah,
Speaker 8: it's it's big and and so the city council.
Speaker 2: But it's okay if he doesn't have to pay the
Speaker 2: parts he doesn't want to write.
Speaker 1: What is budget.
Speaker 8: The city Council has, you know, decided on three K
Speaker 8: is an issue that they want to push back on.
Speaker 8: They're asking for this money back and they're asking for
Speaker 8: you know, they've been holding hearings to try to hold
Speaker 8: the administration take out here. So you know, we'll see
Speaker 8: what that what that, But you know how that plays out.
Speaker 7: And I think the bigger thing is sort of how
Speaker 7: education really fits in with the Adams set of priorities.
Speaker 7: Right we know where policing stands, education seems to be
Speaker 7: something that he's willing to get pretty petty with and
Speaker 7: even not Babe bills with so all eyes on on
Speaker 7: this budget stuff that with the timeline.
Speaker 8: For this so so the budget has to be passed
Speaker 8: by June thirtieth, and the new fiscal year starts to
Speaker 8: July first.
Speaker 4: And so she's no, we keep this guy on the story.
Speaker 5: Yeah, I think there's more to be done. He's the
Speaker 5: person gets this fired up.
Speaker 2: Well, I just think, Look, we are a network that
Speaker 2: serves investors in large part, right, And if you want
Speaker 2: to get the best ROI the best return on investment
Speaker 2: in the humans that we're making, we need to invest
Speaker 2: in them at the age you know, at this age,
Speaker 2: three years old, four years old, five years old, and
Speaker 2: we need to be giving them all the things they
Speaker 2: need then in order to make them better people and
Speaker 2: more productive members of society later. And it real want
Speaker 2: to give this story with money in the long term.
Speaker 4: I want to give the story of the plugging it
Speaker 4: it deserves if you'll let me. Sorry, all right, fullest
Speaker 4: story will be featured in the upcoming issue of BusinessWeek magazine.
Speaker 4: You can read it now on Bloomberg on the Bloomberg
Speaker 4: terminal and at this thing called the internet Bloomberg dot
Speaker 4: com slash business. We go there check this story out
Speaker 4: read it and then you know, form your own opinions.
Speaker 4: But you'll certainly be enlightened. I'll say, I'll tell you
Speaker 4: that Joel Webber, he's the editor for Bloomberg Business. He's
Speaker 4: responsible for all this stuff here, he joins us. Here
Speaker 4: in a Bloomberg Interactive Broker studio full of a Kenneedy.
Speaker 4: I'm going with that pronunciation. That's where you're gonna go
Speaker 4: with municipal financial reporter, but so much more.
Speaker 5: He's of this story.
Speaker 4: Bloomberg News also want a Bloomberg Interactive Brokers studio, some
Speaker 4: really good reporting as we become a custom.
Speaker 2: Broomco the journal. How about you let me drive?
Speaker 9: Oh no, no, no, no, who's.
Speaker 3: Honey?
Speaker 5: Please gravel? I want to drive.
Speaker 4: It's a good question that drives.
Speaker 1: This is the Drive to the Clothes don on Bloomberg Radio.
Speaker 2: All right, Matt Miller here in for Tim Cenovic. Paul
Speaker 2: Sweeney is filling in for Carol Sweeney.
Speaker 3: I wouldn't do that one.
Speaker 4: I'm just kind of we're think Warman's I know, we're
Speaker 4: the guest hosts, which is taking over?
Speaker 2: Yeah, uh, I well for one day. I am looking
Speaker 2: forward to talking to Stacy Sears right now, senior vice
Speaker 2: president and portfolio manager a small cap growth fund at
Speaker 2: Emerald Advisors, on zoom from Pennsylvany, because there's so much
Speaker 2: going on, but it seems like markets aren't moving much
Speaker 2: at all on a broader, you know, index level. Of course,
Speaker 2: it may be different when you're looking at a small
Speaker 2: cap growth fund. But Stacy, thanks so much for joining us.
Speaker 2: Let me first get your take on what the biggest
Speaker 2: driver is right now. Are you really that worried about
Speaker 2: the debt ceiling?
