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Speaker 1: P and L Podcast. I'm Pim Fox. Along with my

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Speaker 1: co host Lisa Abramowitz. Each day we bring you the

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Speaker 1: the Bloomberg P and L Podcast on iTunes, SoundCloud and

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Speaker 1: at Bloomberg dot com. Earlier today, we found out that

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Speaker 1: sales have previously owned US homes climbed for the fifth

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Speaker 1: time in six months, to the highest level since two

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Speaker 1: thousand and seven. At the same time, we're seeing thirty

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Speaker 1: year mortgage rates starting to rise and some weakness emerging

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Speaker 1: in place like Miami and New York City. So what's

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Speaker 1: ahead for the home market. I want to bring in

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Speaker 1: Logan Modashami, Senior loan officer at AMC Lending Group, to

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Speaker 1: get up some broader perspective. Logan, when you look forward,

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Speaker 1: at what point will these higher mortgage rates start to

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Speaker 1: impede the progress in the housing market. So as of

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Speaker 1: this year, we've seen higher rates maybe uh slow down

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Speaker 1: the rate of growth, but as of now, nothing has

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Speaker 1: has changed the demand curve. I think what what people

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Speaker 1: missed sometimes is that in the ten year yeal sold

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Speaker 1: off just basically the same amount and last year existing

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Speaker 1: home sales for the cycle high with inventory at psycho lows,

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Speaker 1: and today's report we just hit another psychle high with

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Speaker 1: inventory low at demand is still rising, but overall demand

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Speaker 1: is still very socked because our demographic still in this

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Speaker 1: country or more for renting than it is for home buys.

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Speaker 1: Can you speak a little bit about today's report about

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Speaker 1: January existing home sales, they were up about three three

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Speaker 1: and a half percent. The selling rate is stronger than

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Speaker 1: the consensus estimates. They are looking for five point five

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Speaker 1: five million. But I thought even even more interesting is

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Speaker 1: this comparison where single family sales are up two and

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Speaker 1: a half percent, condos up eight percent. Uh, and um,

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Speaker 1: I'm wondering whether you could speak to those uh, those numbers.

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Speaker 1: Here's here's the thing, existing homesales. If you if you

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Speaker 1: listen to housing people, they tell you that existing home

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Speaker 1: sales can't grow because inventory is too over. That's not great.

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Speaker 1: But the biggest buyers homes in America to their millennials.

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Speaker 1: So first time homebuyers are growing, and naturally condos would

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Speaker 1: be one avenue that they would be buying, especially single women.

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Speaker 1: Single women buy homes twice the rate of the single men.

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Speaker 1: So if we get more and more first time home buyers,

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Speaker 1: you should see more and more first time home sales

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Speaker 1: being predicated to either the condo or the smaller single

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Speaker 1: family and residents. You said that we've seen. You mentioned

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Speaker 1: the cycle highs in home sales, and you see prices

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Speaker 1: generally rising at least on average, at least when you

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Speaker 1: look at the US across the board. But there are

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Speaker 1: some specific signs of weakness we've been looking at, for example,

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Speaker 1: the rental market UH for condos in New York City, Miami,

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Speaker 1: also Toronto. There's a lot of concern that prices are

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Speaker 1: getting ahead of themselves. Do you think that those fears,

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Speaker 1: those specific kind of location specific fears are unfounded or

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Speaker 1: do you think that these could be UH sore spots

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Speaker 1: in the U. I would tell you that real home

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Speaker 1: prices are nowhere close to where they were once you

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Speaker 1: adjust home prices to inflation, we're nowhere close to the

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Speaker 1: housing bubble peaks. So do you take real home prices

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Speaker 1: with real wages growing and interest rates this slow. This

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Speaker 1: is a factor why home mind is still continuing to go.

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Speaker 1: I think people make the mistakes of using nominal home

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Speaker 1: prices and real wages when they should be looking at

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Speaker 1: real wages and real home prices. And this is why

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Speaker 1: national home sales can still grow even though nominal prices

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Speaker 1: are still at high Now, we do have certain spots

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Speaker 1: the luxury market in New York in the home building broom,

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Speaker 1: in terms of multi family growth has cooled down. It's

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Speaker 1: it's actually negative in so that rate of growth has

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Speaker 1: cooled down. They're going to have more supply come on

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Speaker 1: the market. The demographics for a rent in a few

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Speaker 1: years is going to turn to home mind, So there's

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Speaker 1: gonna be a natural dislocation of supply and demand coming

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Speaker 1: it soon. But I don't see a major concern because,

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Speaker 1: for example, the home buyers we have now and the

