WEBVTT - Don't See A Scenario That Moonves Stays At Company: Sweeney 0:00:05.800 --> 0:00:08.720 Welcome to the Bloomberg p m L Podcast. I'm Pim Fox. 0:00:08.760 --> 0:00:11.520 Along with my co host Lisa Abramowitz. Each day we 0:00:11.640 --> 0:00:15.120 bring you the most important, noteworthy, and useful interviews for 0:00:15.200 --> 0:00:17.840 you and your money, whether you're at the grocery store 0:00:17.960 --> 0:00:20.720 or the trading floor. Find the Bloomberg p m L 0:00:20.840 --> 0:00:33.440 Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Shares 0:00:33.479 --> 0:00:36.559 of CBS they are down more than a six percent 0:00:36.800 --> 0:00:40.040 after this ruling by the Delaware judge. A victory for 0:00:40.280 --> 0:00:43.879 Shari Redstone, who happens to be a CBS director and 0:00:43.960 --> 0:00:48.720 president of the of her family's movie theater operator, National Amusements. 0:00:48.960 --> 0:00:52.560 Of course, they're pushing for a merger with CBS and 0:00:52.680 --> 0:00:57.120 National Amusements controls viacom. Here to tell us more about 0:00:57.160 --> 0:01:00.200 it all is Paul Sweeney, Director in North American Search 0:01:00.240 --> 0:01:05.360 for Bloomberg Intelligence and Internet and media analyst for Bloomberg Intelligence. 0:01:05.400 --> 0:01:09.399 Paul uh, Is this the conclusion do you believe of 0:01:09.680 --> 0:01:13.520 Leslie Moonvest's career at CBS. Well, it certainly could be. 0:01:13.600 --> 0:01:16.600 I think we still have probably six months of litigation 0:01:16.680 --> 0:01:18.720 back and forth between the you know, like all the 0:01:18.760 --> 0:01:21.919 parties here, but this was a big blow for less 0:01:22.080 --> 0:01:25.240 uh and for the board that was trying to reassert 0:01:25.400 --> 0:01:29.759 some level of UH influence and and versus its control 0:01:29.840 --> 0:01:34.680 shareholder National Amusements here and and UH that initial uh 0:01:34.680 --> 0:01:37.760 opportunity for them really took a big blow here. So, UM, 0:01:37.800 --> 0:01:39.880 this is something that I think, you know, the next 0:01:39.880 --> 0:01:42.160 the ball is in the court of Sherry Redstone and 0:01:42.240 --> 0:01:44.520 National Amusements and what will they do with the board, 0:01:44.560 --> 0:01:47.560 what will they do with management including less Um? And 0:01:47.600 --> 0:01:49.720 I think with the stock down six percent kind of 0:01:49.520 --> 0:01:52.680 tells you that investors think a deal is coming and 0:01:52.760 --> 0:01:55.440 merger is going to happen, and it won't include less Moonves. Yeah. 0:01:55.480 --> 0:01:58.600 So so basically shares down more than six percent on 0:01:58.800 --> 0:02:02.640 the expectation that less Moonves will exit from the helm 0:02:02.760 --> 0:02:06.240 of CBS, that Viacom and CBS will merge, with a 0:02:06.240 --> 0:02:11.160 lot of shareholders of CBS don't want um just can 0:02:11.200 --> 0:02:14.000 you bring back the memory of y CBS is so 0:02:14.200 --> 0:02:16.520 y CBS showholders are against this merger at this point. 0:02:16.639 --> 0:02:20.239 I think CBS shareholders view Viacom as a flawed asset. Um. 0:02:20.280 --> 0:02:22.639 It's you know, it's a company that's been struggling. Um. 0:02:22.680 --> 0:02:27.120 The cable networks are particularly prone to chord cutting because 0:02:27.160 --> 0:02:30.119 the the MTV networks, the Nickelodeon networks and all those 0:02:30.160 --> 0:02:33.560 they tend to uh you know, be targeting younger demos, 0:02:33.560 --> 0:02:35.399 and the younger demos are spending a less and less 0:02:35.400 --> 0:02:38.760 time with television Number one and number two. The film studio, 0:02:38.880 --> 0:02:41.760 the paramount film studio has really been underperforming. So if 0:02:41.800 --> 0:02:45.440 you're CBS shareholder, you say, g my, CBS Stories working 0:02:45.480 --> 0:02:48.640 pretty well, the CBS networks doing well, the Showtime networks 0:02:48.680 --> 0:02:52.120 doing well. Um, and I'm pretty happy with my CBS investment. 0:02:52.120 --> 0:02:55.679 I don't want to uh see CBS buy Viacom because 0:02:55.720 --> 0:02:57.040 I just don't think they're a great company, and I 0:02:57.080 --> 0:03:00.320 think they're gonna be dilutive to my growth rate going forwards. 