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Speaker 2: We're watching obviously shares of Darden, but we're also watching
Speaker 2: shares of Amazon today hire, and they're on a tear
Speaker 2: this year. They're up about twenty four to twenty five percent.
Speaker 2: There's a few stories on what is one of the
Speaker 2: world's largest market cap companies, including wagehikes and a new
Speaker 2: AI assistant. So let's dig a little bit into Amazon
Speaker 2: with us as Bloomberg Intelligence Senior Technology analyst, Ana rag Grana.
Speaker 2: He's with us from our Chicago bureau anak. I know
Speaker 2: the market overall is rallying, so I know, you know,
Speaker 2: that's probably one reason or a good part of why
Speaker 2: Amazon is hire. But we also see that it's you know,
Speaker 2: raising wages a little bit. Is this just something that
Speaker 2: usually does ahead of the holiday season.
Speaker 3: I think it's it's probably driven by a lot of
Speaker 3: noise about you know, unionization and a little bit of back.
Speaker 3: You know, you could say issues around worker conditions, so
Speaker 3: they you know, I think it was long time due.
Speaker 3: It's it's good that they're doing it. One of the
Speaker 3: biggest stories for Amazon in the last twelve months to
Speaker 3: two years, which Punum and I have talked about quite
Speaker 3: a bit, is Amazon's you know, path towards improving profitability.
Speaker 3: So you know, they have done that quite a bit.
Speaker 3: If you look at the stock over the last twelve months,
Speaker 3: it's done very well. And profit expansion is you know,
Speaker 3: the biggest key of that particular thing. So now when
Speaker 3: the wages go up, that has an impact on margins.
Speaker 3: But at the same time, we also heard they are
Speaker 3: rationalizing their management structure. They're not going to be that
Speaker 3: many managers down the road. I think that's going to
Speaker 3: help offset some of these costs because more of the
Speaker 3: expensive workers are part of the AWS area, not so
Speaker 3: much on the retail side of it.
Speaker 4: And the stock, you know, it has done well. It's
Speaker 4: up over the last five years one hundred and seven percent.
Speaker 4: Some of the other hyper scalers are doing much better.
Speaker 4: I noticed that Microsoft, for example, is up double that
Speaker 4: over the past five years. They just handed sixty billion
Speaker 4: dollars back to shareholders or decided to start doing that
Speaker 4: for the second time. Is Amazon rewarding shareholders in the
Speaker 4: same way.
Speaker 3: I think it's a focus for Amazon at this point.
Speaker 3: Far more is improving profitability, both you know, on the
Speaker 3: retail side as well as the AWS side. We've seen
Speaker 3: Airgibus margins really spiked up quite a bit in the
Speaker 3: last one in one year or so. On top of that,
Speaker 3: that advertising business is doing very well, and that's a
Speaker 3: very high margin business. I think that is going to
Speaker 3: be probably the single biggest driver of next you know,
Speaker 3: face a big, big profit expansion for them, because that's
Speaker 3: very high margin. People instead of you know, going to
Speaker 3: Google to search for a product, may go toon I
Speaker 3: mean directly into the search engine to look for that
Speaker 3: product and they can monetize on that.
Speaker 2: What about the monetization of AI. Where are they on that?
Speaker 2: Because that was one of the other stories that popped
Speaker 2: up on the Bloomberg launching an AI assist and designed
Speaker 2: to help some of their online merchants manage their own businesses.
Speaker 2: So what do we know about that? And I am
Speaker 2: curious if you can kind of put into context where
Speaker 2: Amazon is in the AI race.
Speaker 3: Yeah, So when you look at AI and Amazon, I
Speaker 3: think the first thing you will think about is, you know,
Speaker 3: the cloud business. That's where the bulk of the R
Speaker 3: and D and the bulk of the work is going
Speaker 3: to go because companies will use their cloud services and
Speaker 3: third party models to come up with their own solutions.
Speaker 3: So that's more on the you know, selling of cloud
Speaker 3: resources or technology side of it, as far as they're
Speaker 3: using it themselves to be more productive. Content creation is
Speaker 3: an area, and that's where the application that was launched
Speaker 3: today would help their merchants to be online very quicker,
Speaker 3: much better description of the product pictures. And you know
Speaker 3: what that does is it helps out to get to
Speaker 3: your products to market quicker in a far more effective
Speaker 3: way than you know, you and I would do. Let's
Speaker 3: say we are a third party merchant. This just helps
Speaker 3: it in the everything from points throw all the way
Speaker 3: down to the selling off that particular product.
Speaker 2: Why are you looking at me, Well, you're freaking me
Speaker 2: out here.
Speaker 4: So you don't know about my obsession with the comp function,
Speaker 4: or maybe you don't remember, but Paul Sweeny knows. So
Speaker 4: I use it all the time, and so I'm just
Speaker 4: putting up Amazon against the other fang peers, right, or
Speaker 4: the other megacap what we call magnificent seven stocks. So
Speaker 4: Amazon has doubled over the past five years, up one
Speaker 4: hundred eight percent. Facebook is up one hundred and ninety
Speaker 4: five percent. Right, Apple is up three hundred thirteen percent.
Speaker 4: Netflix is up one hundred and forty six percent. Google
Speaker 4: is up one hundred and sixty two percent. Microsoft, I mean,
Speaker 4: up two hundred and eleven percent, all of them, all
Speaker 4: of them, and I won't even mention Nvidia because obviously
Speaker 4: they destroy this group. But Amazon's the big loser among
Speaker 4: the mag seven. Why is that an rag?
Speaker 3: So you know, why don't we try the last twelve months,
Speaker 3: I mean, they've done better than Microsoft.
Speaker 4: I always do five. Ye, it's just my base because
Speaker 4: it's the default of the comp function. I've done it
Speaker 4: since I started working here in nineteen ninety nine.
Speaker 3: Yeah, So one of the things I'd say is, you know,
Speaker 3: we're building in a lot of the up that happened
Speaker 3: during the pandemic and the down in that particular one.
