1 00:00:01,360 --> 00:00:04,120 Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, along 2 00:00:04,120 --> 00:00:06,200 Speaker 1: with my co host of Bonnie Quinn. Every business day 3 00:00:06,240 --> 00:00:10,360 Speaker 1: we bring you interviews from ceo, market pros, and Bloomberg experts, 4 00:00:10,400 --> 00:00:13,600 Speaker 1: along with essential market moving news. Find the Bloomberg Markets 5 00:00:13,600 --> 00:00:17,000 Speaker 1: Podcast on Apple podcast or wherever you listen to podcasts, 6 00:00:17,000 --> 00:00:22,360 Speaker 1: and on Bloomberg dot com. Tesla, that stock that everybody 7 00:00:22,400 --> 00:00:24,599 Speaker 1: loves to talk about, up two thirds of represent in 8 00:00:24,640 --> 00:00:27,639 Speaker 1: today's trading after earnings came out yesterday. Let's bring in 9 00:00:27,680 --> 00:00:31,760 Speaker 1: somebody who says, maybe Tesla's, you know, just a little 10 00:00:31,800 --> 00:00:36,639 Speaker 1: bit um not cooking the books. But well, we'll let him, 11 00:00:36,680 --> 00:00:38,559 Speaker 1: We'll let him say it. Gordon Johnson is founder and 12 00:00:38,600 --> 00:00:43,040 Speaker 1: CEO of g LJ Research. So Gordon, did Tesla or 13 00:00:43,080 --> 00:00:47,360 Speaker 1: did Tesla not make a good profit? Uh? Put it 14 00:00:47,440 --> 00:00:50,040 Speaker 1: this way, Um, if you look at their core auto segment, 15 00:00:50,120 --> 00:00:53,440 Speaker 1: Tesla losses significant amount of money. So what Tesla does 16 00:00:53,479 --> 00:00:56,920 Speaker 1: is every quarter they recognize a certain level of regulatory 17 00:00:56,960 --> 00:01:01,640 Speaker 1: credits and these net income revenue that don't have cash 18 00:01:01,680 --> 00:01:04,840 Speaker 1: tied to them. Um uh. And this quarter that number 19 00:01:04,880 --> 00:01:08,320 Speaker 1: was million. Their net income that they reported was one 20 00:01:08,319 --> 00:01:11,720 Speaker 1: oh four. So those credits, um. They lost a significant 21 00:01:11,720 --> 00:01:13,880 Speaker 1: amount of money, and the CEO even said this on 22 00:01:13,920 --> 00:01:16,119 Speaker 1: the call. He said, our business is not based on 23 00:01:16,680 --> 00:01:20,560 Speaker 1: the assumption of continued credit recognition because these are temporary numbers. 24 00:01:20,560 --> 00:01:22,440 Speaker 1: But what's key here is if you look over the 25 00:01:22,480 --> 00:01:26,559 Speaker 1: past twenty six quarters um and only four of those quarters, 26 00:01:26,560 --> 00:01:30,120 Speaker 1: if you take Testla's net income less regulatory credit sold 27 00:01:30,160 --> 00:01:32,479 Speaker 1: has they have They posted a profit, the most recent 28 00:01:32,520 --> 00:01:35,679 Speaker 1: of which was three to nineteen. But what's also interesting 29 00:01:35,760 --> 00:01:39,440 Speaker 1: is their regulatory credit revenue jumped from about a hundred 30 00:01:39,520 --> 00:01:42,080 Speaker 1: million Q four to three hundred four and Q one 31 00:01:42,400 --> 00:01:45,520 Speaker 1: and four hundred eight million and Q two. The reason 32 00:01:45,640 --> 00:01:48,400 Speaker 1: that significant is because that allowed them to report four 33 00:01:48,440 --> 00:01:52,480 Speaker 1: straight quarters of profit, which basically allows them or makes 34 00:01:52,480 --> 00:01:54,600 Speaker 1: them as eligible to be including in the SMC five 35 00:01:54,680 --> 00:01:57,760 Speaker 1: hundred real quick what What's what's important here is they're 36 00:01:57,800 --> 00:02:02,840 Speaker 1: effectively recognizing revenue on credit sells they have not yet 37 00:02:03,040 --> 00:02:07,440 Speaker 1: made to uh FIAT Chrysler. The Chrysler said they're gonna 38 00:02:07,440 --> 00:02:10,480 Speaker 1: buy credits essentially from Tesla at one point one billion 39 00:02:10,720 --> 00:02:13,440 Speaker 1: over the next four years. In the first two quarters 40 00:02:13,440 --> 00:02:16,480 Speaker 1: of this year alone, Tesla has recognized we believe eight 41 00:02:16,560 --> 00:02:18,960 Speaker 1: hundred million of that one point one billion, So you 42 00:02:18,960 --> 00:02:21,920 Speaker 1: can see they're significantly pulling forward revenues if they really 43 00:02:21,960 --> 00:02:24,680 Speaker 1: haven't even sold yet to post the profits. We think 44 00:02:24,720 --> 00:02:27,320 Speaker 1: it's not real. We think it's uh, you know, it's artificial, 45 00:02:27,320 --> 00:02:29,160 Speaker 1: and we think they're gonna go back into severe losses 46 00:02:29,200 --> 00:02:32,040 Speaker 1: in the back half of this year. So Gordon, why 47 00:02:32,440 --> 00:02:35,359 Speaker 1: does the market not care about that? The stock is 48 00:02:35,400 --> 00:02:39,440 Speaker 1: up two percent year to date, up over five on 49 00:02:39,480 --> 00:02:43,040 Speaker 1: a trailing twelve month basis um, Why does a market 50 00:02:43,040 --> 00:02:46,600 Speaker 1: not care? Well, Tesla is completely detached from reality. But 51 00:02:46,600 --> 00:02:47,720 Speaker 1: if we have to put it on one thing, we 52 00:02:47,800 --> 00:02:50,560 Speaker 1: put it on this Tesla stock in March essentially to 53 00:02:50,560 --> 00:02:53,600 Speaker 1: get February. March fell from nine hundred and fifty dollars 54 00:02:53,639 --> 00:02:55,880 Speaker 1: and three hundred and fifty dollars when the market collapsed, right, 55 00:02:56,280 --> 00:02:58,359 Speaker 1: and then in late March the key that the federators 56 00:02:58,400 --> 00:03:02,080 Speaker 1: serve announced Qui infinity. They essentially grew their balance sheet 57 00:03:02,120 --> 00:03:04,600 Speaker 1: by three trillion dollars over a course of nine weeks, 58 00:03:04,600 --> 00:03:06,799 Speaker 1: which is a four years worth of tax revenues in 59 00:03:06,880 --> 00:03:09,400 Speaker 1: the US. The questions why are we even paying taxes? Right? 60 00:03:09,440 --> 00:03:11,440 Speaker 1: That money is just going into stock market, and every 61 00:03:11,480 --> 00:03:14,560 Speaker 1: speculative stock went to the moon. That's essentially the key 62 00:03:14,600 --> 00:03:18,560 Speaker 1: reason why we'd say, um uh, people don't care, but 63 00:03:18,639 --> 00:03:20,720 Speaker 1: we think they're gonna be forced to care. Because Tesla 64 00:03:20,840 --> 00:03:23,640 Speaker 1: reiterated it's it's guidance for five hundred thousand cars sold. 65 00:03:24,000 --> 00:03:25,639 Speaker 1: So in three two they're gonna have to sell roughly 66 00:03:25,639 --> 00:03:27,560 Speaker 1: a hundred and sixty thousand cars. We think they're gonna 67 00:03:27,600 --> 00:03:29,720 Speaker 1: fall far short of that. We think they're gonna report 68 00:03:29,760 --> 00:03:32,600 Speaker 1: a big loss in Q three. They guided, Tesla has guided. 