0:03:00.360 --> 0:03:02.600 So I think most investors, and I think less Moon 0:03:02.600 --> 0:03:04.800 of Us was saying, listen, if you're going to force 0:03:04.919 --> 0:03:07.320 us to merge with Viacom, it has to be on 0:03:07.400 --> 0:03:10.919 our terms at CBS. I E our financial terms. We 0:03:11.320 --> 0:03:13.440 want to we don't want to delude our shareholders, and 0:03:13.520 --> 0:03:16.480 more most importantly, it has to be on our management terms. 0:03:16.520 --> 0:03:19.480 We want our management team to run the combined company. 0:03:19.480 --> 0:03:23.399 And that management issue is really the stumbling block here. Paul, 0:03:23.560 --> 0:03:29.480 maybe just outline what was CBS trying to do tactically. UM. 0:03:29.520 --> 0:03:33.240 I think well, CBS was trying to invoke a part 0:03:33.360 --> 0:03:35.880 of their by laws, which is very unique to their 0:03:35.920 --> 0:03:40.240 by laws, which allows them to convene a special meeting 0:03:40.280 --> 0:03:44.360 today of the board and to declare a one time 0:03:44.400 --> 0:03:48.600 stock dividend which would dilute the ownership the voting ownership 0:03:48.640 --> 0:03:51.360 of n A I from about eight percent down to 0:03:51.400 --> 0:03:56.000 sevent effectively Nick negating the control that Sherry Redstone would have. 0:03:56.040 --> 0:03:57.960 And that's what got blocked. You know, when you came 0:03:58.000 --> 0:04:00.800 in here, you said that Sherry Redstoree and less Moonves 0:04:00.880 --> 0:04:03.040 can never work together again, period the end. So even 0:04:03.120 --> 0:04:06.360 if there's some kind of win on this appeal, uh, 0:04:06.480 --> 0:04:09.880 you know, unless they actually can strip control from Sherry Redstone, 0:04:10.280 --> 0:04:13.440 less moon Vous is out. I think so, I think 0:04:13.520 --> 0:04:17.080 the I don't see a scenario here where, uh, this 0:04:17.160 --> 0:04:20.080 management team at CBS, this board at CBS can ever 0:04:20.120 --> 0:04:23.520 come back and work with Sherry Redstone and National Amusements. 0:04:23.560 --> 0:04:26.360 I just think that, you know, the trust, the relationships 0:04:26.360 --> 0:04:30.279 have probably been irrevocably broken here with these legal maneuvers. 0:04:30.320 --> 0:04:32.160 So I'd like you to put on your psychology hat 0:04:32.200 --> 0:04:34.320 because I know that you have one. And talk a 0:04:34.320 --> 0:04:38.160 little bit about Sherry Redstone when she reads this result, 0:04:38.279 --> 0:04:42.159 when she hears the court ruling, is she jubilant or 0:04:42.200 --> 0:04:44.400 I mean it's sort of a tricky thing because she 0:04:44.480 --> 0:04:47.560 also owned shares in CBS. Yeah, yeah, it's it's I 0:04:47.560 --> 0:04:50.360 I think she is. I think she's um. She's probably 0:04:50.400 --> 0:04:52.919 as a control shadow of both companies, is really playing 0:04:52.960 --> 0:04:55.680 the long game here. And the long game for her 0:04:55.760 --> 0:04:58.480 and for her family's interest into two companies is to 0:04:58.800 --> 0:05:00.960 in her mind, to put the company together to be 0:05:01.080 --> 0:05:05.159 a larger company with more global scale, more resources to 0:05:05.279 --> 0:05:07.640 compete not just against the Comcast and the Disneys of 0:05:07.680 --> 0:05:10.000 the world, but against the the Googles and the facebooks 0:05:10.000 --> 0:05:12.359 and the Amazons and the Netflix. Is um and that 0:05:12.520 --> 0:05:14.640 is that that is a theory that is prevalent in 0:05:14.680 --> 0:05:17.640 the media world today. We're seeing lots of consolidation again, 0:05:17.680 --> 0:05:20.200 most notably with Disney looking at twenty one century Fox, 0:05:20.560 --> 0:05:24.160 Comcast circling around those same assets. Um so a T 0:05:24.240 --> 0:05:26.440 and T, you know, trying to close its acquisition of 0:05:26.480 --> 0:05:30.599 Time Warners. So her strategic rationale is absolutely consistent with 0:05:30.600 --> 0:05:33.360 what's going on the marketplace. Uh, it's just simply that 0:05:33.400 --> 0:05:35.799 the you know, one of the two parties in this case, CBS, 