Speaker 3: If you run a ten year number on COMP which
Speaker 3: I just did while we are talking, Amazon's annual growth
Speaker 3: rate is twenty four point six percent. And Microsoft is
Speaker 3: twenty eight, so not that big of a difference between
Speaker 3: the two. But you know, Amazon's been a very good
Speaker 3: story for a while. And frankly speaking, if you look
Speaker 3: at their cloud business, just that alone is far more
Speaker 3: profitable than most people understand Amazon to be. It's the
Speaker 3: retail side of HILD which is dragging it down. But
Speaker 3: frankly speaking, if you look at it for the next
Speaker 3: five seven years, I think they have a long way
Speaker 3: to go.
Speaker 4: He's not wrong. Over the last ten years, Amazon's the
Speaker 4: best performer in the group.
Speaker 2: Yes, why we talk to anorog right. Longer term, I.
Speaker 4: Can't believe the retail business is the drag, Like I
Speaker 4: buy stuff on Amazon every day? Is it because people
Speaker 4: are mad that they seem to have like more Chinese
Speaker 4: retailer than any other nationality.
Speaker 2: Is it expensive to get all this stuff out?
Speaker 5: Yeah?
Speaker 3: See, Matt, you're you're at this point comparing a technology
Speaker 3: business with the retail business. So you've got to take that,
Speaker 3: you know, with that particular aspect of it. Those are
Speaker 3: single digit margin businesses. Frankly in the long run. Now
Speaker 3: you're comparing it with the gross marchin business of seventy
Speaker 3: five eighty percent, which is the tech business of it.
Speaker 3: But when you look at logistics of Amazon, it's going
Speaker 3: to be very difficult to come up with anything even
Speaker 3: close to that. Over the next five years, they double
Speaker 3: their logistics footprint during the pandemic, which is, you know,
Speaker 3: not good for the shareholders in the short run, but
Speaker 3: I would contend that in the next five seven years
Speaker 3: it'll start to pay far more dividends than it has
Speaker 3: done so far.
Speaker 2: Well, all right, so I don't know, you know, we're
Speaker 2: not into earnings yet. I do wonder where, you know,
Speaker 2: how you're thinking about the environment. It seems like the
Speaker 2: Fed kind of giving a juice to certainly these megacap
Speaker 2: tech names today. Certainly you see it in the trade.
Speaker 2: But I don't know how does the next six to
Speaker 2: twelve months look specifically for Amazon.
Speaker 3: I think, you know, one of the good things in
Speaker 3: this particular case is going to be small businesses. This
Speaker 3: is I think the one thing I haven't heard a
Speaker 3: lot of people talk about it today or since yesterday.
Speaker 3: They have been struggling because of high cost of funding.
Speaker 3: It's not the big guys, I mean, Amazon and Microsoft
Speaker 3: and Apple, they don't really care about what cost of
Speaker 3: funding is they have too much cash on their hands.
Speaker 3: But when I look at companies, smaller software companies that
Speaker 3: cater to the SMB market, they're really struggling. And I'm
Speaker 3: hoping with this particular pivot, the consumption of cloud goes
Speaker 3: up from the SMB community, which will help Amazon. The
Speaker 3: SMBs that are selling their products on Amazon's retail framework,
Speaker 3: that's going to go up. So I think netnet it
Speaker 3: is going to be good for Amazon on to end
Speaker 3: customers as better as its suppliers.
Speaker 5: You know.
Speaker 4: I talked to Steve Eisman on my television show this morning.
Speaker 4: He of big short fame from Newburger Berman, and he
Speaker 4: has he doesn't do shorts anymore.
Speaker 6: He just has.
Speaker 4: A portfolio of thirty to thirty five longs and he
Speaker 4: invests in two stories, one infrastructure, the other is AI.
Speaker 4: And he was saying that, you know, medium to even
Speaker 4: large sized businesses, they don't even have their data sorted
Speaker 4: out to use for jen AI yet, so they need
Speaker 4: to partner with these other AI, you know, masters of
Speaker 4: the universe in order to get that done. And I
Speaker 4: wonder are people going to reach out to AWS before
Speaker 4: they reach out to you know, Microsoft or Google. I mean,
Speaker 4: is is there AI business going to be a big
Speaker 4: money maker for them.
Speaker 3: Yeah. I mean AW is the biggest cloud vendor out
Speaker 3: there just in terms of market size, so that's going
Speaker 3: to do very well. As far as data is concerned,
Speaker 3: each one of these companies has their own data framework.
Speaker 3: I did listen to Steve this morning and he talked
Speaker 3: about Accentua's you know, business of cleaning that up. Frankly speaking,
Speaker 3: there was a mix up. I mean he talked about
Speaker 3: the outsourcing business, but that's completely different. It's the consulting
Speaker 3: business where the data cleanup happens, and from that point
Speaker 3: they are still in that phase of a slowdown. But
Speaker 3: having said that, we think that the data cleanup issue
Speaker 3: is a very long term secular cycle for all technology companies,
Speaker 3: not just you know, either Accenture or AWS.
Speaker 4: Did we do a good job? Did you think Did
Speaker 4: you like the interview?
Speaker 2: Own?
Speaker 6: Oh?
Speaker 3: It was excellent, excellent.
Speaker 4: Thank you.
Speaker 2: You put him on the spot. You think he's going
Speaker 2: to say no.
Speaker 4: You can catch my television program Bloomberg Open Interest every
Speaker 4: day from nineteen.
Speaker 2: Guy, Hey, one more thing before you go. There was
Speaker 2: the story headlines about Intel. This was I think earlier
Speaker 2: in the week at the start of the week about
Speaker 2: Intel making an AI fabric chip for Amazon Web Services
Speaker 2: and the two looking to a customer potential for further designs.
Speaker 2: It was great news for Intel. What do we need
Speaker 2: to know about this?