69 00:03:32,639 --> 00:03:34,760 Speaker 1: Nobody's even talked about this on the South side, but 70 00:03:34,880 --> 00:03:37,280 Speaker 1: Tesla guided on their call last night, they said, our 71 00:03:37,360 --> 00:03:39,640 Speaker 1: credit cells this year are gonna be double last year. 72 00:03:39,920 --> 00:03:42,520 Speaker 1: So if you take last year multiplied by two, subtract 73 00:03:42,560 --> 00:03:44,720 Speaker 1: the first half of this year, they're guiding their credit 74 00:03:44,760 --> 00:03:47,840 Speaker 1: cells down rough and the second half of this year 75 00:03:47,880 --> 00:03:50,360 Speaker 1: that's a hundred percent gross margin revenue, it's gonna fall. 76 00:03:51,400 --> 00:03:53,920 Speaker 1: So it's clear to us we believe right. Our opinion 77 00:03:54,040 --> 00:03:57,800 Speaker 1: is they effectively pulled in a bunch of credit revenue 78 00:03:57,840 --> 00:04:00,400 Speaker 1: to show profit to be including the SMP by hundreds, 79 00:04:00,480 --> 00:04:03,000 Speaker 1: and they're gonna go back to significant losses next quarter. 80 00:04:03,080 --> 00:04:05,040 Speaker 1: So given where the valuation is, not only do they 81 00:04:05,080 --> 00:04:06,880 Speaker 1: need to show tremendous growth, which we don't think they're 82 00:04:06,880 --> 00:04:09,400 Speaker 1: gonna do. Um. Their revenue is essentially peaked in the 83 00:04:09,440 --> 00:04:13,400 Speaker 1: fourth quarter of eighteen UM and so did their deliveries. UM. 84 00:04:13,680 --> 00:04:15,760 Speaker 1: But we also think they're gonna go show severe head 85 00:04:15,760 --> 00:04:18,080 Speaker 1: income losses and cash burn. We think that's gonna push 86 00:04:18,080 --> 00:04:20,800 Speaker 1: the stock down. But all of the analysts conceive that 87 00:04:20,839 --> 00:04:23,800 Speaker 1: test Us sold almost eight hundre million dollars in regulatory credits. Right, 88 00:04:23,800 --> 00:04:25,960 Speaker 1: They're not hiding it or anything. So why are analysts 89 00:04:26,000 --> 00:04:29,640 Speaker 1: even not there is anymore? Well, I'll give you this, right, 90 00:04:29,880 --> 00:04:32,640 Speaker 1: the consensus estimate going into last night's earnings was a 91 00:04:32,720 --> 00:04:35,240 Speaker 1: loss of a dollar twenty Right. If Tesla would have 92 00:04:35,279 --> 00:04:37,720 Speaker 1: lost money, that would have basically ended their ability to 93 00:04:37,839 --> 00:04:41,440 Speaker 1: be included in the SMP five hundreds since must basically 94 00:04:41,800 --> 00:04:43,720 Speaker 1: there was an email he sent out to his employees 95 00:04:43,760 --> 00:04:46,200 Speaker 1: that was leaked to the um UH to the two 96 00:04:46,240 --> 00:04:48,960 Speaker 1: news wires that they're close to propitibility. The stock has 97 00:04:48,960 --> 00:04:51,960 Speaker 1: been on fire. If the street estimate, like, if analysts 98 00:04:52,040 --> 00:04:54,160 Speaker 1: really thought they were gonna lose money yesterday, they should 99 00:04:54,160 --> 00:04:56,200 Speaker 1: have downgraded the stock to cell because the stock would 100 00:04:56,240 --> 00:05:00,600 Speaker 1: have imploded. I think they're select analysts that are complicit um, 101 00:05:00,960 --> 00:05:04,160 Speaker 1: and and and and and essentially the pumps that are 102 00:05:04,200 --> 00:05:07,160 Speaker 1: what Tesla consistently see. Um. What I mean by that 103 00:05:07,360 --> 00:05:10,359 Speaker 1: is like the Street estimate for deliveries with seventy before 104 00:05:10,440 --> 00:05:12,799 Speaker 1: the end of the before they even reported the deliveries, 105 00:05:12,839 --> 00:05:15,800 Speaker 1: Tesla came out themselves effectively be another league and so 106 00:05:15,960 --> 00:05:17,480 Speaker 1: we're gonna do you know, we're gonna be close to 107 00:05:18,000 --> 00:05:20,960 Speaker 1: close to ninety thousand. So I think the Street and argue, 108 00:05:21,040 --> 00:05:23,479 Speaker 1: this is our opinion some analysts are intentionally keeping keeping 109 00:05:23,520 --> 00:05:25,720 Speaker 1: their numbers low in order to keep the barlow so 110 00:05:25,800 --> 00:05:28,600 Speaker 1: Tesla can step over it. All. Right, let's step away 111 00:05:28,640 --> 00:05:32,080 Speaker 1: just a second from Tesla and the quarterly earnings. What 112 00:05:32,279 --> 00:05:35,600 Speaker 1: is your call as to how the other big auto 113 00:05:35,680 --> 00:05:39,600 Speaker 1: manufacturers will step up? When they will step up in 114 00:05:39,680 --> 00:05:44,240 Speaker 1: the EV market? Right, So, if you look at Tesla's 115 00:05:44,279 --> 00:05:47,920 Speaker 1: revenue in Europe, um their market share rather, it's fell 116 00:05:48,040 --> 00:05:53,320 Speaker 1: from to roughly from four Q two I'm sorry, from 117 00:05:53,480 --> 00:05:55,520 Speaker 1: lun Q of last year to today. If you look 118 00:05:55,560 --> 00:05:58,359 Speaker 1: at their market share in the most important global EV market, 119 00:05:58,360 --> 00:06:00,200 Speaker 1: which is Norway. And why do we say that because 120 00:06:00,240 --> 00:06:03,720 Speaker 1: Norway is subsidized of the cost of your electric car. 121 00:06:03,839 --> 00:06:06,440 Speaker 1: So everybody who makes electric electric car sells in Norway. 