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Speaker 1: best in the cycles, the best I've ever seen, and

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Speaker 1: they can afford to buy homes. But housing inflation is

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Speaker 1: a real issue, and it impacts the marginal home buyer

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Speaker 1: who's gonna renter, who doesn't have the income or liquid

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Speaker 1: assets to purchase at home, and that's been the case

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Speaker 1: for twenty years now. The housing bubble f facilitated some

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Speaker 1: of that demand with exotic debt structures. We don't have

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Speaker 1: that anymore, so this is one of the reasons why

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Speaker 1: we don't see low FCO score Americans buy homes anymore,

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Speaker 1: which I don't think it's ever going to come back

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Speaker 1: because they don't have the capacity to buy home. So

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Speaker 1: the how the inflation story is real, but it's not

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Speaker 1: as bad as the nominal headlines show. Logan. I wonder

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Speaker 1: if there's an element that we may be missing having

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Speaker 1: to do with people who are self employed, because you

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Speaker 1: want to claim right as little income as possible if

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Speaker 1: you're self employed, but then that bumps up against the

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Speaker 1: actual very strict guidelines when it comes to filling out

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Speaker 1: the application for a mortgage. I'm wondering if you could

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Speaker 1: speak a little bit about that changing demographic in terms

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Speaker 1: of the workplace and how that plays out in the

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Speaker 1: home market. Well, self employed Americans, I believe we're less

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Speaker 1: than fifteen million UM, so the ones that are really

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Speaker 1: doing good you know right now you really only needed

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Speaker 1: one year tax or trying to show the income um.

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Speaker 1: But in general, yet the stated income loan was designed

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Speaker 1: to allow self employed people to buy homes that had

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Speaker 1: the cash a little but show its little as possible

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Speaker 1: on their on their tax returns. So you know, you

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Speaker 1: can make a valid case that some home buyers could

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Speaker 1: be buying homes but they just don't want to pay

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Speaker 1: the taxes. But then again, I just I don't think

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Speaker 1: it's scale that's big enough to really move the markets,

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Speaker 1: because some of the really successful self employed people still

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Speaker 1: have still can show enough income to buy homes. And

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Speaker 1: being a lender here in southern California for thirty years,

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Speaker 1: we've had many, many many of our clients or self

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Speaker 1: employed people, so that is a factor into it. But

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Speaker 1: I think it's very hard pressed to ever bring back

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Speaker 1: stated income loans under the Consumer Financial Protection because guidelines

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Speaker 1: or showing income. So look, and there was a story

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Speaker 1: on the Bloomberg this morning talking about why Trump's immigration

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Speaker 1: crackdown could cause a dent in US home prices. Do

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Speaker 1: you believe that no, because we're that would it's just

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Speaker 1: not enough scale. Housing is a home practice or function

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Speaker 1: of inventory. Inventory in the last twenty years have only

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Speaker 1: been about six months. From two thousand six to two

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Speaker 1: thousand eleven. That was the housing bubble pent up uh

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Speaker 1: staifth demand, and then the burst happened. Outside of that.

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Speaker 1: You know, it's very hard for US as a country

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Speaker 1: to get over six months inventories because I think it's

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Speaker 1: harder to move up so in scale four and buyers

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Speaker 1: out of six million homes or under three thousand UH

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Speaker 1: in certain cities where you have educated borners coming in

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Speaker 1: and working, I just don't think there's enough for them

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Speaker 1: to touch the entire general housing market in America. I

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Speaker 1: want to thank you very much for spending time with us.

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Speaker 1: Logan Matahni is the senior loan officer at a MC

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Speaker 1: lending group. It is expensive out there. Valuations of industrial

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Speaker 1: companies are so high that it may be thwarting any

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Speaker 1: merger or acquisition strategy. Here to tell us more as

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Speaker 1: Joel Levington. He is our senior credit analyst for Bloomberg Intelligence,

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Speaker 1: and he joins us now, great to have you with us.

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Speaker 1: As always, Joel tell us a little bit about the

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Speaker 1: new report, Spin the Wheel, Make a Deal. Prices high

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Speaker 1: in cap goods I'm just telling you that does not rhyme.

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Speaker 1: But I guess credit analysts you don't have to rhyme

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Speaker 1: at all. But go ahead, tell us spin the wheel,

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Speaker 1: make a deal. Well, you should have got when strike

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Speaker 1: op pose buy backs are in vogue. Very good, all right,

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Speaker 1: you get that gold full mark star. Um. So what's

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Speaker 1: the situation and what kind of companies are we talking about?

