Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm Pim Fox.
Speaker 1: Along with my co host Lisa Abramowitz. Each day we
Speaker 1: bring you the most important, noteworthy, and useful interviews for
Speaker 1: you and your money, whether you're at the grocery store
Speaker 1: or the trading floor. Find the Bloomberg p m L
Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Yes, tesla.
Speaker 1: Great example for our next topic, which is oil and gasoline.
Speaker 1: And here to help us understand more about what's going
Speaker 1: on is Steven Shork. He is the president of the
Speaker 1: Short Group. Stephen always a pleasure. Happy fourth of July
Speaker 1: to you. Uh, let's start. Where do you want to start?
Speaker 1: We could do gasoline prices comparing those to two thousand five,
Speaker 1: or maybe you want to talk about natural gas and kutar.
Speaker 1: Where would you like to begin? Well, I think let's
Speaker 1: start him. What's near and dear to everyone's heart listening,
Speaker 1: and that is gasolene prices. Of course, of course, gasolene
Speaker 1: prices are a function of crude oil prices, So every
Speaker 1: one dollar move in the barrel of crude oil, you
Speaker 1: typically get a lag of about two or three weeks.
Speaker 1: Did knock on to guess lene on the pump is
Speaker 1: usually between two and two and a half cents, So
Speaker 1: given where guest lane prices war when crude prices began
Speaker 1: to tank back right around Memorial Day, we're looking at
Speaker 1: probably another ten cent fall in the price of gasoline.
Speaker 1: So on the triple A survey, that would get guest
Speaker 1: line down to about two ten cents, which is more
Speaker 1: or less the bottom of what we saw last year.
Speaker 1: So from a consumer standpoint, the gasolene prices through the
Speaker 1: remainder of the holiday season this summer looks very favorable.
Speaker 1: So what industries or businesses that depend on consumer spending
Speaker 1: with that spending than translate into better business for those
Speaker 1: lines of sectors, or is there something else that you
Speaker 1: can point us to. Well, When we had the sharp
Speaker 1: sell off in oil prices that began back at the
Speaker 1: end of the concern I had was that it wasn't
Speaker 1: just in the oil markets. It was in the steel
Speaker 1: wea bar market, it was in the lumber market, it
Speaker 1: was in all of the heavy industrial metal markets. So
Speaker 1: clearly the sell off in oil was more endemic of
Speaker 1: what was happening in the general border commodity. Given that
Speaker 1: industrial metals are are clear telltale of potential economic growth
Speaker 1: this time around. The industrial metals complex has had a
Speaker 1: bump from the the the current administration. When we look
Speaker 1: at the charts of what these prices have been doing
Speaker 1: since November, you had a big spike, then you had
Speaker 1: a corrective pull back, but prices have been holding steady.
Speaker 1: And I take that as a positive sign given the
Speaker 1: potential of the demand for for these industrial commodities. If when, when,
Speaker 1: and if we ever see some sort of infrastructure plan
Speaker 1: from this administration. Um So, oil prices have decoupled, and
Speaker 1: the decoupled for a very uh you know, basic good reason,
Speaker 1: and that is essentially, we are producing a lot of oil.
Speaker 1: And this is where Wall Street really made a core
Speaker 1: decision back in November and December in the realm of
Speaker 1: the OPEC decision. That is to say, Wall Street was
Speaker 1: putting too much emphasis on OPEC dwindling power to dictate
Speaker 1: prices and paid little heed to the growing fact that
Speaker 1: the United States in this current environment is now the
Speaker 1: globe's swing producer when it comes to oil. So when
Speaker 1: we look at US production at it over two year high,
Speaker 1: the oil recount up hundred and when we look at
Speaker 1: the hedges produces are well hedged. Also when we look
Speaker 1: at the produces, what's really interesting PIM is when we
Speaker 1: disaggregate the data, we can surmise that the oil producer,
Speaker 1: the only person in the world who must sell oil,
Speaker 1: likes to sell oil that is hedge forward production when
Speaker 1: spot oil prices are between forty seven dollars and fifty
Speaker 1: four dollars a barrel. So I don't think I'm going
Speaker 1: out on the limb to suggest that is the top
Speaker 1: of the market. Now, what is the other interesting part
Speaker 1: of that PIM is when we look at the other side,
Speaker 1: the guys who must sell oil excuse, we must buy oil,
Speaker 1: and there's only one person in the world who has