Speaker 3: Yeah, so think about it this way, and I'll take
Speaker 3: you back to Apple. Apple long time ago was buying
Speaker 3: Intel chips. It was getting heated up. They weren't able
Speaker 3: to do some stuff with it. So then Apple decided
Speaker 3: to design their own chips, which they do and then
Speaker 3: TSMC makes it for them. Made a huge difference to
Speaker 3: their Mac portfolio. All these cloud providers, whether it's Amazon,
Speaker 3: whether it's Google, whether it's Microsoft, they are all going
Speaker 3: down the route of creating their own chips, designing their
Speaker 3: own chips. When I say creating, I mean you just
Speaker 3: design it and somebody else creates it for you. So
Speaker 3: Intel is probably you know, one of the people they're
Speaker 3: talking to. I pet you. They're talking to multiple other
Speaker 3: peoples to help out with that thing. Because the number
Speaker 3: one problem for cloud providers right now is the lack
Speaker 3: of GPUs and chips that they need to take care
Speaker 3: of the AI workload and the other workloads.
Speaker 4: Wait, if everybody designs their own chips. What does what
Speaker 4: do we need in video for? They don't make chips,
Speaker 4: They send their designs.
Speaker 3: Yes, exactly my point. But that's going to take some time.
Speaker 2: So they have a little bit of a runway, probably
Speaker 2: a fairly good size.
Speaker 4: Pretty good job they're doing.
Speaker 2: Okay, okay, aniok, thank you so much. Anna rag Rana
Speaker 2: of course, joining us right there Bloomberg Intelligence senior technology
Speaker 2: analyst out there in our Chicago bureau iceman.
Speaker 4: Yeah, he was. He's always a lot of fun to
Speaker 4: talk to.
Speaker 2: What was the most interesting?
Speaker 4: You know, it's cool about Steve Iisman. He won't give
Speaker 4: us pre interview notes. I love that he does it.
Speaker 4: He's like, listen, I'll show up. You asked me what
Speaker 4: you want to ask me, and if it's interesting, it'll
Speaker 4: be a good interview. Yeah, he said. Last time he
Speaker 4: was on, he said Trump has one hundred percent chance
Speaker 4: of winning. And now but since then, you know, Joe
Speaker 4: Biden dropped out of the race, and now he says
Speaker 4: it's a coin toss.
Speaker 2: All right, Well that's interesting.
Speaker 4: Yeah.
Speaker 1: You're listening to the Bloomberg Business Week podcast. Catch us
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Speaker 2: I see five hundred we were talking about it did
Speaker 2: hitting an inter day right all time high. We'll see
Speaker 2: whether or not we close that way, but it could.
Speaker 2: If it does close at a record, it would be
Speaker 2: its thirty ninth record this year.
Speaker 4: And you know, it was crazy yesterday after the FED
Speaker 4: decision we had the market had two hours to be
Speaker 4: open and figure this out, and we closed down.
Speaker 2: Yeah.
Speaker 4: Then all of a sudden this morning, I'm looking at
Speaker 4: futures up two percent. Wait, yeah, it's good overnight. Did
Speaker 4: somebody tell mister market like, actually the dot plot is
Speaker 4: way underestimating what they're going to cut? Or did the
Speaker 4: initial jobless claims say, hey, look he nailed it. It's
Speaker 4: a soft landing, right.
Speaker 2: And things aren't falling apart, right, And that's what you
Speaker 2: want to see. Jeff Crumpleman and we'll see what he
Speaker 2: has to say. He's chief Investment Striatege, his head of
Speaker 2: equities over at Mariner Wealth Advisors. They're based in Cincinnati.
Speaker 2: He's joining us back in our studio.
Speaker 4: How I should have known you were from the great
Speaker 4: state of Ohio. Oh, now it all makes sense.
Speaker 2: For the next ten minutes. You though expected a quarter
Speaker 2: point cut.
Speaker 1: I did.
Speaker 2: I expected a quarter point cut.
Speaker 4: I also until yesterday, until what until I think on
Speaker 4: Monday morning, I talked to Ed Hyman and he convinced me, oh, okay,
Speaker 4: but I have been expected because they didn't really telegraph
Speaker 4: a fifty basis point. I thought, this Fed wants to
Speaker 4: tell us what they're going to do.
Speaker 2: But do you think the Fed got it wrong or right? Then?
Speaker 4: What's that?
Speaker 2: Do you think the Fed got it wrong or right? Then?
Speaker 7: You know you could justify either one. It was kind
Speaker 7: of a flip of the coin with a slight edge
Speaker 7: that I gave to twenty five.
Speaker 6: And I think that.
Speaker 7: The twenty five would have said, we respect the inflation
Speaker 7: number that didn't improve as much as we wanted it to
Speaker 7: do in the prior month. And you know the fact
Speaker 7: that economic growth is not all that bad. We've got
Speaker 7: a number of things unemployment claims and retail sales and
Speaker 7: all this stuff that just came out that says we're
Speaker 7: doing okay. The Atlanta Fed is saying real GDP growth
Speaker 7: to three percent pace. So I thought, you know, Powell
Speaker 7: probably would push for fifty, but the committee given there
Speaker 7: if you look at some of the members just a
Speaker 7: little more cautious and conservative, I thought he wouldn't convince him.
Speaker 7: And by going fifty, okay, fine, what they've done is
Speaker 7: said we're going to be proactive in case it is flowing.
Speaker 2: Is it really just fine? Wor as Matt like you
Speaker 2: kind of were pepperating Mike McKee like, is there something
Speaker 2: that Fed sees or J. Powell that we need to
Speaker 2: be worthed?
Speaker 4: I just don't understand. Five and a half percent didn't
Speaker 4: feel particularly restrictive to me considering how well or I mean,
Speaker 4: the stock market is doing, how well unemployment is doing.
Speaker 4: You know, I know we went from three point four
Speaker 4: to four point two, but still four point two is
Speaker 4: well below the long term average.
Speaker 7: I could take your case, but I'm gonna sense you're
Speaker 7: asking you to take the other case. The other case
Speaker 7: would be we are way away from normal real Fed
Speaker 7: funds rates and we're five and a half percent. The
Speaker 7: normal real after inflation Fed fund's rate is about one percent,
Speaker 7: So that means that you would have to get if
Speaker 7: inflation's at two and a half percent, you got to
Speaker 7: get Fed funds down to three and a half percent
Speaker 7: to get.