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Speaker 1: G E. Danna, Her, Honeywell, Caterpillar and so on. Yes,

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Speaker 1: we're talking about your your manufacturing sector, in part because

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Speaker 1: of what's happened with that with Donald Trump becoming president,

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Speaker 1: there has been a huge run uh stock prices in

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Speaker 1: the industrial sector to the point where multiples for acquisitions

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Speaker 1: are at the highest that that we can find on

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Speaker 1: the terminal, about thirteen point seven times. And the basic

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Speaker 1: math tells you that, at least from the credit perspective,

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Speaker 1: it's dilutive to leverage leverage averages about two times. So

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Speaker 1: if you're buying at thirteen point seven with debt financing,

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Speaker 1: which is what the averages are, it's weaker for credit

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Speaker 1: to go that route then to go to share a

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Speaker 1: purchase route. All right, Joel, I am looking at you

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Speaker 1: in a whole new light. Now you look like a

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Speaker 1: different person. You're I always knew of you as a

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Speaker 1: credit analyst trying to you know, keep companies truded their

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Speaker 1: uh corporate corporate credit structure. And yet here you are

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Speaker 1: advocating for companies to buy back their shares. How does

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Speaker 1: this work? Because aren't credit guys against this. Isn't that

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Speaker 1: sort of a uh diluting of potential profits to pay

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Speaker 1: back uh their debt? I mean, isn't this a problem?

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Speaker 1: This has been going on a long time, right well,

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Speaker 1: knowing how you looked at me before, um um, please

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Speaker 1: that you're looking at me in a different light right now.

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Speaker 1: But but what I would say is that it really

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Speaker 1: is a case of what's less worse. With relatively cheap

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Speaker 1: financing still out there, there are very very few companies

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Speaker 1: in the industrial sector that are looking to lower leverage.

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Speaker 1: So it becomes what's a game of what is less

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Speaker 1: punitive the share purchase, the share purchase route, or the

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Speaker 1: acquisition route, And it tends to be the share purchase

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Speaker 1: route would make more sense or the less worse case

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Speaker 1: for bottle holders. Could we just go through a little

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Speaker 1: of the detail because I want to see that. Okay,

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Speaker 1: you're talking about the valuation of a company. So let's

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Speaker 1: just do an imaginary scenario right where you've got maybe

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Speaker 1: Honeywell or Ge. They want to go out and buy

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Speaker 1: a company, and the valuation is as you say, thirteen

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Speaker 1: point seven, could we just say fourteen, so fourteen times

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Speaker 1: and um, then they're deciding, well, maybe we shouldn't buy

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Speaker 1: the company, Maybe we should give this money back to

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Speaker 1: shareholders in the form of an increased dividend or buy

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Speaker 1: back shares. Buying a company, they've got to do some

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Speaker 1: analysis that says that the internal rate of return for

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Speaker 1: doing such is going to be better than whatever the

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Speaker 1: alternative is. Correct at your absolutely right, pim and there

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Speaker 1: are there are a few cases. Uh. An example might

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Speaker 1: be Emerson Electrics purchase of pent Air's valves and control business,

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Speaker 1: where they've identify ten percent of sales as cost saves.

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Speaker 1: So that's a very unique case in our in our area.

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Speaker 1: But I do think that valves and control area is

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Speaker 1: a a is a place where you can see a

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Speaker 1: lot more consolidation happened. It's also one where try and

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Speaker 1: had pushed pent Air to look to as a as

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Speaker 1: being a consolidator before they wound up selling out that

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Speaker 1: was Nelson Peltz's a tryan now, okay, But so just

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Speaker 1: let's take this one one step further. What is connected

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Speaker 1: to the compensation of chief executives at major corporations? Well,

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Speaker 1: you know, that's a very case by case. I was

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Speaker 1: going to venture to say the stock price. The stock

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Speaker 1: price is always one, and if you buy back shares,

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Speaker 1: what happens typically to the stock price. Well that that

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Speaker 1: isn't necessarily going to be raised the stock price. But

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Speaker 1: what I would say is that a lot are and

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Speaker 1: stated on EPs growth, and you can get more bang

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Speaker 1: for your buck as a CFO or CEO re purchasing

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Speaker 1: your shares to increase your EPs as opposed to doing

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Speaker 1: the buy backs excuse me, as opposed to doing acquisitions

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Speaker 1: because acquisition multiples are so high makes the EPs look good.

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Speaker 1: Exactly as we talk, I'm thinking about those private equity

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Speaker 1: companies Apollo, Blackstone, Carlyle. They've been collecting, amassing nearly a

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Speaker 1: trillion dollars of dry powder on their books of money

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Speaker 1: that they're looking to spend on something on companies. Ostensibly. Uh,

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Speaker 1: does this mean that it's going to be very challenging

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Speaker 1: for them to spend this? I mean this sort of

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Speaker 1: raises a question of how effectively they can deploy that.