Speaker 1: to buy oil, and that is an oil refinery. When
Speaker 1: we look at their hedging activity, they've been rather quiet
Speaker 1: over the past year and a half. So even though
Speaker 1: we've had oil prices yell yelling between the mid forties
Speaker 1: mid fifties, the oil refinery, again I emphasized, the only
Speaker 1: person who has to buy kudol doesn't see a need
Speaker 1: to hedge oil prices at these levels. So clearly this
Speaker 1: is telling us that this continues to be a buyer's
Speaker 1: market in the oil realm and now today is effectively
Speaker 1: the first trading day of the third quarter, first trading
Speaker 1: day of the second half of the year. What does
Speaker 1: that mean, Well, it means that kudal demand, which has
Speaker 1: and record strong here due the start of the summer
Speaker 1: driving season, that's going to peak rather soon and by
Speaker 1: the end of this quarter, we're going to take about
Speaker 1: a million barrels of demand out of the market as
Speaker 1: we go into the fall and we we we drive
Speaker 1: fewer miles, so that has to be concerned if you
Speaker 1: are a crude bullish investor. That's a great uh, sort
Speaker 1: of summation of what is going on. And uh, Steve
Speaker 1: and I maybe just give you, you know, another forty
Speaker 1: seconds or so. So what should people be looking for
Speaker 1: right now? What's the most important thing? You know, they're
Speaker 1: listening to you, they're hearing this. What's the next you know,
Speaker 1: guide post along the way? Yeah, well absolutely, the next
Speaker 1: guide post is, well, we've had a we had a
Speaker 1: nice corrective rebound in oil prices going into last week
Speaker 1: and that was a function of the market that was
Speaker 1: that was really over sold, so wall speak to risk
Speaker 1: appetite for lower oil prices had really ballooned over the
Speaker 1: past two months, a lot of that money has been
Speaker 1: exercised at a lot of profit was taking and now
Speaker 1: that we're into the second half, we probably are lower.
Speaker 1: Now I put I need to put the caveat out there,
Speaker 1: PIM that everything I've stated is already well known in
Speaker 1: the market, So that means if it's well known, that
Speaker 1: means it is priced in. So that said, this is
Speaker 1: a very telling first day of the second half of
Speaker 1: the year because we're down at dollars six five. As
Speaker 1: I look at my Bloomberg that's a very barished tell tale.
Speaker 1: We gotta, we gotta. That was perfect. I want to
Speaker 1: thank you very much as always, Stephen Shorky is the
Speaker 1: president of the Short Group, giving us a detailed information
Speaker 1: about the oil and energy markets. Well, we turn our
Speaker 1: attention now to China. But in order to help us
Speaker 1: understand what's going on, I want to bring in Eric Valcunas,
Speaker 1: our senior et F analyst for Bloomberg Intelligence. Eric, a
Speaker 1: pleasure always to have you. Maybe you could begin by
Speaker 1: just know I'm going to put you in a tough
Speaker 1: spot here because explain what has happened recently to markets
Speaker 1: in Asia and Uh, I'm referring obviously to the launch
Speaker 1: of a missile by the North Koreans, and we saw
Speaker 1: a tumble of about three quarters of a percent in
Speaker 1: the Japanese stock market yesterday when most Americans were on holiday. Yeah. Look,
Speaker 1: I mean this is part of international investing and in
Speaker 1: particular emerging markets. UM. You know, there's a lot of opportunity,
Speaker 1: but there's also a lot of risk. In geopolitical risk
Speaker 1: is part of that risk. UM. But on the flip side,
Speaker 1: you know, you look at some of the countries you
Speaker 1: just mentioned. In particular, we focused on China and our
Speaker 1: last research report, especially mainland shares. They are basically have
Speaker 1: no correlation to the US market. So while they do
Speaker 1: have these times where they go down and the US
Speaker 1: could go up or um. There that break of link
Speaker 1: of correlation is something it's valuable as a portfolio diversifier, UM,
Speaker 1: and something that's underrated, especially again when it comes to
Speaker 1: the mainland China shares, which investors can now get pretty
Speaker 1: easily through E T S. I want you to just
Speaker 1: compose a little UH sort of offering in your head,
Speaker 1: you know, to explain what has changed in the Chinese
Speaker 1: market to allow UH this new participation by non Chinese participants.
Speaker 1: Yeah sure, I call it the Great Wall of isolation,
Speaker 1: and in China cross the board. That wall is crumbling.