Speaker 5: The Fed is on pause.
Speaker 2: We're in an earnings recession, but it's kind of me
Speaker 2: what are you looking for to move this market?
Speaker 9: Yeah, so from our perspective, you know, ultimately it's going
Speaker 9: to come down to earnings. I think in the short run,
Speaker 9: you're right, you know, we are likely in a trading
Speaker 9: range until we get some resolution to the debt ceiling.
Speaker 9: But in you know, full transparency, you know, the debt
Speaker 9: ceiling is the devil that we know to a certain degree,
Speaker 9: everyone would prefer not to have to deal with the risk.
Speaker 9: But it's not like we haven't been here before. So
Speaker 9: in the interim, you know, the way that we're looking
Speaker 9: at the world, I think the rhetoric surrounding the debate
Speaker 9: is likely to continue to create some volatility, but we
Speaker 9: ultimately expected to be resolved. Debt ceiling will be raised,
Speaker 9: and we'll move forward. Admittedly, volatility here in the short
Speaker 9: run probably some risk to rates, but ultimately we think
Speaker 9: the path forward was going to be driven ultimately by earnings,
Speaker 9: corporate earnings.
Speaker 4: So Stacia, our notes here just say that you're from Pennsylvania,
Speaker 4: but I think you're from Leola, Pennsylvania. My right, that's correct,
Speaker 4: And now Leola, Pennsylvania. I had to google it, so
Speaker 4: this is not just off you know, the top of
Speaker 4: my head. Yeah, seventy five miles due west of Philadelphia
Speaker 4: is a way I phrase it.
Speaker 3: So is that?
Speaker 4: I mean you guys? Is that do you guys go
Speaker 4: to Philly for? Are you like Philly fans and stuff
Speaker 4: like that, Eagles and all that.
Speaker 9: Yes, absolutely, I grew up outside. I grew up in Philadelphia.
Speaker 2: Actually, all right, I'll love it.
Speaker 7: So, yes, this stuff.
Speaker 4: Patsylvania is a huge state.
Speaker 2: By the way, I dude, I drive to Ohio. I'm
Speaker 2: from the great state of Ohio. So every time I
Speaker 2: have to go back and forth, which you.
Speaker 4: Basically spend your entire trip in Ohio.
Speaker 2: I mean Pen Pennsyvannsylvania exactly. They see.
Speaker 4: So I know, you guys there at Emerald Advisors look
Speaker 4: at small cap. You're a PM on the small Cap
Speaker 4: Growth Fund. Give us a sense of how small caps
Speaker 4: have done recently versus the rest of the market, and
Speaker 4: kind of how you're positioning small caps for some of
Speaker 4: your clients.
Speaker 2: Especially like year to date. It's interesting because Stacy, the
Speaker 2: S and P is up eight percent year to date,
Speaker 2: but the Russell two thousand is unched.
Speaker 9: That's correct, you know, we really small caps got off
Speaker 9: to a very strong start through February. Economy was improving,
Speaker 9: economic surprise data was positive. We were seeing I think
Speaker 9: some encouraging earnings revisions to the positive. You know, fast
Speaker 9: forward to March. The advent of banking stresses and the
Speaker 9: failure of Silicon Valley and Signature Bank really changed the
Speaker 9: landscape for small cap.
Speaker 2: During the month.