122 00:06:06,680 --> 00:06:09,200 Speaker 1: Tesla shares down from thirty seven percent in the fourth 123 00:06:09,279 --> 00:06:12,800 Speaker 1: quarter to roughly five percent as of today. The point 124 00:06:12,960 --> 00:06:16,000 Speaker 1: is just this year e the EU put in a 125 00:06:16,120 --> 00:06:18,679 Speaker 1: rule that you had to basically sell a certain amount 126 00:06:18,680 --> 00:06:21,120 Speaker 1: of electric car that a carmaker or you penalized. That 127 00:06:21,200 --> 00:06:23,719 Speaker 1: wasn't the case last year. So in the markets where 128 00:06:23,760 --> 00:06:28,080 Speaker 1: Tesla is facing competition now they're getting uh, they're losing 129 00:06:28,160 --> 00:06:30,040 Speaker 1: in a big way. The other thing I will not 130 00:06:30,080 --> 00:06:31,760 Speaker 1: it is a lot of people say, well tech Tesla 131 00:06:31,800 --> 00:06:33,920 Speaker 1: is the technology leader, right, they lead in batteries and 132 00:06:33,960 --> 00:06:35,920 Speaker 1: they lead in autonomous driving. Let me let me put 133 00:06:35,960 --> 00:06:39,200 Speaker 1: some reality today. Tesla does not make batteries, right, They 134 00:06:39,240 --> 00:06:41,520 Speaker 1: do not make batteries. They buy them from Panasonic and 135 00:06:41,600 --> 00:06:43,760 Speaker 1: c A t O. Anybody can buy a loop AMN 136 00:06:43,800 --> 00:06:46,200 Speaker 1: on batteries from those vendors. And Tesla's R and D 137 00:06:46,360 --> 00:06:48,520 Speaker 1: right if they're gonna take over the battery space. Their 138 00:06:48,640 --> 00:06:51,680 Speaker 1: R and D spin was down almost six in Q 139 00:06:51,839 --> 00:06:54,400 Speaker 1: two year over year, um, so they're not spending on 140 00:06:54,560 --> 00:06:56,400 Speaker 1: R and D and they five batteries from other people. 141 00:06:56,400 --> 00:06:58,760 Speaker 1: So we think there's misconceptions. And then lastly, in full 142 00:06:58,800 --> 00:07:02,479 Speaker 1: self drive navigant rank the Dead Last dead lest Gordon Johnson, 143 00:07:02,480 --> 00:07:05,200 Speaker 1: thanks so much for joining us. A compelling bear case 144 00:07:05,279 --> 00:07:08,039 Speaker 1: for what has been a rocket ship of a stock. 145 00:07:08,080 --> 00:07:12,840 Speaker 1: We'll see how it plays out, certainly. You know, no 146 00:07:13,040 --> 00:07:16,600 Speaker 1: sector has been hit harder arguably than the US airline business. 147 00:07:16,640 --> 00:07:19,760 Speaker 1: They sold. The traffic just plummet with the pandemic, and 148 00:07:19,840 --> 00:07:22,880 Speaker 1: it really hasn't rebounded that much, putting a lot of 149 00:07:22,960 --> 00:07:26,440 Speaker 1: pressure on their balance sheets. UH, and they are coming 150 00:07:26,520 --> 00:07:29,520 Speaker 1: to market left, right and center, trying to raise capital, 151 00:07:29,560 --> 00:07:32,720 Speaker 1: mortgaging everything they can effectively. American Airlines is in the 152 00:07:32,800 --> 00:07:36,000 Speaker 1: market right now. Let's talk about that deal. Molly Smith, 153 00:07:36,080 --> 00:07:39,720 Speaker 1: corporate finance reporter for Bloomberg News. Molly, thanks so much 154 00:07:39,760 --> 00:07:42,320 Speaker 1: for joining us here. Tell us about this one point 155 00:07:42,360 --> 00:07:46,800 Speaker 1: two billion dollar financing that American is bringing the market. Yeah, 156 00:07:46,920 --> 00:07:49,400 Speaker 1: so we're probably going to see at sometime at this quarter. 157 00:07:49,760 --> 00:07:52,920 Speaker 1: American told us this morning when they reported earnings, and 158 00:07:53,040 --> 00:07:57,080 Speaker 1: the idea is basically to mortgage the brand in uh, 159 00:07:57,440 --> 00:08:00,360 Speaker 1: putting together a collateral package for this one point billion 160 00:08:00,400 --> 00:08:03,840 Speaker 1: dollars debt financing that Goldman is going to be working 161 00:08:03,880 --> 00:08:07,600 Speaker 1: with American on so that some of that collateral includes 162 00:08:07,680 --> 00:08:10,840 Speaker 1: the American Airlines trademark, also the a A dot com 163 00:08:10,920 --> 00:08:16,160 Speaker 1: website domain, as well as key airline plots at LaGuardia 164 00:08:16,280 --> 00:08:19,960 Speaker 1: and Reagan National Airports. So it's really interesting on the 165 00:08:20,160 --> 00:08:23,480 Speaker 1: I P side, at least, we haven't seen airlines yet 166 00:08:23,520 --> 00:08:26,360 Speaker 1: putting up their trademark as collateral, so really shows you 167 00:08:26,440 --> 00:08:29,240 Speaker 1: how they're really dolling out the kitchens things to get 168 00:08:29,320 --> 00:08:32,560 Speaker 1: some of the secured financing. Yeah, how if you were 169 00:08:32,559 --> 00:08:34,199 Speaker 1: a Goldman and you needed to would you sort of 170 00:08:35,280 --> 00:08:39,439 Speaker 1: cash that in? So it's a it's a bit reminiscent 171 00:08:39,600 --> 00:08:42,199 Speaker 1: for me, at least of when Ford had to do 172 00:08:42,360 --> 00:08:45,480 Speaker 1: something similar to put pretty much all of its assets 173 00:08:45,559 --> 00:08:48,640 Speaker 1: in hock to avoid filing for bankruptcy back in two 174 00:08:48,679 --> 00:08:51,880 Speaker 1: thousands five, and including for Fords the blue oval logo 175 00:08:52,000 --> 00:08:54,959 Speaker 1: at the time. So it's, uh, it's something that's not 176 00:08:55,520 --> 00:08:59,160 Speaker 1: you know, unique to companies in general, but definitely have 177 00:08:59,240 --> 00:09:02,040 Speaker 1: not seen this from the airline so far in putting 178 00:09:02,040 --> 00:09:05,680 Speaker 1: together these collateral packages. Boy, here's a young corporate finance 179 00:09:05,679 --> 00:09:08,160 Speaker 1: bankers the Chase Manhattan Bank. I could not even imagine 180 00:09:08,200 --> 00:09:10,680 Speaker 1: going to my credit committee saying, you know, we lend 181 00:09:10,720 --> 00:09:14,800 Speaker 1: one point two billion dollars against basically a logo. Um, 182 00:09:15,000 --> 00:09:17,839 Speaker 1: but let's see if goldben can get it done. So, Molly, 183 00:09:17,880 --> 00:09:20,840 Speaker 1: give us a sense of the cash burn for this industry. 184 00:09:21,000 --> 00:09:22,520 Speaker 1: You know, I just reported a story in the last 185 00:09:22,559 --> 00:09:25,360 Speaker 1: hour of Bloomberg News, reported a story about, you know, 186 00:09:25,440 --> 00:09:29,000 Speaker 1: how the airlines are adding fewer than the expected flights 187 00:09:29,080 --> 00:09:31,760 Speaker 1: here because the pandemic is kind of surging in in 188 00:09:31,920 --> 00:09:35,280 Speaker 1: in key states. Here. What's the cash burn like for 189 00:09:35,280 --> 00:09:38,959 Speaker 1: a lot of these companies right now? It's improving, but 190 00:09:39,120 --> 00:09:41,880 Speaker 1: still negative. So I think they would take that as 191 00:09:41,920 --> 00:09:44,440 Speaker 1: a general positive, and it seems that that's what investors 192 00:09:44,520 --> 00:09:47,040 Speaker 1: are taking as a positive as well, that at least 193 00:09:47,120 --> 00:09:51,040 Speaker 1: for American the cashman was nearly a hundred million dollars 194 00:09:51,120 --> 00:09:53,959 Speaker 1: in April, pretty much a third of that in June. 195 00:09:54,200 --> 00:09:57,360 Speaker 1: So again still negative, but improving. And we saw that 196 00:09:57,520 --> 00:10:01,439 Speaker 1: also with Southwest and United. So they are attributing that, 197 00:10:01,600 --> 00:10:03,920 Speaker 1: of course to you know, some increased revenue and that 198 00:10:04,320 --> 00:10:07,000 Speaker 1: it does seem that passengers are more willing to fly. 199 00:10:07,240 --> 00:10:09,880 Speaker 1: But of course, uh, there's still a long way to 200 00:10:09,960 --> 00:10:12,200 Speaker 1: go in terms of coming back from this travel shutdown. 