Speaker 1: And while China has taken some steps to open up
Speaker 1: its a share market by issuing quota having a connect
Speaker 1: between Hong Kong and China, it's really M s C
Speaker 1: I who's come around a lot. M s c I
Speaker 1: recently has said they're gonna allow two stocks that are
Speaker 1: mainly in China shares into their Emerging Markets index. This
Speaker 1: has covered pretty heavily two weeks ago. What we did
Speaker 1: is we looked at E t F that most hold
Speaker 1: those two twenty two stocks because there's so much money
Speaker 1: benchmarked to the M s C Emerging Markets and exit
Speaker 1: that once that they reach full inclusion in about five years,
Speaker 1: that's gonna equal about four hundred billion dollars in by
Speaker 1: orders of these two d and twenty two stocks, and
Speaker 1: the ETS that holds the most of those on a
Speaker 1: percentage basis is a s hr UM that holds seventy
Speaker 1: percent on a weighted basis of those two two stocks,
Speaker 1: K B A. There's a few other ones. We have
Speaker 1: a diagram on B I, E t F, but basically
Speaker 1: a lot of the r et F s are a
Speaker 1: great way to get ahead of that money. However, you
Speaker 1: do have to accept some volatility, like some of the
Speaker 1: things you just mentioned um and a lot of people
Speaker 1: are a little skittish because the a share market um
Speaker 1: in went gangbusters up and down. It was a sort
Speaker 1: of a mini spike and crash, and I think a
Speaker 1: lot of people are a little scared. But again, this
Speaker 1: is a long term play to try to get ahead
Speaker 1: of all the all those uh foreign investment investment dollars
Speaker 1: that are headed towards mainland China. I'm wondering if you
Speaker 1: could just repeat that specific part of what you were describing,
Speaker 1: because this is something that is already being set in motion.
Speaker 1: We just have not seen the effects and necessarily really
Speaker 1: even seen the actual activity of the investment. That's right.
Speaker 1: I mean you can almost imagine that the China share
Speaker 1: markets a new country, and it's like the MSc Emerging
Speaker 1: Markets just identified it as an emerging market, so you're
Speaker 1: basically and it's such a big country, um it's seven
Speaker 1: trillion dollar market that it will ultimately be seventeen percent
Speaker 1: of the Emerging Markets Index, which along with the offshore shares,
Speaker 1: would make China about of that index. That's how big
Speaker 1: China is, and so what people are the reason they're
Speaker 1: noticing and excited about this is that that's seventent of
Speaker 1: the emerging markets. There's two trillion benchmark to it. So
Speaker 1: um though, that money will go and buy those stocks
Speaker 1: because people are there's passive um ets and inexpens the
Speaker 1: track MSc Emerging Markets, but it's also active managers who
Speaker 1: are trying to beat it. So order to beat the
Speaker 1: Emerging Markets Index, you're gonna have to buy some A
Speaker 1: shares to make sure you don't lag. And so that's
Speaker 1: why this opening up, especially with m c I is
Speaker 1: such a big deal in terms of opening up that market.
Speaker 1: Um and there's other countries that might be promoted, like
Speaker 1: Taiwan and South Korea. So ultimately you could be looking
Speaker 1: at an Emerging Markets index that's China in five to
Speaker 1: seven years. Wow, that's something to take in. So all
Speaker 1: right now, so give us the detail then on the
Speaker 1: differences between the various exchange traded funds, because you know,
Speaker 1: there are a lot of acronyms and and a lot
Speaker 1: of fancy uh sort of names to these things, and
Speaker 1: you you actually take a look inside yeah, So China
Speaker 1: is so complicated. I call it's like an alphabet suit
Speaker 1: because because of the regulation, there's all these different share
Speaker 1: classes A shares, eight shares, red chips. I'll make it
Speaker 1: easy if an investor just wants to make a play
Speaker 1: on that foreign investment that's coming over. A s HR
Speaker 1: are the Deutsche Bank A share e TF is probably
Speaker 1: the best bet. K B A, which is the crane
Speaker 1: shares A share E t F would also work. Well,
Speaker 1: those are they already own those two two stocks. For
Speaker 1: investors who want, say, uh, like a wide a diverse
Speaker 1: China E t F that includes A shares, there's not
Speaker 1: that many. You sort of have to pick your your
Speaker 1: share class, and that's why it's difficult. So a lot
Speaker 1: of people might use m CHI m c h I,
Speaker 1: which holds every other share class, in combination with a
Speaker 1: s HR, which is a shares. There's one that tracks
Speaker 1: all of them with the ticker c N. Doesn't have
Speaker 1: a lot of assets yet, but that gives you everything
Speaker 1: in one shot. Alternatively, if you're looking for an emerging
Speaker 1: markets index or e t F, there's one out there
Speaker 1: that's designed already to be like where M s C
Speaker 1: I will be in those five to seven years, it's
Speaker 1: already China and that's the ticker on that KEMP. It
Speaker 1: was specifically designed look like k E m P the
Speaker 1: Crane Shares emerging market, and it was designed to look
Speaker 1: like what MSCI emerging markets will look like in seven years.