0:05:35.880 --> 0:05:38.160 doesn't want to do the deal on her terms. Would 0:05:38.160 --> 0:05:43.040 it be possible for CBS under Leslie Moonvest to initiate 0:05:43.200 --> 0:05:48.719 a large acquisition, Uh no, because, um, you know, Sherry Redstone, 0:05:48.760 --> 0:05:51.320 as again control shareholder, would not allow it. And that's 0:05:51.320 --> 0:05:54.119 one of the reasons over the years, Uh, CBS hasn't 0:05:54.120 --> 0:05:57.200 really done any large acquisitions because, um, you know, they'd 0:05:57.200 --> 0:05:58.960 be a would have to get the approval of of 0:05:58.960 --> 0:06:01.800 of National Amusement and Sherry Redstone, and I guess they 0:06:01.800 --> 0:06:04.039 felt like that they never had that support. So, you know, 0:06:04.120 --> 0:06:07.200 I think the the only bowl case scenario left for 0:06:07.279 --> 0:06:10.560 CBS is that that they win their you know, legal 0:06:10.600 --> 0:06:14.040 case against National Amusements, um, and they are left as 0:06:14.080 --> 0:06:17.280 a standalone company with National Amusements maybe even diluted down, 0:06:17.640 --> 0:06:20.159 in which case then the story becomes very interesting for 0:06:20.200 --> 0:06:23.680 CBS shareholders because they can either uh you know, just 0:06:23.760 --> 0:06:26.280 grow with the existing management team and let the management 0:06:26.279 --> 0:06:29.800 team you know, kind of deal with it, or um, 0:06:29.839 --> 0:06:33.120 you know, they become a acquisition candidate of their own. 0:06:33.120 --> 0:06:35.000 But that assumes that they you know, kind of went 0:06:35.040 --> 0:06:38.080 all on appeals going forward. Here, I'm wondering if you 0:06:38.080 --> 0:06:41.520 could just extrapolate out into the future, and let's talk 0:06:41.520 --> 0:06:44.919 about Sherry Redstone strategy. You're saying that she's betting on 0:06:44.960 --> 0:06:49.840 a stronger combined company between Viacom and CBS. Viacom shares 0:06:50.080 --> 0:06:54.719 up about one percent on this news. Is she right? Well? Um, 0:06:54.880 --> 0:06:57.680 I don't. It remains to be seen the the assets here. 0:06:57.760 --> 0:06:59.560 One could argue that even if you emerge CBS and 0:06:59.680 --> 0:07:02.080 Viacom together, it's still not a great company. It's it's 0:07:02.080 --> 0:07:04.800 not a Walt Disney, um. You know, and and and 0:07:04.880 --> 0:07:06.479 you you take a look at some of the other 0:07:06.520 --> 0:07:09.559 media moguls in the marketplace. Jeff Bukas at Time Warner, 0:07:09.640 --> 0:07:13.080 Rupert Murdoch at twenty one Century Fox. They've effectively thrown 0:07:13.080 --> 0:07:16.200 in the towel and agreed to sell their companies because 0:07:16.240 --> 0:07:18.640 they recognize that, you know, going forward over the next 0:07:18.680 --> 0:07:20.560 five to ten years, you know, how do I even 0:07:20.600 --> 0:07:23.200 think about compete against Amazon and Google and Facebook and 0:07:23.240 --> 0:07:25.600 Netflix and all these companies in the Apple um. So, 0:07:25.640 --> 0:07:27.960 you could argue that even if you emerge these two companies, 0:07:27.960 --> 0:07:30.680 you're still left at a competitive disadvantage, you know, kind 0:07:30.680 --> 0:07:32.440 of going forward. And I do want to note it 0:07:32.560 --> 0:07:34.880 was up one percent that shares of Viacom, but they 0:07:34.920 --> 0:07:37.280 are now down about a half percent, so right, and 0:07:37.320 --> 0:07:39.560 the shares of CBS, they're down about the six and 0:07:39.640 --> 0:07:43.720 a half percent. Is there any likelihood just quickly, uh, 0:07:43.840 --> 0:07:48.000 Paul less moon Best could have a second career. I 0:07:48.000 --> 0:07:50.320 mean he's going to be a very attractive candidate for 0:07:50.360 --> 0:07:53.360 any position, absolutely, and uh, he's gonna have a lot 0:07:53.400 --> 0:07:55.560 of money in his pocket as well. So, um, you know, 0:07:55.600 --> 0:07:57.400 we've we've seen that in the past. Um, you know, 0:07:57.680 --> 0:08:00.080 Jeffrey Katkatzenberg has been able to raise some money to 0:08:00.280 --> 0:08:02.320 kind of get into back into the business on the 0:08:02.320 --> 0:08:04.800 digital side. What we're seeing here is, I think, you know, 0:08:04.800 --> 0:08:06.640 we've seen a lot of media execs who have left 0:08:06.720 --> 0:08:09.200 kind of the big conglomerates kind of go off on 0:08:09.240 --> 0:08:11.160 their own and you know, kind of try to figure 0:08:11.160 --> 0:08:13.160 out ways to make money in the digital side of 0:08:13.320 --> 0:08:15.600 the media business. Paul Sweeney, we will be having you 0:08:15.680 --> 0:08:17.920 back to discuss this more in depth, I'm sure as 0:08:17.960 --> 0:08:22.240 it progresses. A really interesting and fascinating and frankly surprising decision. 