201 00:10:13,200 --> 00:10:15,520 Speaker 1: It seems a little odd. So United putting up its 202 00:10:15,559 --> 00:10:19,200 Speaker 1: loyalty points as collateral. You know American now putting up basically, 203 00:10:19,240 --> 00:10:22,560 Speaker 1: I suppose that its logo, why go to the trouble 204 00:10:22,600 --> 00:10:24,319 Speaker 1: of all of this, Why not just give them some 205 00:10:24,480 --> 00:10:26,959 Speaker 1: cash to tie them over? If you're going to back them, 206 00:10:27,000 --> 00:10:30,520 Speaker 1: why not back them? I think, you know, there needs 207 00:10:30,600 --> 00:10:32,959 Speaker 1: to be some kind of security in these deals, and 208 00:10:33,080 --> 00:10:36,080 Speaker 1: that of course, if any of these companies could borrow 209 00:10:36,200 --> 00:10:39,880 Speaker 1: through the unsecured market at a reasonable cost, they would 210 00:10:39,880 --> 00:10:43,000 Speaker 1: probably consider that. But if you're already looking at double 211 00:10:43,080 --> 00:10:46,600 Speaker 1: digit yields on secured financing, then you can only imagine 212 00:10:46,640 --> 00:10:50,199 Speaker 1: how much more painful or possibly not even it doesn't 213 00:10:50,240 --> 00:10:52,600 Speaker 1: even seem possible to do it in the unsecured market. 214 00:10:53,040 --> 00:10:56,400 Speaker 1: So and we've seen that investors are definitely assigning more 215 00:10:56,480 --> 00:10:59,920 Speaker 1: weight to collateral too. I mean, remember United had try 216 00:11:00,160 --> 00:11:03,200 Speaker 1: to previously secure a bond sale with some of its 217 00:11:03,280 --> 00:11:06,040 Speaker 1: old aircraft, and investors were thinking that by the time 218 00:11:06,120 --> 00:11:08,360 Speaker 1: these debts the debt matures, that a lot of those 219 00:11:08,360 --> 00:11:11,319 Speaker 1: aircraft wouldn't even be in flight, so they then turned 220 00:11:11,440 --> 00:11:14,839 Speaker 1: to the frequent flyer mile program. So it definitely is 221 00:11:14,920 --> 00:11:17,840 Speaker 1: looking like the brands are getting more creative in terms 222 00:11:17,840 --> 00:11:21,280 Speaker 1: of what they're putting up. So Molly, how's the market 223 00:11:21,320 --> 00:11:23,760 Speaker 1: for some of these? I would call them quasi esoteric 224 00:11:24,000 --> 00:11:28,199 Speaker 1: kind of credit facilities. Here are bond deals you have 225 00:11:28,320 --> 00:11:31,280 Speaker 1: to pay a huge premium to get money based upon 226 00:11:31,600 --> 00:11:35,959 Speaker 1: you know, with lateral clatteral being your logo. Yes, So 227 00:11:36,240 --> 00:11:38,520 Speaker 1: we've seen a lot of other industries to like cruise 228 00:11:38,559 --> 00:11:41,400 Speaker 1: lines um it's another big one that have also been 229 00:11:41,559 --> 00:11:44,720 Speaker 1: very creative and some of these secured financings of believe 230 00:11:44,760 --> 00:11:46,640 Speaker 1: it was Norwegian Cruise Line that cut up some of 231 00:11:46,720 --> 00:11:50,199 Speaker 1: its islands believe it or not to borrow against and 232 00:11:50,720 --> 00:11:54,800 Speaker 1: still paid um a ten percent plus fields in that deal. Uh. 233 00:11:55,080 --> 00:11:59,760 Speaker 1: Carnival has also done some similar financings backed by its ships. 234 00:12:00,559 --> 00:12:03,240 Speaker 1: So we definitely see that there is a price to play. 235 00:12:03,360 --> 00:12:06,280 Speaker 1: But it seems like the idea on the investors side 236 00:12:06,360 --> 00:12:08,360 Speaker 1: is that these companies are going to be around and 237 00:12:08,640 --> 00:12:11,679 Speaker 1: come three five years whenever this debt matures, and that's 238 00:12:11,720 --> 00:12:14,040 Speaker 1: why they're willing to lend. I mean, I can see 239 00:12:14,080 --> 00:12:16,440 Speaker 1: the slots being worth something, but has it ever happened 240 00:12:16,480 --> 00:12:18,960 Speaker 1: before that, For example, a new you know, an entity 241 00:12:19,000 --> 00:12:21,800 Speaker 1: goes bust it it didn't make good on its in 242 00:12:22,679 --> 00:12:25,200 Speaker 1: you know, and its promise to sort of pawn back. 243 00:12:25,280 --> 00:12:28,280 Speaker 1: Basically it's logo, and then some other entity arrives twenty 244 00:12:28,360 --> 00:12:30,240 Speaker 1: years later and takes the name or something. I mean, 245 00:12:30,320 --> 00:12:35,120 Speaker 1: it could could have happened, Molly. I guess theoretically it's possible, 246 00:12:35,200 --> 00:12:38,880 Speaker 1: suere though, I would think that whenever you are putting 247 00:12:39,000 --> 00:12:41,439 Speaker 1: up these kinds of assets of collaterals, that there's a 248 00:12:41,960 --> 00:12:44,800 Speaker 1: huge bedding process to make sure that the appraisal value 249 00:12:44,880 --> 00:12:47,160 Speaker 1: is there and that it is something we should admit 250 00:12:47,280 --> 00:12:50,880 Speaker 1: to borrow against. Yeah, it's so fascinating. It's a great story, Molly. 251 00:12:51,080 --> 00:12:54,120 Speaker 1: I hope everybody listening to us reads it. Molly Smith's 252 00:12:54,160 --> 00:12:57,400 Speaker 1: an American air borrows against Brandon one point two billion 253 00:12:57,480 --> 00:13:03,320 Speaker 1: dollar Goldman deal. Let's take a look at the equity market, 254 00:13:03,360 --> 00:13:05,640 Speaker 1: shall we. We had that, Let's just put it into context. 