Speaker 9: Small Caps, as you know, are the more risk averse
Speaker 9: area of the market, and I think you know, what
Speaker 9: we were seeing just from a broad perspective was risk
Speaker 9: inversion as the market was concerned of how the tightening
Speaker 9: of lending standards would roll through the small cap would
Speaker 9: roll through the small cap universe, so that has put
Speaker 9: us behind a little bit. Then on a year to
Speaker 9: date basis, as you mentioned, we'reunched compared to the S
Speaker 9: and P. But I think if you dig below the surface,
Speaker 9: there's some really interesting things going on, particularly within the
Speaker 9: small cap growth area. The small cap growth area is
Speaker 9: actually outperforming the Russell Index overall, up about three point
Speaker 9: nine percent on a year to date basis versus the
Speaker 9: Russell two thousand, as you said, is unched, and within
Speaker 9: that we're finding a tremendous amount of opportunity. I know,
Speaker 9: March and over the last month and a half, a
Speaker 9: lot of the press has been focused on what's been
Speaker 9: going on megacap tech. We have seen megacap tech largely
Speaker 9: outperform broadly, but under the surface, you know, we're really
Speaker 9: seeing some interesting opportunities within healthcare, particularly within biotechnology. I know,
Speaker 9: the conversation prior to my joining was, you know, on
Speaker 9: Serepta and the advancements that we're seeing there in DeShane
Speaker 9: muscular dystrophy. We think it's broader than that. There's a
Speaker 9: tremendous amount of innovation again that's really propelling growth in
Speaker 9: that sector, and it's an area that we're really excited about,
Speaker 9: you know, beyond just biotech, but medical and medical devices
Speaker 9: as well. Just a tremendous amount of innovation in orthopedics, diagnostics, testing, transplantation,
Speaker 9: for example. There's a lot of positive things going on
Speaker 9: in the small cap growth universe today as we see it.
Speaker 2: It's interesting. I look at the Rustle two thousand broken
Speaker 2: down into groups, and obviously financials are the biggest laggard
Speaker 2: on the year, down nineteen percent. Energy is down ten percent.
Speaker 2: But the biggest winners consumer discretionary, even ahead of healthcare.
Speaker 2: I mean, you mentioned the healthcare stocks, Stacey, but a
Speaker 2: bunch of I guess consumer discretionary kind of broadly defined,
Speaker 2: has really been killing it. Arlow Technologies, thread Up, Neo Games,
Speaker 2: Green Brick Partners. These are companies for the most part
Speaker 2: that I've never heard of. A couple standouts are Dual
Speaker 2: Lingo and Cinemak Hovnanian. But it looks like you've got
Speaker 2: some runaway winners. I guess that's always the case in
Speaker 2: the small smaller caps, right You've got these I guess
Speaker 2: one hit wonders or just knock out of the park
Speaker 2: home runs that you couldn't have guessed beforehand.
Speaker 9: Well, there is a truth to that, right, I mean,
Speaker 9: small cap is great for enabling niche niche companies to
Speaker 9: exploit opportunities, and we definitely see that in the consumer
Speaker 9: sector and particularly on the services side of the economy. Right,
Speaker 9: we've been talking a lot about wallet share shift from
Speaker 9: consumption perspective, the consumer over consume goods over the better
Speaker 9: part of the last you know, two years post COVID,
Speaker 9: we've seen some renormalization of behavior and patterns spending back
Speaker 9: towards services that's still durable from our perspective. We're seeing
Speaker 9: it in restaurants, We're seeing it in leisure, we're seeing
Speaker 9: it in recreational services. So while overall consumer spending is
Speaker 9: likely going to slow, we believe those services areas of
Speaker 9: the economy are likely to be more resilient and have
Speaker 9: identified significant opportunity there as well.
Speaker 4: So Stacy just about thirty seconds here. Small cap banks
Speaker 4: staying away from them for the moment.
Speaker 9: We have been avoiding small cap banks. We lowered our
Speaker 9: exposures significantly entering this year. Again from our perspective, profitability concerns,
Speaker 9: deposit beta banks were paying up more for deposits coming
Speaker 9: into the year that was going to have an impact
Speaker 9: on lending, going to have an impact on yields, So
Speaker 9: we were a little bit ahead of the curve there.
Speaker 9: Admittedly did not see the stress quite the level of
Speaker 9: stress that matter infested itself in March, but we do
Speaker 9: think on a relative basis that area is going to
Speaker 9: be more challenged at least for the visible future.
Speaker 2: Stacy, great to have you with us. Hope we can
Speaker 2: get you back again. Thanks so much. Stacy Sears there.
Speaker 2: She is the senior vice president and a portfolio manager
Speaker 2: of Small Cap Growth, the Small Cap Growth Fund at
Speaker 2: Emerald Advisors. Matt Miller here in the studio with Paul Sweeney.
Speaker 8: This is Bloomberg.
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