Speaker 6: Back to normal.
Speaker 7: So you know, I mean, you have Jeffrey Gunlock out
Speaker 7: there saying and they should have gone twenty five in
Speaker 7: the prior month.
Speaker 5: So fine.
Speaker 7: Kind of the way I resolved in my mind is, well,
Speaker 7: if they would have done that and started their measured
Speaker 7: kind of approach, it would have been twenty five last month,
Speaker 7: twenty five this month, a total of fifty. I think
Speaker 7: what freaks people out is this all of a sudden,
Speaker 7: these guys are saying, Ah, you know, we fought inflation,
Speaker 7: We're comfortable. Now we're really going to focus on employment.
Speaker 7: And they were willing earlier to let inflation run to
Speaker 7: two and a half or three percent hotter before all
Speaker 7: this stuff started a couple of years ago, And now
Speaker 7: I think they're going to err on the side of
Speaker 7: being if they're going to be wrong, they'll be a
Speaker 7: little too aggressive and making sure.
Speaker 4: They're Powell said as much yesterday. He said, could we
Speaker 4: have cut at the last meeting? Yeah, yeah, I mean
Speaker 4: would have had we seen the employment number that came
Speaker 4: out right after. But it doesn't make that much of
Speaker 4: a difference. I mean, one month this even if you
Speaker 4: think the long and variable legs are shorter now they're
Speaker 4: not that short.
Speaker 7: Yeah, And at the end of the day, we look
Speaker 7: at three things when we look at the markets. We
Speaker 7: look at fundamentals, valuation levels, and technicals. And from a
Speaker 7: fundamental standpoint, you look at the economy and trends of
Speaker 7: the economy that are solid. You look at overall interest
Speaker 7: rate trends that are stable and coming down a little bit,
Speaker 7: and you look at credit spreads. All that stuff is
Speaker 7: good and earnings are very good. So if inflation's falling,
Speaker 7: margins are expanding, you've got good business models.
Speaker 6: That tends to be a decent time in the market.
Speaker 2: All right, Well, let's talk a little bit about some
Speaker 2: of the names that you like, because the semiconductor area
Speaker 2: is definitely outperforming.
Speaker 6: It's up.
Speaker 2: I'm looking at the socks up about five percent so
Speaker 2: far in today's trade. If I look at some of
Speaker 2: the best performers in both the NASTAQ one hundred and
Speaker 2: the S and P five hundred, AMD is on that list.
Speaker 2: You like AMD? Why that name in the semispace?
Speaker 7: Well, I think that it's just a diversified way. If
Speaker 7: you've had your fill of Nvidia and you've had so
Speaker 7: much success, you can't stand it anymore? Why don't you
Speaker 7: diverse file a little bit and get some AMD in there,
Speaker 7: which also benefits from the graphics chips and the expansion
Speaker 7: in cloud and data center, but also has some cyclical
Speaker 7: stuff going on with just CPUs that they also manufacture.
Speaker 7: And you got a thirty percent growth rate trading at
Speaker 7: about thirty five times, which is a wonderful PEG rate.
Speaker 7: So you know, you don't just have to own one
Speaker 7: semiconductor company. You can spread out the risk.
Speaker 6: A little bit.
Speaker 2: Would you still you still own Nvidio?
Speaker 5: Absolutely?
Speaker 7: We under own it relative to its waiting in the market.
Speaker 7: Those things are crazy in terms of there are percent
Speaker 7: of market value of the indices, so I think it's
Speaker 7: something like eleven percent of the Russell one thousand growth index.
Speaker 7: We own more like seven percent of it in our portfolio,
Speaker 7: so yes. And it is in terms of earnings growth,
Speaker 7: I'm looking for eighty percent earnings growth and it's trading
Speaker 7: at about thirty times. I'm sorry, but you know there's
Speaker 7: not a whole lot not to like about that right now.
Speaker 2: Just at the numbers.
Speaker 4: Did I tell you guys talked to Steve Eisman this morning.
Speaker 4: He was saying pretty much exactly the same thing you
Speaker 4: are in terms of the economy and the FED. And
Speaker 4: he also likes the AI sort guy.
Speaker 6: He's got stories.
Speaker 4: We're in good times right now, and in good times
Speaker 4: you got to have a story to invest in. I
Speaker 4: see that you like, Eli Lilly. I love this story.
Speaker 4: What do you think about the Wonder drugs? I mean,
Speaker 4: I get a little bit too optimistic about these things.
Speaker 4: I also loved, you know, m RNA. But what do
Speaker 4: you think about Uh, well, every every g LP won.
Speaker 7: Every couple of months, we go off site and we
Speaker 7: sit down and we although we do this daily, we
Speaker 7: look at what we call the FVTS fundamentals Evaluation level
Speaker 7: of technicals, and we rate each stock and going in,
Speaker 7: I thought, come on, Eli, Lilly's run and you know,
Speaker 7: I've got a nicke it on valuation not really for
Speaker 7: growth forty times, you know, kind of pe And yeah,
Speaker 7: in terms of these you know, wonder drugs, it's thriving
Speaker 7: that growth now out to counteract that. Another idea I
Speaker 7: gave you guys was Resmet, which is a sleep apnea company.
Speaker 4: And everybody stock as well. I mean, wellhi, Lily, over
Speaker 4: the past five years is up seven hundred percent resme
Speaker 4: is up eighty one.
Speaker 7: Eighty one is not bad. And I think also that's
Speaker 7: the opportunity. And everyone's saying, well, these g LP ones,
Speaker 7: you know now you.
Speaker 2: Might not need it for it and it helps out
Speaker 2: sleep acne.
Speaker 7: We're going to sleep now. I guess everyone's gonna lose
Speaker 7: forty percent our body weight and you're gonna sleep just fine.