255 00:13:05,720 --> 00:13:09,920 Speaker 1: We came into this pandemic, markets traded off about thirty 256 00:13:09,960 --> 00:13:13,719 Speaker 1: four thirty five percent. We since retraced about that just 257 00:13:13,840 --> 00:13:16,800 Speaker 1: extraordinary bounce back. The question is, as we head into 258 00:13:16,960 --> 00:13:19,880 Speaker 1: and experience the second quarter earnings, where do we go 259 00:13:20,240 --> 00:13:23,319 Speaker 1: from here? Tell us answer that we welcome Phil Orlando, 260 00:13:23,480 --> 00:13:27,120 Speaker 1: chief equity market strategist ahead of client portfolio management at 261 00:13:27,160 --> 00:13:32,040 Speaker 1: Federated Hermes. Uh, they are in uh sixty two sixty 262 00:13:32,120 --> 00:13:35,320 Speaker 1: eight billion dollars in equities under management. Phil, thanks much 263 00:13:35,360 --> 00:13:38,080 Speaker 1: for joining us once again. Here we're in I guess 264 00:13:38,160 --> 00:13:41,880 Speaker 1: the second week of earnings here. Any takeaways you've had 265 00:13:41,960 --> 00:13:47,480 Speaker 1: so far, the major takeaway is how much better the 266 00:13:47,520 --> 00:13:50,640 Speaker 1: earnings have come out versus what we were expecting. So 267 00:13:51,400 --> 00:13:55,120 Speaker 1: consensus going in was that earnings would be down about 268 00:13:55,280 --> 00:14:00,439 Speaker 1: forty five year over year, UH, and that uh, you 269 00:14:00,520 --> 00:14:04,800 Speaker 1: know or so of companies would would be withholding guidance. 270 00:14:05,200 --> 00:14:08,280 Speaker 1: Now we're only about you know, fifteen or twenty of 271 00:14:08,360 --> 00:14:11,280 Speaker 1: the way into the season, so it's still early. But 272 00:14:11,679 --> 00:14:15,800 Speaker 1: the companies that have reported, three quarters of them uh 273 00:14:16,480 --> 00:14:21,160 Speaker 1: beaten consensus earnings by about four which is the strongest 274 00:14:21,280 --> 00:14:25,680 Speaker 1: beat we've seen in in ten years. So again, uh, 275 00:14:26,520 --> 00:14:28,920 Speaker 1: there's still plenty of track left. But at least the 276 00:14:28,960 --> 00:14:32,160 Speaker 1: companies that have reported early uh seem to be doing 277 00:14:32,200 --> 00:14:36,080 Speaker 1: a lot better than than we had thought. How correct 278 00:14:36,280 --> 00:14:38,880 Speaker 1: quote unquote our valuations right now? Pheel. There's a little 279 00:14:38,920 --> 00:14:41,440 Speaker 1: talk in recent days about the you know, the top 280 00:14:41,640 --> 00:14:43,960 Speaker 1: five companies in the SP five accounting for a fifth 281 00:14:44,000 --> 00:14:45,720 Speaker 1: of the index. But if you actually look into it. 282 00:14:45,960 --> 00:14:50,280 Speaker 1: Many of these companies you know have sold off. So 283 00:14:50,880 --> 00:14:54,640 Speaker 1: there's no question that technology has been an important driver 284 00:14:55,080 --> 00:14:58,680 Speaker 1: of UH this fifty percent rally we've seen from the 285 00:14:58,840 --> 00:15:02,320 Speaker 1: bottom of the market on March twenty three. And there's 286 00:15:02,360 --> 00:15:11,000 Speaker 1: no question that within technology, the fang stocks Facebook, Apple, Amazon, Netflix, Google, 287 00:15:11,440 --> 00:15:15,160 Speaker 1: I'll throw Microsoft into that mix have have done heavy 288 00:15:15,280 --> 00:15:18,840 Speaker 1: lifting in terms of technology UM and and this is 289 00:15:18,880 --> 00:15:21,520 Speaker 1: a question that clients are asking a lot are in 290 00:15:21,640 --> 00:15:26,480 Speaker 1: stocks expensive and on the basis of the reduction and 291 00:15:26,600 --> 00:15:29,480 Speaker 1: earnings that we've put in place for this year UH 292 00:15:29,760 --> 00:15:32,840 Speaker 1: SMP earrings last year or hiring sixty seven dollars. We 293 00:15:33,600 --> 00:15:36,800 Speaker 1: initially had a hundred and eighty dollar estimate for this 294 00:15:37,080 --> 00:15:39,600 Speaker 1: year at the beginning of the year, and then the 295 00:15:39,680 --> 00:15:43,720 Speaker 1: pandemic hit. So we've taken our estimate down from a 296 00:15:43,800 --> 00:15:46,120 Speaker 1: hundred and eighty dollars this year down a hundred and 297 00:15:46,160 --> 00:15:49,080 Speaker 1: twenty five dollars. So on the basis of where stocks 298 00:15:49,120 --> 00:15:52,160 Speaker 1: are now, on the basis of a HUD and earnings, 299 00:15:52,560 --> 00:15:55,720 Speaker 1: you're trading at about twenty six times earnings, which which 300 00:15:55,840 --> 00:15:58,560 Speaker 1: is very high by by any measure. But the point 301 00:15:58,640 --> 00:16:01,320 Speaker 1: of issue that a lot of people don't understand is 302 00:16:01,360 --> 00:16:04,320 Speaker 1: that because you're in the depth of the recession, and this, 303 00:16:04,640 --> 00:16:06,520 Speaker 1: you know, the second quarter, this is the long the 304 00:16:06,600 --> 00:16:10,200 Speaker 1: deepest recession we've seen in a really long time, it's 305 00:16:10,240 --> 00:16:13,880 Speaker 1: inappropriate to value stocks off of the trough of the recession. 306 00:16:14,160 --> 00:16:16,640 Speaker 1: You've got to look out to when you're gonna see 307 00:16:16,720 --> 00:16:20,240 Speaker 1: some normalization in the economy, and in our mind that 308 00:16:20,480 --> 00:16:23,760 Speaker 1: that's calendar twenty two. It will take us that long 309 00:16:24,640 --> 00:16:26,640 Speaker 1: to get back to about a hundred and seventy five 310 00:16:26,680 --> 00:16:29,600 Speaker 1: dollars in earnings. So if you're looking at today's stock 311 00:16:29,680 --> 00:16:33,040 Speaker 1: prices on the basis of you know, normal earnings quote 312 00:16:33,080 --> 00:16:36,240 Speaker 1: unquote in calendar twenty two, that you're looking at about 313 00:16:36,240 --> 00:16:40,080 Speaker 1: an a team multiple, which is perfectly fine given the 314 00:16:40,160 --> 00:16:43,080 Speaker 1: fact that treasury yields here at sixty basis points and 315 00:16:43,160 --> 00:16:47,760 Speaker 1: the core PC inflation indicators at one. So it's really 316 00:16:47,840 --> 00:16:51,800 Speaker 1: a function of your focus and your time horizon. Alright, Phil, 317 00:16:51,880 --> 00:16:54,600 Speaker 1: So more near term here, I guess we're starting to 318 00:16:54,680 --> 00:16:57,320 Speaker 1: hear a lot of conversation coming out of Washington, d C. 319 00:16:57,480 --> 00:17:00,440 Speaker 1: We're getting to the short strokes here of potential fourth 320 00:17:00,680 --> 00:17:04,520 Speaker 1: round of fiscal stimulus. How key is it that the 321 00:17:04,600 --> 00:17:07,919 Speaker 1: stimulus package be, you know, as robust as maybe investors 322 00:17:07,960 --> 00:17:11,399 Speaker 1: really hope for. Well. I think it's critically important that 323 00:17:11,960 --> 00:17:15,159 Speaker 1: there is a package. I think it's important that it 324 00:17:16,119 --> 00:17:19,640 Speaker 1: be done in a timely fashion, which is to suggest 325 00:17:19,720 --> 00:17:24,560 Speaker 1: the window between this past Monday, when Congress returned from vacation, 326 00:17:25,119 --> 00:17:29,200 Speaker 1: UH to August tenth, when Congress goes back on vacation. 