0:08:22.280 --> 0:08:25.960 Paul Sweeney, Director of North American Research for Bloomberg Intelligence. 0:08:39.840 --> 0:08:43.000 The shares of oil refiners are surging today a delic 0:08:43.320 --> 0:08:46.560 US holdings up more than five percent, CVR Refining a 0:08:46.640 --> 0:08:49.959 gain of nearly four percent, Holly Frontier adding more than 0:08:50.040 --> 0:08:52.200 five and a quarter percent. Here to tell us more 0:08:52.240 --> 0:08:55.559 about the refining industry is Peter Polican. He is the 0:08:55.720 --> 0:08:59.480 U S Energy analyst for Bloomberg Intelligence. He joins us 0:08:59.480 --> 0:09:01.960 here in our and THREO studios. Peter, thank you very 0:09:02.040 --> 0:09:04.320 much for being here. Maybe you could just start up 0:09:04.320 --> 0:09:09.199 by explaining that US refining capacity is not necessarily aligned 0:09:09.200 --> 0:09:13.679 with the kind of shale oil that exists in abundance 0:09:13.679 --> 0:09:16.320 in the United States. Yeah, that's correct. I mean a 0:09:16.360 --> 0:09:19.160 lot of people when they think about, um, the explosion 0:09:19.240 --> 0:09:23.120 of shale and US independence, they don't realize that oil 0:09:23.360 --> 0:09:26.440 by itself can't is not really terrible useful. It needs 0:09:26.440 --> 0:09:29.040 to be refined. And the US refining complex, which is 0:09:29.080 --> 0:09:32.439 the largest and biggest in the world, was built prior 0:09:32.559 --> 0:09:35.120 to shale. So what that means is it was actually 0:09:35.120 --> 0:09:37.959 built in a world to process a very different type 0:09:37.960 --> 0:09:40.960 of crew to heavier type of crude than what shale is. 0:09:41.000 --> 0:09:44.080 So now reaching the point where these refiners have tried 0:09:44.120 --> 0:09:46.720 to benefit as much as they can from the onslaught 0:09:46.760 --> 0:09:50.640 of shale, but it's reaching a maximization saturation point. So 0:09:50.679 --> 0:09:53.760 now that crew that's the US is producing needs to 0:09:53.760 --> 0:09:55.600 find a new home. So you're seeing the spread between 0:09:55.720 --> 0:09:58.160 W A t I, which is domestic prices, and Brent, 0:09:58.160 --> 0:10:00.680 which are global prices blow U and that's gonna be 0:10:00.679 --> 0:10:02.800 persistent for some time. Who are the big refiners in 0:10:02.840 --> 0:10:06.720 the US. So we have Delic, there's Valero, um Pete, 0:10:06.720 --> 0:10:11.520 There's PBF, Philip sixty six. All these refiners in general 0:10:11.559 --> 0:10:14.079 benefit because essentially they're gonna they're gonna capitalize on lower 0:10:14.120 --> 0:10:17.240 input costs and higher output output costs for their prices 0:10:17.280 --> 0:10:19.080 for their product. So is this a reason why we 0:10:19.120 --> 0:10:22.200 haven't really seen the profit boom in many shell companies 0:10:22.240 --> 0:10:25.200 that that some are expecting. I mean, most shell companies 0:10:25.200 --> 0:10:28.400 are still spending more than they are taking in, that's right. 0:10:28.440 --> 0:10:31.439 I mean overall price levels going up obviously helps all 0:10:31.440 --> 0:10:33.840 these companies, but they do have a cash flow problem. 0:10:34.160 --> 0:10:36.840 But oil prices at seventy dollars quite frankly cures a 0:10:36.840 --> 0:10:39.240 lot of balance issues and debt issues that they're having. 