Speaker 7: And that's probably not the case. So you know, you
Speaker 7: kind of balance that a little bit.
Speaker 4: But yeah, they would only give it to me, if
Speaker 4: they would just give it to me, which one, you know,
Speaker 4: ozembic or we go to the I don't care what,
Speaker 4: just do you need it? I need to shed some pounds.
Speaker 4: My wife's angry that I'm snoring. I'm always turning the
Speaker 4: A C low. You know, it would fix some Plus
Speaker 4: I'm gonna get Alzheimer's probably hard disease, Like I want
Speaker 4: to avoid all those things.
Speaker 7: Well, you don't want to o d on those you
Speaker 7: know you get.
Speaker 4: Yeah, no, I'm want to just take a little bit.
Speaker 2: I forgot what it's like to work with you. Always
Speaker 2: fun to see you, Jeff, Thank you so much. Jeff Crumpleman.
Speaker 2: He's chief Investment Stratius head of Equities ere at Marinerwealth Advisors,
Speaker 2: someone from Ohio.
Speaker 4: Matt, We're good people. Good people.
Speaker 5: For a while.
Speaker 3: You are.
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Speaker 2: Mortgage rates continuing their decline, hitting the lowest level since
Speaker 2: early February twenty twenty three. Boring costs have fallen significantly
Speaker 2: in recent weeks in anticipation of those rate cuts by
Speaker 2: the Fed. We got that first cut yesterday. The what's
Speaker 2: interesting is whether or not, Matt, people are going to
Speaker 2: like maybe hold off on buying house thinking, okay, rates
Speaker 2: are going to go even lower.
Speaker 1: Yeah.
Speaker 4: I think it's really fascinating to watch home prices right now.
Speaker 4: Obviously with lower rates you have in but especially in
Speaker 4: this area, there's a state in local tax deduction cap
Speaker 4: stop there right now, which makes it no, it makes it.
Speaker 4: It makes it a lot more expensive to own a
Speaker 4: home in this area. Now. If certain things fall into place,
Speaker 4: that could sunset next year, and then you could see
Speaker 4: a flood of buyers.
Speaker 2: We shall see what in Westchester. Let's do what our
Speaker 2: next guest has to say. Thomas Carroll's back with us.
Speaker 2: He's the founder and CEO of ballast Rock Asset Management.
Speaker 2: They've got about two hundred and forty million in assets
Speaker 2: under management. He's also a former Goldman Sachs head of
Speaker 2: trading for fixed income, currencies and commodities. Back with us,
Speaker 2: how are you.
Speaker 6: I'm excellent, thank you. Busy day in the market, but
Speaker 6: fascinating day in real estate for sure.
Speaker 2: Why because of the FED move?
Speaker 6: Actually, I think the FED move was largely priced in
Speaker 6: but off fifty basis points depending on the house, different
Speaker 6: house views, different places, but on average, more or less
Speaker 6: that's what you've seen in rate.
Speaker 4: The market priced it in like seventy percent chance of
Speaker 4: a fifty basis point cuts.
Speaker 6: More or less you've seen that in rates movement, But
Speaker 6: more importantly what you've seen today with secondary home trading
Speaker 6: with and for those of us that are on the
Speaker 6: institutional investment side, looking forward at deliveries, in particular in multifamily,
Speaker 6: which is our area of focus. But deliveries in twenty
Speaker 6: twenty four projected deliveries in twenty twenty five and twenty
Speaker 6: twenty six really dropping off a cliff, so with twenty
Speaker 6: four deliveries expected to be around six hundred and eleven
Speaker 6: thousand units this year, but next year a forty five
Speaker 6: percent decline in deliveries and again a further fifteen percent
Speaker 6: in twenty twenty six projected. What we see is the
Speaker 6: potential for substantial rent increases in the next two years,
Speaker 6: in particular in twenty twenty six. And the question therefore
Speaker 6: is what does that mean? How quickly can those of
Speaker 6: us with capital to deploy, How quickly can we get
Speaker 6: long the market? And can we get long enough in
Speaker 6: a more accommodative rate environment?
Speaker 4: Wait, can people afford to pay more rent? I mean,
Speaker 4: the rent's already too damn high, right, So well, is
Speaker 4: it just which areas can see a rental increase?
Speaker 2: When you guys play in the south in a big way,
Speaker 2: we do.
Speaker 6: We're exclusively in the southeast, in the Carolinas, in Georgia,
Speaker 6: in Tennessee, Alabama, northern Florida. But interestingly enough, the data
Speaker 6: shows that the differential between the cost of owning a
Speaker 6: home and the cost of renting a home has increased
Speaker 6: over the past twelve months by a bit more than
Speaker 6: twenty percent, so it is still about forty percent cheaper
Speaker 6: to rent on average nationally. Obviously, it depends exactly where
Speaker 6: in the country you are, and different markets have different
Speaker 6: demand and supply dynamics, but in general, nationally it is
Speaker 6: still cheaper to rent. So therefore, for those landlords that
Speaker 6: are looking at a drop off in new supply in
Speaker 6: the years to come, we're certainly eyeing an expectation of
Speaker 6: increasing rents.
Speaker 4: What's it look like in your areas in your region.
Speaker 6: Well, I can just say for our portfolio, for example,
Speaker 6: right now, of our existing assets, we are currently running
Speaker 6: at the highest revenue levels we've ever run at. Meanwhile,
Speaker 6: actually occupancy is not actually at peak, so that means
Speaker 6: that rents are at the highest that they've been and
Speaker 6: our forward is we're not offering concessions, we're running very
Speaker 6: close to peak occupancy. That means that there's further pressure
Speaker 6: upwards on rents.