327 00:17:29,520 --> 00:17:31,879 Speaker 1: We've got to have a package in that window. We 328 00:17:32,240 --> 00:17:35,439 Speaker 1: can't have Congress go on vacation and not get anything done. Now, 329 00:17:35,520 --> 00:17:37,680 Speaker 1: the question is what's the size of the package, and 330 00:17:37,760 --> 00:17:41,199 Speaker 1: what are the details going to be? And and Speaker 331 00:17:41,240 --> 00:17:44,600 Speaker 1: Pelosi and the Democrats in the House have talked about 332 00:17:44,680 --> 00:17:47,800 Speaker 1: something in the three trillion dollar neighborhood. I think the 333 00:17:47,880 --> 00:17:51,119 Speaker 1: Republicans in the Senate have talked about something in the 334 00:17:51,160 --> 00:17:54,920 Speaker 1: neighborhood and half that size. I'm less concerned about the 335 00:17:55,080 --> 00:17:59,200 Speaker 1: size that I am. In terms of the components. I 336 00:17:59,280 --> 00:18:03,040 Speaker 1: think we need to make sure that uh that there's 337 00:18:03,119 --> 00:18:07,280 Speaker 1: more more money for hospitals and labs and testing. We've 338 00:18:07,320 --> 00:18:09,840 Speaker 1: got to make sure that that cities and states are 339 00:18:09,920 --> 00:18:13,560 Speaker 1: taken care of in terms of maintaining their their near 340 00:18:13,720 --> 00:18:16,439 Speaker 1: term payrolls. We've got to make sure that businesses are 341 00:18:16,480 --> 00:18:19,160 Speaker 1: taken care of. We've got to make sure that there's 342 00:18:19,160 --> 00:18:22,359 Speaker 1: some liability protection for companies that have done the right 343 00:18:22,440 --> 00:18:26,760 Speaker 1: thing in terms of keeping their customers and their employees safe. 344 00:18:27,080 --> 00:18:29,159 Speaker 1: And we've got to get some money into the hands 345 00:18:29,320 --> 00:18:34,560 Speaker 1: of of individuals. The sticking point up until now, and 346 00:18:34,640 --> 00:18:36,440 Speaker 1: I don't know. I'm not in the room, so I 347 00:18:36,480 --> 00:18:39,399 Speaker 1: don't know what the discussions are is how do we 348 00:18:39,600 --> 00:18:45,520 Speaker 1: shift the incentivization from from staying home and and getting 349 00:18:45,600 --> 00:18:49,399 Speaker 1: money as opposed to going back to work if your 350 00:18:49,520 --> 00:18:52,920 Speaker 1: environment is safe and getting back on the payroll. And 351 00:18:53,000 --> 00:18:57,639 Speaker 1: I think that that that six dollar extended unemployment bonus 352 00:18:57,720 --> 00:19:00,480 Speaker 1: which is set to expire at the end of this month, 353 00:19:00,920 --> 00:19:04,880 Speaker 1: that seems to be the key discussion point that's going on. Well, 354 00:19:04,960 --> 00:19:06,960 Speaker 1: that's a long list of things that need to be 355 00:19:07,040 --> 00:19:08,879 Speaker 1: in this package, and they have a week to do it, 356 00:19:09,040 --> 00:19:12,840 Speaker 1: so I hope that some of them do actually materialize. 357 00:19:13,000 --> 00:19:15,320 Speaker 1: Our thanks as always to fill Orlando for joining us 358 00:19:15,320 --> 00:19:19,600 Speaker 1: from Federated Hermes Investors. It is time to check in 359 00:19:19,680 --> 00:19:23,680 Speaker 1: with Bloomberg Opinion. Today we are looking at and Taylor's 360 00:19:23,760 --> 00:19:27,040 Speaker 1: parent going bankrupt. Retailer's collapse has the potential to create 361 00:19:27,119 --> 00:19:30,679 Speaker 1: more devastating ribble effects than were called by other COVID 362 00:19:31,000 --> 00:19:35,000 Speaker 1: related watchouts that preceded it. According to Bloomberg Opinions, Sarah 363 00:19:35,040 --> 00:19:39,639 Speaker 1: Holzac who joins US now Sarah, why is and Taylor 364 00:19:39,720 --> 00:19:43,280 Speaker 1: and its parent more of a systemically important retailer or 365 00:19:43,320 --> 00:19:45,800 Speaker 1: a group of retailers than, for example, a J. C. 366 00:19:45,960 --> 00:19:49,720 Speaker 1: Penney or a Brooks Brothers or a J. Crew. Yeah, 367 00:19:49,760 --> 00:19:52,320 Speaker 1: So as Tina is this quiet giant, and not in 368 00:19:52,480 --> 00:19:55,159 Speaker 1: terms of sales, but in terms of how ubiquitous it 369 00:19:55,320 --> 00:19:59,399 Speaker 1: is in US shopping center. So it has twenty hundred doors. 370 00:19:59,600 --> 00:20:02,760 Speaker 1: Compare that to four hundred fifty stores for J. Crew 371 00:20:03,240 --> 00:20:05,919 Speaker 1: or two hundred fifty stores for Brooks Brothers or eight 372 00:20:06,040 --> 00:20:09,400 Speaker 1: hundred forty stores for J. C. Penney. It's just massive, 373 00:20:09,760 --> 00:20:12,080 Speaker 1: And so all kinds of mall reefs have a lot 374 00:20:12,160 --> 00:20:15,520 Speaker 1: of exposure to this company. Uh. It is the second 375 00:20:15,600 --> 00:20:19,359 Speaker 1: largest tenant for Tanger Factory outlet centers, It's a top 376 00:20:19,440 --> 00:20:23,320 Speaker 1: ten tenant for Brookfield and Acadia, and It's Simond property 377 00:20:23,400 --> 00:20:26,320 Speaker 1: is a huge mall operator. Only Gap and L Brands 378 00:20:26,320 --> 00:20:30,119 Speaker 1: are larger tenants than a Sena. So a Sena, I 379 00:20:30,119 --> 00:20:32,160 Speaker 1: haven't eve heard about it until I read your column, Sarah, 380 00:20:32,200 --> 00:20:34,399 Speaker 1: so full disclosure. So I learned a lot reading your 381 00:20:34,480 --> 00:20:36,840 Speaker 1: column here. Uh. And how big they are in the 382 00:20:36,880 --> 00:20:40,640 Speaker 1: world of retailing? How are they overall? How's their balance sheet? 