0:10:39.760 --> 0:10:42.720 Um But the issue going forward now for them is 0:10:43.160 --> 0:10:45.880 domestic producers em p s will receive a lower price 0:10:45.960 --> 0:10:48.680 and uh someone else globally, So that means is on 0:10:48.679 --> 0:10:51.720 a relative basis, they're not winners, Peter. I'm looking at 0:10:51.760 --> 0:10:54.600 the national average price as quoted by the triple A 0:10:54.800 --> 0:10:57.640 and the price two dollars and nineties cents, although of course, 0:10:57.679 --> 0:10:59.840 if you're in California or New York or any of 0:10:59.840 --> 0:11:03.559 the host really uh, you're ending up paying U substantially 0:11:03.640 --> 0:11:06.880 higher price in some cases California three dollars and seventy 0:11:06.920 --> 0:11:11.920 cents for a gallon? Is the increase also going to 0:11:12.080 --> 0:11:17.200 affect industries that use refined products other than gasoline, So 0:11:17.200 --> 0:11:20.480 I'm thinking of the chemical industry. Well, I think all 0:11:20.520 --> 0:11:23.480 these industries are governed by by different forces, So the 0:11:23.760 --> 0:11:26.199 refiners are really going to benefits essentially. The way that 0:11:26.280 --> 0:11:29.160 you think about it is, look, they produce a variety 0:11:29.200 --> 0:11:31.040 of products that go into a lot of different industries, 0:11:31.040 --> 0:11:35.120 like you mentioned, from petro chemicals to gasoline, and the 0:11:35.160 --> 0:11:37.800 margins for those products are widening, which is called the 0:11:37.800 --> 0:11:41.120 crack spread. So all the the real winner and all 0:11:41.160 --> 0:11:44.840 this uh is going to be the refiners, and they'll 0:11:44.920 --> 0:11:49.480 simply elevate the cost of their products to UH the 0:11:49.559 --> 0:11:51.880 UH the end users which are the petro chemical companies 0:11:51.880 --> 0:11:54.600 in an ultimately U S consumer. So has there been 0:11:54.640 --> 0:11:58.880 any talk about building more refinery capacity here? There has 0:11:58.920 --> 0:12:01.200 been talk of it. Xon is thinking about expanding their 0:12:01.240 --> 0:12:04.600 their light old processing capacity UM. But the real the 0:12:04.640 --> 0:12:08.920 reality is refiners are really expensive facilities and in order 0:12:08.960 --> 0:12:14.000 for them to consider UH green field expansion, the economics 0:12:14.280 --> 0:12:16.719 need to be better. So what they've done historically is 0:12:16.800 --> 0:12:19.240 sale boomed, is that they've done added things onto their 0:12:19.240 --> 0:12:23.520 facilities such as altinization units and other type things to 0:12:23.520 --> 0:12:25.520 to be able to process more crude. But at some 0:12:25.600 --> 0:12:29.360 point these are capital these are capital maximizing companies, and 0:12:29.440 --> 0:12:33.120 you cannot maximize the profits of refiners by increasing the 0:12:33.200 --> 0:12:36.360 increasing exponentially the amount of shille that they process. Peter, 0:12:36.400 --> 0:12:38.920 Can they just export it? Well, this is a great 0:12:38.960 --> 0:12:41.280 question in the subject of the next research report I'm 0:12:41.280 --> 0:12:43.040 writing on. But now we've actually going to reach a 0:12:43.120 --> 0:12:46.640 cap in in exports. So currently re export about two 0:12:46.640 --> 0:12:49.319 point seven million barrels per day, and if you look 0:12:49.320 --> 0:12:53.040 at the chart for exports, it looks like something exponential growth. Now, 0:12:53.080 --> 0:12:55.959 the mistake the markets are making is that they're extrapolating 0:12:55.960 --> 0:12:59.079 that this exponential growth and exports can continue. But that's 0:12:59.120 --> 0:13:02.440 about to hit a bottle next. So refiners are maxed out. 0:13:03.200 --> 0:13:05.720 Oil has nowhere to go in the continental US, and 0:13:05.760 --> 0:13:09.600 there's a glut of it being produced. So that's spread 0:13:09.640 --> 0:13:11.360 between w t I and Brent is going to stay 0:13:11.360 --> 0:13:15.360 wide for a long time. And this suggests that the 0:13:15.400 --> 0:13:17.200 price that people are going to pay at the pump 0:13:17.440 --> 0:13:21.120 could potentially rise just proportionately in the US to the 0:13:21.280 --> 0:13:25.760 rise in Brent. That that's right, meaning essentially gasoline is 0:13:25.760 --> 0:13:28.640 priced off of Brent global prices. So when people talk 0:13:28.679 --> 0:13:31.160 about discounted U S crudin the abundance of US shil, 0:13:31.400 --> 0:13:33.800 why aren't we seeing it at the pumps. The reality 0:13:33.880 --> 0:13:38.160 is refiners process local crude, but the gasoline market is 0:13:38.200 --> 0:13:41.840 a global market and that's priced much higher. Wow, that 0:13:42.000 --> 0:13:44.680 was really fantastic. I understand this a lot better. Peter 0:13:44.720 --> 0:13:48.239 at Pulican, he is U S Energy analyst for Bloomberg Intelligence. 