Speaker 2: Thomas, I've got to ask you, though, in an election year,
Speaker 2: and we talk so much about the affordability or lack
Speaker 2: thereof of individuals being able to buy a home or
Speaker 2: even a forward rent. I do wonder whether you think
Speaker 2: about you know, whether the spotlight or the you know
Speaker 2: that investors owning real estate their role in pushing up
Speaker 2: the cost of housing, which is something that has certainly
Speaker 2: played into inflation in a big way and sticky. You know,
Speaker 2: how are you thinking about that? And you know where
Speaker 2: politicians may come in and say, listen, we got to
Speaker 2: do something about this because, as you say, the lack
Speaker 2: of supply in the next year, it's not going to
Speaker 2: be there. So it's just going to get tougher for individuals,
Speaker 2: how you know, And there's a point where, you know,
Speaker 2: different investor bases all of a sudden, politicians are you know,
Speaker 2: looking at you saying, well, wait a minute, this is
Speaker 2: maybe not fair.
Speaker 6: Absolutely, And so for us, we focus really on the
Speaker 6: positive social impact that we're able to have through our funds,
Speaker 6: through our investments, because we are making very substantial investments
Speaker 6: in these assets. We focus on taking older properties, class B,
Speaker 6: class C assets and upgrading them, improving them, improving the
Speaker 6: quality of them. So, yes, rents do go up, but
Speaker 6: they don't go up in a vacuum. They go up
Speaker 6: because we're investing millions and millions of dollars in our
Speaker 6: assets to make them higher quality assets. So from our perspective,
Speaker 6: we're changing the nature of the asset itself from something
Speaker 6: that may be less safe. We focus on safety, security
Speaker 6: for our residents, a better quality experience, et cetera. In
Speaker 6: those circumstances where we're genuinely adding value, changing the nature
Speaker 6: of the asset, changing the position of the asset in
Speaker 6: the marketplace. And in particular, given that we focus primarily
Speaker 6: in states that are a little bit less governmentally driven,
Speaker 6: let's just say they're more landlage. Either way, they're more
Speaker 6: landlord friendly. Let's put it that way. They're more landlord friendly.
Speaker 6: We don't view that as a massive risk for our portfolio,
Speaker 6: but nationally, certainly we see the discussion.
Speaker 2: And but what's your role in all of this, like
Speaker 2: I always.
Speaker 4: Or what kind of push back do you think the
Speaker 4: industry is going to get? Because the anger, especially coming
Speaker 4: from the Democratic side of the eye, well really from
Speaker 4: all populous and the Republicans have now become a real
Speaker 4: populist party, is has been directed at funds that are
Speaker 4: buying up supply. So not necessarily your fund.
Speaker 6: No, but so there certainly needs to be substantial new development.
Speaker 6: That's the critical piece that's missing. Our role, for example,
Speaker 6: in our current funds is improving antiquated assets that otherwise
Speaker 6: would just get worse and worse and fall into disrepair
Speaker 6: and actually be unusable. So we're taking nineteen seventies, nineteen
Speaker 6: eighties assets, nineteen nineties assets and making them very usable.
Speaker 6: But really the way to resolve the affordability crisis is
Speaker 6: through new development. That's it. That's it.
Speaker 4: And what needs to happen. What kind of incentives need
Speaker 4: to be in place. I think Kamala Harris has spoken about,
Speaker 4: you know, incentivizing new building. What needs to be there.
Speaker 4: We're talking about tax cuts, or we're talking about regulatory cuts.
Speaker 4: Donald Trump has talked a lot about cutting regulations in
Speaker 4: order to spur new development. What in your view needs
Speaker 4: to happen so that builders can come back in and
Speaker 4: really start. I mean, I feel like they've been afraid
Speaker 4: since two thousand and eight.
Speaker 6: Certainly. In fact, if you look at the average delivery
Speaker 6: of single family homes in the ten years after the
Speaker 6: global financial crisis verst the ten years prior, the total
Speaker 6: delivery was fifty percent less on average. So certainly they've
Speaker 6: been very nervous since two thousand and eight and haven't delivered.
Speaker 6: But there is a little bit of dealing with the
Speaker 6: not in my backyard component there is. Remember, a lot
Speaker 6: of these regulations aren't necessarily federal, they're local and zoning requisition.
Speaker 6: So that's actually arguably where the bigger challenge is.
Speaker 2: But where we started is you said, one of the
Speaker 2: positives to what you guys do is the lack of supply. Right,
Speaker 2: that's good for what you're doing.
Speaker 6: For our business.
Speaker 2: It's just basic supply and demand in terms of, you know,
Speaker 2: kicking up the prices of what you can charge. So
Speaker 2: having said that, you've got to watch it right because
Speaker 2: you don't necessarily want a ton of building to come
Speaker 2: into some of the markets that you play in, right,
Speaker 2: because that will impact potentially those investments.
Speaker 6: Theoretically, but in practice it's sort of apples and oranges.
Speaker 6: New development on average, say reasonably cheap cost of development
Speaker 6: in the US per unit is about two hundred two
Speaker 6: twenty thousand dollars a unit. We're acquiring assets often below
Speaker 6: one hundred thousand dollars a unit. So new, a new apartment,
Speaker 6: multi family apartment being delivered for rent, needs to rent
Speaker 6: for let's say twenty five hundred dollars a month. Our
Speaker 6: average rent across our portfolio is a thousand a month,
Speaker 6: is it really? So it is totally different. To step
Speaker 6: up from a Class B or Class C older renovated
Speaker 6: unit into a class A newly delivered unit is almost
Speaker 6: two point five times. So think about that. You know,
Speaker 6: you get a slightly better job, you get a pay increase,
Speaker 6: doesn't mean that you're getting a two and a half
Speaker 6: times increase. They're fundamentally different markets. So all these new deliveries, really,
Speaker 6: all the deliveries that are happening this year, next year,
Speaker 6: in the year after, they're almost entirely what are called
Speaker 6: four star and five star deliveries, So they are really
Speaker 6: built build their luxury. So actually the real challenge is
Speaker 6: how do we develop more workforce housing. How do we
Speaker 6: either renovate the existing assets that are there, improve them,
Speaker 6: make them safe, secure, clean, professionally managed. How do we
Speaker 6: do that? Well, that's where my fund and our teams
Speaker 6: step in. But then how do we deliver more affordable housing,
Speaker 6: not just luxury homes a luxury apartment does.