383 00:20:40,680 --> 00:20:43,320 Speaker 1: Has their capital structure? Is there a real risk here 384 00:20:44,040 --> 00:20:49,000 Speaker 1: for these malls from this big group here? Yeah, so 385 00:20:49,400 --> 00:20:51,320 Speaker 1: their balance sheet is not in great shape and that's 386 00:20:51,359 --> 00:20:54,280 Speaker 1: been true since before COVID. Uh. This is a company 387 00:20:54,359 --> 00:20:58,000 Speaker 1: that took on a significant amount of debt in when 388 00:20:58,040 --> 00:21:02,200 Speaker 1: it bought an Taylor and Law and because of the 389 00:21:02,520 --> 00:21:05,600 Speaker 1: business has been so unhealthy since then. It just hasn't 390 00:21:05,600 --> 00:21:08,640 Speaker 1: been able to make much progress in bringing down that debt. 391 00:21:08,960 --> 00:21:11,359 Speaker 1: So that was a key factor here and having to 392 00:21:11,600 --> 00:21:14,719 Speaker 1: resort to bankruptcy. And it's just a company that's been 393 00:21:14,760 --> 00:21:17,720 Speaker 1: really out of touch with consumer taste already. In the 394 00:21:17,800 --> 00:21:20,760 Speaker 1: last couple of years, had to wind down its dress 395 00:21:20,800 --> 00:21:23,440 Speaker 1: Barn chain, which was another huge chain with hundreds and 396 00:21:23,520 --> 00:21:26,600 Speaker 1: hundreds of locations and it's sold it's more resist chain 397 00:21:27,320 --> 00:21:29,679 Speaker 1: because again, it just couldn't find a way to generate 398 00:21:29,800 --> 00:21:33,440 Speaker 1: consistently strong, comparable sales growth at these concepts because it 399 00:21:33,560 --> 00:21:36,720 Speaker 1: was having so many fashion misses on Taylor and Taylor 400 00:21:36,800 --> 00:21:39,600 Speaker 1: Loves Lane. Brian Lewin Gray, on and on and on. 401 00:21:39,760 --> 00:21:42,800 Speaker 1: Will anybody miss these? Is there a moat at all 402 00:21:42,960 --> 00:21:45,159 Speaker 1: that it was protecting or can somebody else just do 403 00:21:45,240 --> 00:21:49,440 Speaker 1: the job of on Taylor at l Yeah, so it's 404 00:21:49,440 --> 00:21:51,719 Speaker 1: certainly in this time where we're all working from home 405 00:21:51,760 --> 00:21:55,000 Speaker 1: in our sweatpants, I think. And Taylor's customer that was, 406 00:21:55,119 --> 00:21:58,159 Speaker 1: you know, mostly looking for office clothing. Um that that 407 00:21:58,280 --> 00:22:00,680 Speaker 1: might be a business that you know, there's not a 408 00:22:00,760 --> 00:22:03,760 Speaker 1: lot of demand for for quite some time. But it 409 00:22:03,840 --> 00:22:06,679 Speaker 1: struggles with the Lane Bryant and Catherine's chains have been 410 00:22:06,720 --> 00:22:09,760 Speaker 1: particularly baffling for me, and I do think there's opportunities 411 00:22:10,080 --> 00:22:12,680 Speaker 1: for competitors to step in there. Both of those chains 412 00:22:13,280 --> 00:22:16,639 Speaker 1: catered to plus sized women and that's a remarkably underserved 413 00:22:16,960 --> 00:22:19,680 Speaker 1: portion of the US apparel market, and so I think 414 00:22:20,280 --> 00:22:23,000 Speaker 1: if there's lots of closures there, that's a really good 415 00:22:23,040 --> 00:22:27,640 Speaker 1: opportunity for department stores are specialty apparel target to step 416 00:22:27,720 --> 00:22:30,840 Speaker 1: in and serve that audience. Sir, With all the trouble 417 00:22:31,040 --> 00:22:34,120 Speaker 1: with the bricks and mortar retail, which you cover so well, 418 00:22:34,440 --> 00:22:39,080 Speaker 1: what does it mean for the traditional American shopping mall. 419 00:22:41,040 --> 00:22:43,439 Speaker 1: I think it means it's in a lot of trouble um, 420 00:22:43,560 --> 00:22:46,800 Speaker 1: you know, the the store closures. When we look out 421 00:22:46,840 --> 00:22:49,119 Speaker 1: over the next five years, I expect we'll see the 422 00:22:49,240 --> 00:22:53,480 Speaker 1: most store closures in the clothing and accessories category. Some 423 00:22:53,720 --> 00:22:55,960 Speaker 1: estimates have said we're going to see twenty four thousand 424 00:22:56,040 --> 00:23:00,400 Speaker 1: store closures in that category. By compare that to only 425 00:23:00,440 --> 00:23:04,520 Speaker 1: say twelve th store closures in consumer electronics or eleven 426 00:23:04,600 --> 00:23:07,080 Speaker 1: thousand store closures and grocery. And as we all know, 427 00:23:07,520 --> 00:23:10,120 Speaker 1: clothing is the heartbeat of the American mall, right, That's 428 00:23:10,160 --> 00:23:12,680 Speaker 1: what most of the tenants are, that's what the store 429 00:23:12,760 --> 00:23:15,760 Speaker 1: mixes then for quite some time. So as we continue 430 00:23:15,800 --> 00:23:19,040 Speaker 1: to see struggles for clothing stores amid COVID, I think 431 00:23:19,080 --> 00:23:21,320 Speaker 1: that really spells a lot of trouble to the American mall, 432 00:23:21,400 --> 00:23:23,760 Speaker 1: which has been so much trouble already before this crisis. 433 00:23:24,320 --> 00:23:26,719 Speaker 1: I mean, you don't have to pay rent on Instagram, right, 434 00:23:27,600 --> 00:23:30,920 Speaker 1: The advertising is probably a lot lower on Instagram. And 435 00:23:31,240 --> 00:23:33,200 Speaker 1: I'm not even being funny. I mean the amount of 436 00:23:33,320 --> 00:23:36,879 Speaker 1: ads that I'm receiving for clothing and for discounts obviously 437 00:23:36,920 --> 00:23:39,760 Speaker 1: now because clothing retailers are just not selling is do 438 00:23:40,000 --> 00:23:41,360 Speaker 1: I mean, it would make you not want to open 439 00:23:41,440 --> 00:23:45,120 Speaker 1: Instagram these days, Sarah, what happens to these malls? I mean, 440 00:23:46,000 --> 00:23:50,000 Speaker 1: have you heard of of any sort of new idea 441 00:23:50,880 --> 00:23:54,120 Speaker 1: that the that that that will make these malls work again? 442 00:23:54,160 --> 00:23:56,680 Speaker 1: I mean, obviously there will be huge efforts to try 443 00:23:56,720 --> 00:23:59,440 Speaker 1: and sanitize and and so on, but I mean, until 444 00:23:59,480 --> 00:24:01,480 Speaker 1: after the the vaccine, does anybody want to be in 445 00:24:01,520 --> 00:24:05,400 Speaker 1: a mall? I don't think so. And look, I think 446 00:24:05,480 --> 00:24:08,080 Speaker 1: that the strategy that malls had been resorting to before 447 00:24:08,240 --> 00:24:13,520 Speaker 1: COVID was to bring in alternative tenants like restaurants and gym's, 448 00:24:14,040 --> 00:24:16,479 Speaker 1: because those are the things that were actually generating foot traffic. 