0:13:48.240 --> 0:13:49.920 We will look out for that next report, We will 0:13:49.920 --> 0:13:53.000 read it and we will highlight it. Definitely really interesting 0:13:53.080 --> 0:13:55.600 dynamic right now, given the fact that the the oil prices 0:13:55.600 --> 0:13:58.600 are climbing to their highest level in years, and this 0:13:58.720 --> 0:14:01.319 should help those shild is, it should help the pump. 0:14:01.600 --> 0:14:20.840 And yet and yet earnings for companies in the SMP 0:14:21.000 --> 0:14:25.160 five hundred up about so far, and yet the stock 0:14:25.240 --> 0:14:28.680 market doesn't seem to reflect that increase in profits. Here 0:14:28.680 --> 0:14:31.240 to help us understand more, as Casey Matthews, he is 0:14:31.280 --> 0:14:35.080 economist chief investment officer for you m B Bank based 0:14:35.080 --> 0:14:38.000 in Kansas City, Missouri, helping to manage more than ten 0:14:38.200 --> 0:14:41.360 billion dollars of customer assets. Casey, thank you very much 0:14:41.360 --> 0:14:43.360 for being with us. So what accounts for what is 0:14:43.480 --> 0:14:45.520 seems to be a divergence you look at as you 0:14:45.640 --> 0:14:49.520 As you mentioned profits are up, but stocks, well, the 0:14:49.600 --> 0:14:53.960 SMP five hundred is up two year today. Right. My 0:14:54.080 --> 0:14:57.000 take is our economy in the markets are in a 0:14:57.040 --> 0:15:02.200 state of transition. We came from this Goldilocks environment where 0:15:02.240 --> 0:15:07.600 we had low interest rates, low inflation, synchronized global growth, 0:15:07.840 --> 0:15:11.280 and a course stellar corporate earnings. It's interesting our research 0:15:11.360 --> 0:15:13.800 department and I were sitting around talking about, well, what's 0:15:13.800 --> 0:15:17.440 the opposite of Goldilocks? Some degree it might be the 0:15:17.480 --> 0:15:21.720 big bad Wolf. So today our economy is transitioned from 0:15:21.760 --> 0:15:24.880 a Goldilocks environment to an economy riddled with these big 0:15:24.920 --> 0:15:30.360 bad wolves. Now we have rising interest rates, changing inflation expectations, 0:15:30.360 --> 0:15:35.640 a question regarding synchronized global growth, peak earnings, trade wars. 0:15:35.960 --> 0:15:38.320 So you can see, you have all these issues that 0:15:38.400 --> 0:15:43.320 potentially could blow down economic activity, and that of course 0:15:43.440 --> 0:15:47.680 disrupts the market, leads to volatility and a lot of uncertainty. 0:15:48.080 --> 0:15:51.400 The big bad wolf. I think you just coined the 0:15:51.480 --> 0:15:57.080 new phrase casey values. Are we experiencing the big bad wolf? Um? 0:15:57.120 --> 0:16:00.560 Given the fact that we are transitioning to the other 0:16:00.680 --> 0:16:04.760 part of the Goldilocks story, Um, I'm trying to figure 0:16:04.800 --> 0:16:06.720 out what does this mean that you're moving a greater 0:16:06.760 --> 0:16:09.800 proportion of your ten billion dollars of assets into cash 0:16:09.960 --> 0:16:12.960 or what are you doing with this? You have a 0:16:12.960 --> 0:16:15.480 good question. Not yet. I think clearly there are some 0:16:15.600 --> 0:16:18.680 yellow flags out there in the economy and financial markets, 0:16:18.920 --> 0:16:22.040 but doesn't appear that we have the red flags. And 0:16:22.080 --> 0:16:27.160 when you look at a lot of market signals, many 0:16:27.200 --> 0:16:30.600 times if you look at those signals mutually exclusively, it 0:16:30.600 --> 0:16:34.360 will lead to a premature decision to de risk portfolios. 0:16:34.880 --> 0:16:38.240 The perfect example is the slope of the yield curve. 