Speaker 1: So that's sort of skating to where the puck will be.
Speaker 1: I gotta say that's a really helpful guide that you've provided, Eric,
Speaker 1: Thank you. The composition of these various e t fsh
Speaker 1: and their volume of trading will sometimes well, let's just say,
Speaker 1: you'll be in a in conflict. Where do you see
Speaker 1: the most liquidity for these e t f s. Who's
Speaker 1: going to be the most liquid, who's on the most platforms,
Speaker 1: and who's going to be able to take this and
Speaker 1: run with it. Yeah, So for a shares E T S,
Speaker 1: a s HR is by far the most liquid distinct trade.
Speaker 1: It has four million dollars, which isn't a ton, but
Speaker 1: it's liquid enough you could probably just put in a
Speaker 1: market order and be fine. Just to let you know,
Speaker 1: the current volume is a hundred and thirty eight thousand shares. Yeah,
Speaker 1: I mean that's that spreads one or two cents and
Speaker 1: correct it's liquid enough, it's not spy no and no
Speaker 1: and and you know, no leverage, no swap based, nothing
Speaker 1: like that. This literally tracks China shares. I am shocked
Speaker 1: more people aren't buying the China share market again. It's
Speaker 1: like they discovered a new country that has seven trillion
Speaker 1: dollars worth of market cap and nobody owns it um
Speaker 1: but ultimately people are going to own it. So it's
Speaker 1: a way to get ahead of it. Like I said,
Speaker 1: China A shares are largely you know, only two percent
Speaker 1: of that market is four and owned. So these there's
Speaker 1: a couple a share ets that do track those those stocks,
Speaker 1: and a s HR is the most liquid one of
Speaker 1: the group, and it's the it's the one that has
Speaker 1: the most waiting overlap with the foreign investment that's coming in. Uh,
Speaker 1: those two stocks that will ultimately be in the M
Speaker 1: s c I emerging markets. Well, I gotta say, this
Speaker 1: is wonderful for you, for us to have you tell
Speaker 1: us all this. Eric Vaucina, senior et F analyst for
Speaker 1: Bloomberg Intelligence. He knows everything about the E t F market.
Speaker 1: You know, one of the things to always focus on
Speaker 1: the strategies that money managers employ and uh, I'm looking
Speaker 1: at things such as low debt with strong cash flow,
Speaker 1: low price to earnings ratio, multi caap, maybe with a
Speaker 1: small to MidCap focus, and also the idea of trying
Speaker 1: to dominate a niche in the market that has a
Speaker 1: high barrier to entry. And here to tell us a
Speaker 1: little bit more about these ideas in the strategy is
Speaker 1: George Young. He is a partner and portfolio manager at
Speaker 1: a Villary Funds and he joins us on the phone.
Speaker 1: Greg George, great to have you with us, Thanks for
Speaker 1: being here and belated happy fourth of July to you.
Speaker 1: Thank you very much, glad to be here. All right,
Speaker 1: let's start off. I want to get this idea looking
Speaker 1: at your your strategy because I know that you've got
Speaker 1: the Villary Equity Fund v l e q X and
Speaker 1: this is solely focused on equities and it emphasize this
Speaker 1: is the potential in small and mid sized companies. What
Speaker 1: are you some of your criterias and maybe just give
Speaker 1: us an example, sure be glad to do that is
Speaker 1: something that has a low pe ratio, something that has
Speaker 1: a moat built around it, somewhat unassailable, and that's either
Speaker 1: by patents or some sort of service that they're able
Speaker 1: to provide that others aren't able to do. So. A
Speaker 1: couple of examples of that. One would be a software
Speaker 1: company epics UM that is a MidCap company. Their insurance software.
Speaker 1: So if you think about it right now, Lloyd's London
Speaker 1: is an example, is still paper based. A lot of
Speaker 1: criteria for meeting insurance and analyzing insurance risks are done
Speaker 1: by paper, by people meeting and deciding what to do.
Speaker 1: All that can be digitized, it can be stored properly
Speaker 1: and it's something that can be analyzed on a more
Speaker 1: efficient basis. That's where edex comes into play. They link
Speaker 1: brokers and agents to try and assess risk. They've got
Speaker 1: eighty percent recurring revenue. That's very important in our world
Speaker 1: because you want some predictability in any investment you're gonna make.
Speaker 1: How did how did you find epics and have you
Speaker 1: visited them? In John's Creek, Georgia. We've met with management before.
Speaker 1: They've got a CEO that owns ten percent of the company.