449 00:24:16,840 --> 00:24:19,800 Speaker 1: And I think those tendants are are going to struggle 450 00:24:19,840 --> 00:24:23,480 Speaker 1: even more to draw foot traffic in COVID era, given 451 00:24:23,800 --> 00:24:26,600 Speaker 1: you know, the health concerns related to heavy breathing and 452 00:24:26,640 --> 00:24:29,360 Speaker 1: sweating in close proximity with other people at a gym, 453 00:24:29,480 --> 00:24:32,040 Speaker 1: for example. So I think malls are in a really 454 00:24:32,119 --> 00:24:34,360 Speaker 1: tough spot right now. I think, you know, the best 455 00:24:34,480 --> 00:24:37,520 Speaker 1: they can hope for is to you know, really enforce 456 00:24:37,640 --> 00:24:41,280 Speaker 1: social distancing guidelines, try to make it easy for stores 457 00:24:41,359 --> 00:24:44,560 Speaker 1: to use their parking lots for curbside pickup. Um. I 458 00:24:44,640 --> 00:24:47,680 Speaker 1: guess really emerging as a popular way to get product 459 00:24:47,800 --> 00:24:50,359 Speaker 1: right now, and you know they're going to kind of 460 00:24:50,400 --> 00:24:54,680 Speaker 1: have to muddle through that way. It's a really difficult situation. Yes, sorry, 461 00:24:54,720 --> 00:24:57,000 Speaker 1: and and Vanni. Yesterday I drove into New York City 462 00:24:57,160 --> 00:24:59,800 Speaker 1: for the first time since March, and I was just 463 00:25:00,160 --> 00:25:04,440 Speaker 1: shocked by the number of empty stores, uh stores for 464 00:25:04,760 --> 00:25:07,880 Speaker 1: rent um. It just seems like an every single block 465 00:25:07,920 --> 00:25:11,639 Speaker 1: there are multiple empty storefronts. Just in the space of 466 00:25:12,080 --> 00:25:14,600 Speaker 1: four months. It's just been devastating here in New York. 467 00:25:14,800 --> 00:25:16,920 Speaker 1: I mean maybe even taken up our inventory and and 468 00:25:17,119 --> 00:25:19,520 Speaker 1: and and still are the past one the other day 469 00:25:19,760 --> 00:25:21,680 Speaker 1: where there was inventory and it last weekend, there was 470 00:25:21,840 --> 00:25:25,320 Speaker 1: none this week. Yeah, it's it's just extraordinary. So, Sarah, 471 00:25:25,440 --> 00:25:28,280 Speaker 1: my guess is this is just accelerating the demise of 472 00:25:28,320 --> 00:25:34,080 Speaker 1: bricks and mortar and the rise of e commerce. Yes, exactly. 473 00:25:34,200 --> 00:25:37,800 Speaker 1: A lot of these retailers are seeing unprecedented e commerce growth. 474 00:25:38,240 --> 00:25:41,600 Speaker 1: You know, Target said on an average day in April 475 00:25:42,359 --> 00:25:44,440 Speaker 1: it was getting as many e commerce orders as it 476 00:25:44,480 --> 00:25:47,840 Speaker 1: gets on Cyber Monday. Right, this is just completely um 477 00:25:48,440 --> 00:25:50,920 Speaker 1: change the contours of their business. And so I will think, 478 00:25:51,000 --> 00:25:53,720 Speaker 1: I do think will continue to see stores trying to 479 00:25:54,400 --> 00:25:57,399 Speaker 1: retailers trying to use those physical stores as fulfillment centers 480 00:25:57,440 --> 00:26:00,240 Speaker 1: for online orders at least in the meantime time. But 481 00:26:00,320 --> 00:26:02,760 Speaker 1: of course that's not a practical solution over the long term, 482 00:26:02,840 --> 00:26:04,880 Speaker 1: right you don't need to be paying fifth avenue rent 483 00:26:05,400 --> 00:26:09,120 Speaker 1: uh to mail clothing to your shoppers. And so there's 484 00:26:09,160 --> 00:26:11,119 Speaker 1: just going to have to be a dramatic rethinking of 485 00:26:11,200 --> 00:26:14,159 Speaker 1: the store portfolios as LEAs has come up UM and 486 00:26:14,359 --> 00:26:16,719 Speaker 1: I think that's going to take time, but it's definitely 487 00:26:16,800 --> 00:26:21,000 Speaker 1: going to happen. I did see that certain leases have 488 00:26:21,080 --> 00:26:24,359 Speaker 1: been taken over, and one that jumped out was Aritzia, 489 00:26:24,600 --> 00:26:28,680 Speaker 1: that Spanish retailer, and I just wondered what retailer is 490 00:26:28,720 --> 00:26:30,919 Speaker 1: to I mean, how much money do you have? How 491 00:26:30,960 --> 00:26:32,280 Speaker 1: much cash do you have to have on your books 492 00:26:32,320 --> 00:26:34,119 Speaker 1: to decide to sort of a new release right now. 493 00:26:36,240 --> 00:26:38,880 Speaker 1: I'm not sure there's one magic number, but I think 494 00:26:38,920 --> 00:26:41,840 Speaker 1: you just have to feel confident that you are going 495 00:26:41,960 --> 00:26:44,520 Speaker 1: to be able to whether this crisis, and I think 496 00:26:44,560 --> 00:26:46,640 Speaker 1: you have to think about where you are in your 497 00:26:46,760 --> 00:26:49,600 Speaker 1: store closure or opening journey. Right There are a lot 498 00:26:49,680 --> 00:26:52,399 Speaker 1: of retailers who you know, younger changed, like a the 499 00:26:52,520 --> 00:26:56,400 Speaker 1: No Boast for example, UM that their store portfolio isn't 500 00:26:56,600 --> 00:26:59,439 Speaker 1: littered with all these uh, you know store locations they 501 00:26:59,480 --> 00:27:02,440 Speaker 1: picked out in N five. They don't make sense anymore 502 00:27:02,640 --> 00:27:05,600 Speaker 1: right um, So for them opening stores in its targeted 503 00:27:05,640 --> 00:27:07,800 Speaker 1: way still makes sense right now, and they're likely to 504 00:27:07,840 --> 00:27:10,040 Speaker 1: be able to get cheap rents and take advantage of that. 505 00:27:10,359 --> 00:27:12,280 Speaker 1: If you're Maze, you've probably got a lot of old 506 00:27:12,320 --> 00:27:15,640 Speaker 1: stores in your portfolio that don't make sense for this environment, 507 00:27:15,640 --> 00:27:18,720 Speaker 1: and you're certainly not looking to lease anymore right now. Hey, Sarah, 508 00:27:18,760 --> 00:27:20,680 Speaker 1: thanks so much for joining us. Once again. We always 509 00:27:20,680 --> 00:27:25,040 Speaker 1: appreciate your thoughts on the retail space. Sarah Halzack retail 510 00:27:25,160 --> 00:27:27,520 Speaker 1: columns for Bloomberg Opinion. You can read all her work 511 00:27:27,560 --> 00:27:31,199 Speaker 1: in that of Bloomberg Opinion, Bloomberg dot Com, Slash Opinion, 512 00:27:31,320 --> 00:27:34,800 Speaker 1: or Opie I n go on the terminal. Thanks for 513 00:27:34,880 --> 00:27:38,320 Speaker 1: listening to Bloomberg Markets podcast. You can subscribe and listen 514 00:27:38,400 --> 00:27:41,880 Speaker 1: to interviews at Apple Podcasts or whatever a podcast platform 515 00:27:41,920 --> 00:27:45,080 Speaker 1: you prefer. I'm Bonnie Quinn. I'm on Twitter at Bonnie 516 00:27:45,119 --> 00:27:47,879 Speaker 1: Quinn and on Paul Sweeney I'm on Twitter at pt Sweeney. 517 00:27:47,960 --> 00:27:50,600 Speaker 1: Before the podcast, you can always catch us worldwide at 518 00:27:50,640 --> 00:27:51,400 Speaker 1: Bloomberg Radio