0:16:38.720 --> 0:16:41.600 Of course, the difference between the two and tenure treasuries 0:16:41.600 --> 0:16:45.720 about fifty three basis points today and this indicator has 0:16:45.720 --> 0:16:51.560 a perfect track record forecasting looming recessions. Um So once 0:16:51.600 --> 0:16:54.240 the once the slope of that yold curve becomes flat 0:16:54.320 --> 0:16:58.640 to inverted, there's the red flag you've got an oncoming recession. 0:16:58.960 --> 0:17:03.520 But it's interesting still have twelve to eighteen months before 0:17:03.640 --> 0:17:06.320 you see the recession once that you old curve becomes inverted. 0:17:06.760 --> 0:17:09.280 So what we like to do is look for pairings 0:17:09.320 --> 0:17:12.600 of signals, and we found is when you look at 0:17:12.640 --> 0:17:16.800 the slope of the yield curve paired with the change 0:17:16.800 --> 0:17:21.600 in high yield spreads, you get a better signal uh 0:17:21.600 --> 0:17:25.760 to de risk portfolios. And it's not as premature as 0:17:25.840 --> 0:17:28.000 just looking at one the slope of the yield curve. 0:17:28.359 --> 0:17:30.639 So those are things that we're watching right now, and 0:17:30.760 --> 0:17:33.840 right now you get a bit of a green light, 0:17:34.320 --> 0:17:38.680 meaning it's not time to de risk portfolios just yet. Casey, 0:17:38.880 --> 0:17:41.359 If someone has new money to deploy, what would you 0:17:41.400 --> 0:17:44.600 suggest they do. Well, of course it depends on their 0:17:44.720 --> 0:17:47.000 their objectives and their risk budget. Well, let's say that 0:17:47.040 --> 0:17:50.120 they're they're willing to weigh three to five years. They 0:17:50.119 --> 0:17:53.120 don't want to lose it, of course, but they're willing 0:17:53.359 --> 0:17:57.640 that to under to undertake an investment that there isn't 0:17:57.640 --> 0:18:01.280 going to show a month by month increase in value. Yeah, 0:18:01.320 --> 0:18:03.520 I think to some degree it's it's it's the old 0:18:03.520 --> 0:18:06.760 adage of a well diversified portfolio. I would put money 0:18:06.840 --> 0:18:10.000 at risk today. Um, I am favorable in the stock 0:18:10.080 --> 0:18:15.080 market or ass allocation models are overweight risk via the 0:18:15.119 --> 0:18:18.840 stock market and to something that US stock market, emerging 0:18:18.880 --> 0:18:22.719 stock market, developed Europe, where would it go. Yeah, we're 0:18:22.760 --> 0:18:26.719 overweight domestic large cap stocks. Of course, they have a 0:18:26.720 --> 0:18:29.520 healthy weight to mid caps and small caps, and then 0:18:29.600 --> 0:18:34.240 do have an allocation to international and emerging markets, so 0:18:34.320 --> 0:18:38.800 across the board we would get exposure. But to answer 0:18:38.840 --> 0:18:41.760 your question, I think the play right now is domestic 0:18:41.840 --> 0:18:44.680 large cap stocks. Alright, So Casey, one thing that I'm 0:18:44.680 --> 0:18:47.040 wondering is it's one thing to say, look, I don't 0:18:47.080 --> 0:18:49.600 see a recession on the horizon. Companies look like they're 0:18:49.640 --> 0:18:52.840 in pretty good shape. It's another thing to say, look, 0:18:52.840 --> 0:18:55.399 the relative valuation just doesn't look so hot anymore, and 0:18:55.440 --> 0:18:58.960 you're certainly seeing that narrative continue to gain prominence. Is 0:18:58.960 --> 0:19:02.240 the tenure treasury rises? Where are you on that at 0:19:02.240 --> 0:19:05.679 what point will the tenure treasury start to look attractive 0:19:05.880 --> 0:19:09.919 as an alternative to stocks. Oh, I think the yield 0:19:09.960 --> 0:19:13.680 has some legs to go on. That meaning three tan 0:19:13.760 --> 0:19:15.760 it's too early. I don't think investors are going to 0:19:15.800 --> 0:19:19.480 switch from stocks to bonds just yet, especially looking at 0:19:19.480 --> 0:19:23.000 a tenure treasury. Um. I think you have to get 0:19:23.000 --> 0:19:25.800 that yield up to closer to four percent. It's interesting. 