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Speaker 1: It certainly does, and it certainly dictates what sectors that

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Speaker 1: they could participate in. In industrials where you're looking at

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Speaker 1: GDP growth plus or minus a percentage for your typical business,

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Speaker 1: if you're leveraged, if you're buying something at fourteen times UH,

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Speaker 1: if you're doing a recap of a company, maybe you

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Speaker 1: can leverage it six or seven times, which means that

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Speaker 1: your equity component is gonna be another seven or eight times.

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Speaker 1: And the basic math says like that's not really going

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Speaker 1: to work for good returns. And so a sector like

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Speaker 1: mind where the growth is low tells you that that's

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Speaker 1: not a place that they can go. Maybe something like

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Speaker 1: tech or healthcare, where the growth rates are higher, they

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Speaker 1: would be able to get a better return over time.

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Speaker 1: So you don't expect any private equity involvement in the

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Speaker 1: industrial space for a while. Well, you can never say never,

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Speaker 1: but if you're trying to make the math work, it

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Speaker 1: would be very hard to do it at these levels.

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Speaker 1: Thanks very much for telling us all about this, Joel Levington.

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Speaker 1: Here's our senior credit analyst Bloomberg Intelligence really gives you

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Speaker 1: a different perspective on what's going on, doesn't it. Well.

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Speaker 1: It also makes me understand a little bit better why

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Speaker 1: there have been so many shared buy backs, even companies

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Speaker 1: that do raise debt to lock in low interest rates

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Speaker 1: for a longer period of time and then use that

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Speaker 1: to buy back shares. You know. The original this sort

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Speaker 1: of knee jerk reaction is this is sort of making

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Speaker 1: a bad situation for the credit investors. But perhaps this

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Speaker 1: is the lesser of a number of evils. Very interesting,

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Speaker 1: Thank you so much to it will be keeping a

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Speaker 1: track of that. P and L is brought to you

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Speaker 1: Custom shirts made Smarter. So what's cooking across some America?

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Speaker 1: At McDonald's. Well, it might be a chocolate e mint

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Speaker 1: it maybe some increases or eggs. Indeed, I was going

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Speaker 1: to go to the drinks thing, because the big thing

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Speaker 1: about McDonald's, which just reported its results, is that it

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Speaker 1: is going to promote drinks by lowering the cost. And

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Speaker 1: here to tell us more, as Leslie Patton, our consumer

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Speaker 1: reporter for Bloomberg News, here to tell us all about

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Speaker 1: Mickey D's. All right, so Leslie, tell us about what

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Speaker 1: the company's doing, why they're doing it, and do you

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Speaker 1: think it's gonna work. So McDonald's, starting in April, they're

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Speaker 1: going to be promoting dollar sodas any size and then

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Speaker 1: two dollars small Mick cafe drinks UM across the US.

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Speaker 1: This is the first time they've done this on a

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Speaker 1: national basis. They've done it here and there regionally, so

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Speaker 1: you may have seen it at your local McDonald's. Especially

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Speaker 1: the dollar SODA's I think is a pretty popular thing.

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Speaker 1: But I think they're just trying to get more people

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Speaker 1: in the door, maybe during some of those off hours,

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Speaker 1: like in the afternoon when you need a coffee pick

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Speaker 1: me up, um, you can get one for only two

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Speaker 1: bucks at McDonald's and then also it may be a

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Speaker 1: sign that some of the food deflation that we've seen

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Speaker 1: in the past couple of years maybe starting to wear

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Speaker 1: off a little bit, especially kind of in the back

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Speaker 1: half of this year. So McDonald's is going to promote

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Speaker 1: drinks instead of food to kind of help the bottom

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Speaker 1: line a little bit. Okay, So that's interesting that you

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Speaker 1: say that, because when I read this, I thought to myself,

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Speaker 1: you know, everyone's talking about inflation and the reflationary trade,

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Speaker 1: and then you hear about McDonald's cutting their prices, and

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Speaker 1: that kind of speaks to an opposite narrative, but you're

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Speaker 1: saying it fits in. It just sort of shows how

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Speaker 1: they're trying to get an edge in a place where

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Speaker 1: to be less affected by inflation. Is that correct? Yeah,

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Speaker 1: that's right. You know, it's a little nuanced because they're

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Speaker 1: doing drinks instead of food this time, because drinks are

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Speaker 1: super high margin for restaurants. They're one of the highest

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Speaker 1: margin things on the menu, much higher than food. So

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Speaker 1: it makes sense that they would be promoting the beverages

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Speaker 1: in a time when maybe we're starting to see food

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Speaker 1: inflation tick up a little bit. So does the fact

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Speaker 1: that McDonald's is taking this step mean that the boost

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Speaker 1: that they got from introducing All Day Breakfast is wearing off.