Speaker 4: How helpful is then this first fifty basis point cut
Speaker 4: and how much do they have to cut before it's
Speaker 4: no longer restrictive for your industry.
Speaker 6: So we, for example, are because of course, the changes
Speaker 6: in FED funds are already effectively priced into the longer
Speaker 6: end of the curve, and that's ultimately how our debt
Speaker 6: is priced. We aren't borrowing on a floating rate basis.
Speaker 6: We're barring five, seven, ten, twelve. You're fixed. So I
Speaker 6: don't particularly care what happens to FED funds. I just
Speaker 6: care what FED funds implies for long term yields, and
Speaker 6: thus what happens to the long end of the curve
Speaker 6: or the medium end of the curve where we're pricing
Speaker 6: our debt against. For us today, we're actually borrowing pretty
Speaker 6: equivalently to where we were borrowing five six years ago
Speaker 6: because spreads have compressed, so when we borrow money Fanny
Speaker 6: and Freddie spreads are almost at all time tights. Those
Speaker 6: markets are those deck capital markets are wide open. So
Speaker 6: a combination of kind of a three fifty ten year
Speaker 6: and our cost of our spread cost of borrowing means
Speaker 6: that we're borrowing in the mid fibes, which is quite
Speaker 6: possible attractive for US. We're buying assets on an unlevered basis.
Speaker 6: Of about six and a half percent. So with leverage,
Speaker 6: we're able to create attractive total returns for our clients
Speaker 6: and our investors.
Speaker 2: Great deep dive, Thank you, Great to have you back.
Speaker 2: Thomas Carroll, CEO at ballast Rock Asset Management, Mark.
Speaker 4: A journal Now about you let me drive?
Speaker 6: No no, no, please, honey, please gravels.
Speaker 4: Let's wake, I want.
Speaker 6: It's a good question.
Speaker 1: This is the drive to the clothes teck Well shod
Speaker 1: it don on Bluebird Radio.
Speaker 2: All right, everybody just got a bad just under twenty
Speaker 2: minutes left in today's trading session, and we've definitely got
Speaker 2: a rally underway. We're off our best levels of the session.
Speaker 2: Charlie of course, just breaking down the numbers. But still
Speaker 2: Matt two point eight percent higher on the Nasdaq one hundred,
Speaker 2: almost a two percent gain on the sp I know
Speaker 2: it's okay, so fed cut.
Speaker 4: So that well helpful to the big mega tech yeah,
Speaker 4: megacap tech companies, right because Nazdaq one hundred is such
Speaker 4: a big gainer and the S and P is only
Speaker 4: up one point eight percent.
Speaker 2: It sounds as up five percent right now.
Speaker 4: The Philadelphia Semiconductor Induction, Yeah amazing, I mean it just
Speaker 4: continues to climb higher and hire, and I guess it
Speaker 4: just took the market a while to understand what happened yesterday.
Speaker 2: Yeah, I'm just looking at small caps two they're up
Speaker 2: two percent here as well, So you're seeing really broad
Speaker 2: based behind all right, So let's see what Greg Halter
Speaker 2: has to say. Is director of research at Carnegie Investment Council.
Speaker 2: They've got four billion in assets under management. And he's
Speaker 2: joining us from Cleveland, Ohio.
Speaker 4: Another Ohio guy, the great state of Ohio.
Speaker 2: How did we do this? Is Greg there?
Speaker 5: I am here Hillo.
Speaker 4: Jill buck Eyes, Oh h, I l.
Speaker 2: How are you? How are you good?
Speaker 5: Thank you for having me back.
Speaker 2: Well, it's good to have you back. I always appreciate
Speaker 2: what you have to say about the market environment. It
Speaker 2: is true interesting, you know, yesterday we saw rally and
Speaker 2: then we saw a pullback on the equity side of things.
Speaker 2: But it does seem like investors are all in on
Speaker 2: stocks today. How has the FED move yesterday and commentary
Speaker 2: in any way influenced your thoughts when it comes to
Speaker 2: strategy in the equity markets right now?
Speaker 8: Well, for one thing, we are pleased that the market
Speaker 8: is up, but I'm not sure it's changed our thoughts.
Speaker 8: You know, we look for our market leaders, We look
Speaker 8: for companies over the long term that have some sort
Speaker 8: of sustainable competitive advantage, and there's plenty of them working
Speaker 8: out today in the stock market. But I'm not really
Speaker 8: sure that our strategy has changed at all because of
Speaker 8: fifty basis points.
Speaker 4: So, yeah, I mean, I guess this was priced in,
Speaker 4: and you could see that rates the treasury market had
Speaker 4: already kind of priced it in as well. What do
Speaker 4: you expect the FED to you going forward? I don't
Speaker 4: mean to say, like, what's next already, since we're still
Speaker 4: dealing with what happened now, But where's your terminal rate
Speaker 4: expectation and how important is that?
Speaker 5: Well, I don't know that we have a number to
Speaker 5: provide for you.
Speaker 8: I would just say that we do expect for yields
Speaker 8: to be lower, certainly in the next over the next
Speaker 8: twelve months.
Speaker 1: You know.
Speaker 5: Obviously, if you look.
Speaker 8: At the dot plot what is out there right now,
Speaker 8: it does indicate that rates are set to go lower
Speaker 8: from all spectrums.
Speaker 4: To two point nine percent thirty years. Yeah. So, I
Speaker 4: mean I wonder if the FED is being a little
Speaker 4: bit too conservative here. We've heard from let's say John
Speaker 4: Paulson said he thinks two and a half percent, right,
Speaker 4: whereas Howard Mark's is three percent. I guess it's not
Speaker 4: that important.
Speaker 5: Yeah, I don't know that, you know, are we dealing
Speaker 5: in basis points?
Speaker 8: I think the direction is more important, and lower rates
Speaker 8: are certainly going to help anyone that's on a variable rate,
Speaker 8: from the consumer to the commercial side.
Speaker 5: Of lending, anyone who has loans. On the other hand, you.