0:19:25.800 --> 0:19:27.439 At the beginning of the year, our forecast for the 0:19:27.440 --> 0:19:30.240 tenure treasury was three and a quarter percent, and a 0:19:30.320 --> 0:19:32.080 lot of people thought, oh, you're you're going to miss 0:19:32.080 --> 0:19:34.000 the mark there, And here we are at three point 0:19:34.000 --> 0:19:36.640 one percent already, So I think we got some time. 0:19:36.680 --> 0:19:38.440 I think the tipping point would be closer to four 0:19:39.640 --> 0:19:42.679 rather than three. Kasey Matthews, thank you so much for 0:19:42.720 --> 0:19:45.520 being with us, with us and giving us the Big 0:19:45.560 --> 0:19:48.439 Bad Wolf theory of the world. Kasey Matthews is an 0:19:48.480 --> 0:19:51.440 economist uh and chief investment officer at u m B, 0:19:51.640 --> 0:20:09.159 a bank with ten billion dollars un management. M This 0:20:09.320 --> 0:20:11.280 is the time in the show when we wring our 0:20:11.320 --> 0:20:15.640 hands and wonder whither Walmart. We announced a pretty good 0:20:15.800 --> 0:20:19.360 earnings report earlier today and shares were up and now 0:20:19.400 --> 0:20:24.440 they're down more than a percent here to Wax. Wax 0:20:24.720 --> 0:20:27.960 Retail with US is a Jennifer Gatasha's senior US food 0:20:28.040 --> 0:20:31.679 retail and mass Merchants analyst for Bloomberg Intelligence. Jennifer, what 0:20:31.800 --> 0:20:35.320 happened here? Why are people treating this as a negative report? Well, 0:20:35.359 --> 0:20:37.760 you know, it really was a solid quarter for Walmart. 0:20:37.800 --> 0:20:40.440 But I think the news that is out about in 0:20:40.480 --> 0:20:43.560 the deal between Kroger and Ocado is that is just 0:20:43.680 --> 0:20:46.640 reinforcing the idea that there's no clear winner in online 0:20:46.760 --> 0:20:49.760 commerce for grocery, especially UM, and that it's going to 0:20:49.800 --> 0:20:53.880 remain a very competitive landscape for the indeterminate future. Tell 0:20:53.920 --> 0:20:57.520 people about the Kroger deal, So yeah, what what this 0:20:57.680 --> 0:21:00.080 deal that Kroger and Occada have have have penned and 0:21:00.640 --> 0:21:05.040 is really about installing highly efficient automated warehouses that do 0:21:05.200 --> 0:21:09.439 picking of grocery online orders. UM assembles those orders very 0:21:09.520 --> 0:21:12.600 quickly and then UM is able to you know, achieve 0:21:12.760 --> 0:21:14.640 a lot of scale so that they can be delivered 0:21:14.680 --> 0:21:17.639 to people's homes in a very economical manner. UM. The 0:21:17.680 --> 0:21:20.600 biggest challenge with a with the home delivery for groceries 0:21:20.720 --> 0:21:23.240 is that it's it's the least profitable business model that 0:21:23.280 --> 0:21:26.600 companies can follow. So something that's highly efficient and highly 0:21:26.640 --> 0:21:30.119 automated really helps solve some of that problem, you know, Jennifer, 0:21:30.160 --> 0:21:32.280 I'm struck by the fact that Walmart reported earnings that 0:21:32.320 --> 0:21:37.600 included fairly good online sales. They purchased flip cart, uh, 0:21:37.640 --> 0:21:40.720 and they were penalized for it because people were saying, 0:21:40.720 --> 0:21:43.200 you're going outside your wheelhouse. But they showed pretty good 0:21:43.240 --> 0:21:46.320 growth internationally. Why are they getting punished if they do 0:21:46.359 --> 0:21:49.720 and punished if they don't. Well, it's one of those 0:21:49.760 --> 0:21:52.439 situations where you know, at this point, um, you know, 0:21:52.520 --> 0:21:55.520 Walmart is just going to stick true to their to 0:21:55.560 --> 0:21:57.720 their their plan for the year, which is really about 0:21:57.720 --> 0:22:01.120 optimizing their portfolio, making the or experience as good as 0:22:01.119 --> 0:22:03.520 it can um. And at this point it's very difficult 0:22:03.520 --> 0:22:06.440 to determine exactly what would make everybody happy, if there 0:22:06.520 --> 0:22:09.159 is even such a thing, um So, so really it's 0:22:09.160 --> 0:22:12.360 about staying the course, um. And they do expect that 0:22:12.440 --> 0:22:16.560 the online sales will be back up in around the 0:22:16.680 --> 0:22:19.960 entire year for for growth and the growth figureine And 0:22:20.119 --> 0:22:22.800 really that's the plan right now. Do we have any 0:22:22.840 --> 0:22:27.680 information that this ocado technology as used by Kroger in 0:22:27.720 --> 0:22:30.720