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Speaker 1: You know. I think we saw that a little bit

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Speaker 1: when they reported uh fourth quarter earnings that was a

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Speaker 1: little bit of a concern, a little bit of slowdown

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Speaker 1: in the US comps. So perhaps some of that hype

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Speaker 1: around All Day Breakfast is wearing off and they're going

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Speaker 1: to have to find something a little bit new, something,

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Speaker 1: something exciting to keep customers coming in. I wondering if

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Speaker 1: you could describe for us the state of the strategic

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Speaker 1: plan as it relates to the franchises and also the

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Speaker 1: operations in China. Um. Sure so so for the franchises

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Speaker 1: UM here in the US. I know McDonald's and globally

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Speaker 1: McDonald's has been selling off their company owned stores, moving

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Speaker 1: to that asset light models what they like to call

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Speaker 1: it in the industry. So that's something we're seeing more

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Speaker 1: and more of, and mc donalds is continuing on that path.

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Speaker 1: Other restaurants are doing the same thing. So really no

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Speaker 1: surprise there, UM nothing super new. I don't think we've

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Speaker 1: heard too much about that lately. And then the same

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Speaker 1: with China and some of its other Asian businesses selling

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Speaker 1: off the rights to own and manage those stores is

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Speaker 1: something they've been working on for a while now too.

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Speaker 1: So how much can we glean about the broader restaurant

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Speaker 1: industry or sort of lower cost restaurant industry from McDonald's results.

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Speaker 1: We've been hearing about the sort of restaurant recession and

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Speaker 1: uh seeing some of the bad results that have come

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Speaker 1: out of places like Chipotle, UH and others. Does McDonald's

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Speaker 1: serve as a sort of harbinger of things to come

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Speaker 1: for others or is it really an idiosyncratic story. You know,

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Speaker 1: it's a it's a little hard to say. I think

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Speaker 1: in general you could take McDonald's and say, yes, this

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Speaker 1: applies to the rest of the industry. The rest of

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Speaker 1: the industry is seeing what McDonald's is seeing in terms

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Speaker 1: of maybe food inflation is going to start um picking

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Speaker 1: back up, or we're going to see some food inflation

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Speaker 1: in the back half of the team. But at the

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Speaker 1: same time, McDonald's is very much its own beast. It's

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Speaker 1: um you know, it's known for fast food, convenience value,

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Speaker 1: that sort of thing. So if we if we try

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Speaker 1: to take that to like a Panera or Chipotle or

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Speaker 1: the casual dining industry and may not necessarily translate exactly

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Speaker 1: um as to what's going on at this at the

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Speaker 1: staff food company. Let's see who they want who do

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Speaker 1: they really want to take take some share from? I mean,

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Speaker 1: for example, when you cut the cost of some of

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Speaker 1: these sugary drinks, particularly coffee based, that means that Starbucks

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Speaker 1: might be losing some sales or Am I wrong? No,

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Speaker 1: it's possible. I think probably there's a little bit of

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Speaker 1: customer overlaps there, But for the most part, I think

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Speaker 1: McDonald's and Starbucks probably have some different customers. Maybe they

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Speaker 1: could steal a little share from dunkin Donuts. That's maybe

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Speaker 1: who they have a little more overlap withst in terms

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Speaker 1: of the coffees and beverages that sort of thing. Um.

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Speaker 1: But really, I mean McDonald's and the rest of the industry,

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Speaker 1: they're just happy to take share from whoever they can,

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Speaker 1: from from the mom and pop coffee shop, from the

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Speaker 1: regional player, to from from anyone. Leslie Patton, thank you

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Speaker 1: so much. Really a fascinating look at sort of how

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Speaker 1: some of the restaurant companies are dealing with inflation in

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Speaker 1: some areas but perhaps not others. Thanks for listening to

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Speaker 1: the Bloomberg P and L Podcast. You can subscribe and

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Speaker 1: listen to interviews at iTunes, SoundCloud, or whatever podcast platform

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Speaker 1: you prefer. I'm pim Fox. I'm out there on Twitter

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Speaker 1: at pim Fox. I'm out there on Twitter at Lisa Abramo.

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Speaker 1: It's one before the podcast. You can always catch us

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Speaker 1: worldwide on Bloomberg Radio. P and L is brought to

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