Speaker 8: Know, we've got six point three trillion in money market
Speaker 8: fund assets and those are going to be yielding less,
Speaker 8: so there's less income in the savers pockets as well.
Speaker 5: So again you got to I think you have to
Speaker 5: look at both sides.
Speaker 2: Can we assume all of that money? I feel like
Speaker 2: there's been you know, folks salivating for where that money's
Speaker 2: going to go, assuming it's going to come out of
Speaker 2: money market although I thought I heard a few months
Speaker 2: ago somebody saying, historically, you know, money market levels kind
Speaker 2: of stay around this. This is just what we see.
Speaker 2: But help me out here, and is that momentum certainly
Speaker 2: for other asset classes eventually?
Speaker 5: I really don't think so.
Speaker 8: I think history is on the side of what you
Speaker 8: had mentioned that money tends to stay there.
Speaker 5: It tends to be very sticky.
Speaker 8: And if someone's getting four point five four point seventy
Speaker 8: five relative to the risk they perceive in the market
Speaker 8: and the volatility. You know, a couple of weeks ago
Speaker 8: we had a huge drop and people some people got nervous.
Speaker 8: So four and a half four point seventy five as
Speaker 8: rates come down, that's not all that bad. If we
Speaker 8: get back to three or two, you know, where's the
Speaker 8: tipping point, and you may see some of that go
Speaker 8: into the market.
Speaker 5: Then you know, we've had an increase of.
Speaker 8: A couple trillion I think over the last four years
Speaker 8: in terms of money market funds. By the way, there's
Speaker 8: three trillion sitting in checking accounts, demand deposits, earning nothing
Speaker 8: right now. So there's an opportunity for people to earn money.
Speaker 8: They should be taking advantage of that, and for whatever
Speaker 8: reason they're not.
Speaker 5: It's baffling.
Speaker 4: Well, if somebody has money that she or he needs
Speaker 4: to put to work, where do you expect that to
Speaker 4: do best? I know that in your notes you point
Speaker 4: out that banks and biotech have tended to do well
Speaker 4: the six months after a first cut. Is that where
Speaker 4: you would go.
Speaker 8: Yeah, I think that's a good place. Again, you're talking sectors.
Speaker 8: I would prefer to invest in some of the best
Speaker 8: companies that we can find, and there's not that many
Speaker 8: of them out there. When you think about the compounders
Speaker 8: of the world, you know, the Echo Labs and Sherwin
Speaker 8: Williams and Eaton's and companies like that, there's just not
Speaker 8: thousands of them. You've got to look for these solid companies,
Speaker 8: good balance sheets, good cash flow, companies that have been
Speaker 8: around for a while and they're benefiting from secular positive
Speaker 8: trends in.
Speaker 5: Their industries, such as I mentioned a couple.
Speaker 8: Another one would be trade Web, which is on the
Speaker 8: whole fixed income and money market side of electrifying or
Speaker 8: electrification if you will, if that's what you want to
Speaker 8: call it, electronics of trading. That's a company that we like.
Speaker 8: Syntas is a fabulous company. Otis, which makes elevators, is
Speaker 8: an excellent company. I mentioned Sherwan Williams and Echo Labs.
Speaker 8: Obviously you've got Microsoft and Apple and Nvidia as the
Speaker 8: mag seven names, but there's plenty of other companies within
Speaker 8: this one hundred or so that we like to invest
Speaker 8: in and talk about that are out there.
Speaker 4: You mentioned sure when Williams, it makes me think of
Speaker 4: the housing market. What do you expect to fall out
Speaker 4: to be in the housing market. A lot of people
Speaker 4: have implied that when rates go to a five handle
Speaker 4: mortgage rates, that is that the market could start to
Speaker 4: move around. But I mean, I have a three percent mortgage.
Speaker 4: It's going to take a long look at a mote.
Speaker 5: No.
Speaker 8: Yeah, mine's at two point sixty five, so I'm not
Speaker 8: keen to give that up and go anywhere soon. And
Speaker 8: on top of that, you've had a huge increase in
Speaker 8: home prices, so you've got that double whammy. However, there
Speaker 8: are people that I just spoke to one today. They
Speaker 8: have six point three seven percent mortgage. They can start refinancing,
Speaker 8: and the people who are on the fence can start
Speaker 8: coming into the market. Yesterday we saw what a nine
Speaker 8: point six percent increase month over month in housing starts,
Speaker 8: So you know, some of the stuff can percolate and
Speaker 8: that goes to the home depots. The low is the
Speaker 8: Sherwn Williams of the world.
Speaker 2: Greg, do you think by any chance that traders investors
Speaker 2: are getting kind of ahead of themselves in terms of
Speaker 2: expectations despite what the dot plot says from the FED
Speaker 2: that maybe we won't get all those moves either later
Speaker 2: this year or into twenty twenty five.
Speaker 8: Tough question, very tough question, girl. I mean, obviously the
Speaker 8: data is going to be important. What happens with inflation?
Speaker 8: And we've had the two sticky items insurance and shelter?
Speaker 8: Where do those go? Everything else seems to be fairly
Speaker 8: tame at this point. But with these rate decreases.
Speaker 5: What does that do? We're going to have to let
Speaker 5: the data really tell us where that goes.
Speaker 8: Because you know as well as I do, we're in
Speaker 8: a twenty six trillion dollar economy. Things can move around
Speaker 8: a lot, and the stock prices can move a lot
Speaker 8: differently than the actual fundamentals of the industry or the company.
Speaker 4: Greg, does the election matter to you when you are
Speaker 4: planning out for the future and just got about ten seconds?
Speaker 5: Not really, it's more media attention.
Speaker 8: History shows that it really doesn't matter in terms of
Speaker 8: the markets with the long term.
Speaker 2: All right, going to leave it on that note, Hey, Greg,
Speaker 2: fun to get some time with you again. Greg Halter,
Speaker 2: director of Research at Carnegie Investment Council. Four billion in
Speaker 2: assets under manageer.
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