Speaker 1: That's very important to us that we have board and
Speaker 1: management who are engaged. Robin Robin exactly exactly. Uh. He
Speaker 1: takes a very strong interest in what's going on in
Speaker 1: what is his company? Even though it's a publicly owned company,
Speaker 1: he founded it, so he takes it very personally. That's
Speaker 1: exactly want. We want fellow investors to be investing alongside
Speaker 1: of us, and we want to engage management and board members.
Speaker 1: How did you find Evis Was that a screening process?
Speaker 1: Was that a personal effort on the part of one
Speaker 1: of your analysts or colleagues. Yes, good question. We depend
Speaker 1: on analysts to introduce us to different ideas and then
Speaker 1: we follow through. We worked with a number of analysts
Speaker 1: and brokers for over twenty five years, so they know
Speaker 1: the type of companies it we like and they are
Speaker 1: very focused on the type of companies of fitting into
Speaker 1: our portfolios. They know we want investments for a long term,
Speaker 1: stocks that we can hold for three, five, ten plus
Speaker 1: years and our turnover reflects on our turnovers about fifteen
Speaker 1: percent per year, meaning we don't want to have any
Speaker 1: of our clients exposed unnecessarily to taxes. We want to
Speaker 1: buy investments that we believe can work for a long
Speaker 1: period of time, even though there may be some volatility.
Speaker 1: Our clients understand that over the long period our investments
Speaker 1: have generally rung true. Well, you know, it's interesting looking
Speaker 1: at e bix because it seems to fit in the
Speaker 1: narrative that you just described. What do you go through
Speaker 1: when the stock, let's say, is you know, in the sixties,
Speaker 1: sixty four was the high back in h I believe
Speaker 1: March of this year, what do you say or how
Speaker 1: do you react to the fact that, Okay, it was
Speaker 1: sixty four in March, it's fifty three now. But there
Speaker 1: are reasons why you want want it and may want
Speaker 1: even more of it. Sure. What we try to do
Speaker 1: is to try and make an assessment of what the
Speaker 1: company's value is based on what their potential earnings may be.
Speaker 1: Uh So that means that we're buying something for longer
Speaker 1: term growth. This is company we just start buying about
Speaker 1: three weeks ago, and we're buying it right now as
Speaker 1: we speak. It's a great company that offers that long
Speaker 1: term potential. And in terms of a pricing scenario, we're
Speaker 1: not overly concerned about where it was. We're more concerned
Speaker 1: about where it's going to be. So in that case,
Speaker 1: from a pe standpoint, relatively cheap, we think it's only
Speaker 1: trading in fifteen times next year's earnings and we try
Speaker 1: to look forward three years out and feel that it
Speaker 1: can grow. It's up like per year. Well, the symbol
Speaker 1: there is e B I X for this particular stock,
Speaker 1: Epics based in John's Creek and Georgia. Stock is down
Speaker 1: about seven p so far this year. Uh. You know,
Speaker 1: I'd like to turn your attention, if you can, to
Speaker 1: the visits that you make the company management and the
Speaker 1: interviews that you do with competitors and suppliers. Uh, with
Speaker 1: or without naming names, could you give us an example
Speaker 1: of one of those meetings that maybe turned you against
Speaker 1: making the investment or made you gunshy about it. Sure, sure,
Speaker 1: I've got a great example. There's a company a few
Speaker 1: years ago that had a proprietary interest in tires, manufacturing
Speaker 1: and replacing tires. If you go back about eight years ago,
Speaker 1: tires were very expensive for mining because at that point
Speaker 1: commodities were very expensive. UM. It's interesting because one of
Speaker 1: the founders, who's pretty well respected, made some disparaging comments
Speaker 1: about women and their ability to understand the mining and
Speaker 1: the tire business. UM. We didn't tolerate that, and irrespected
Speaker 1: of whether he's a good leader or not. That reflected
Speaker 1: poorly on on management and we own that for about
Speaker 1: a day and a half and that was it. That's
Speaker 1: a very interesting Uh, that's a very interesting determination obviously,
Speaker 1: something that doesn't even take a balance sheet to figure out. No,
Speaker 1: it doesn't, and sometimes investments can can lend themselves to that.
Speaker 1: You know, none of us are perfect, but we would
Speaker 1: hope that board and management understands the consumer, understands the
Speaker 1: way the world works, and just you know, at least
Speaker 1: some civility. And I dare say we're gonna have a
Speaker 1: little more civility in the world today. Well said speak
Speaker 1: if you can't about any recent changes, whether you've been
Speaker 1: adding to your cash positions, do you feel that having
Speaker 1: something increased liquidity will be useful in the near future. UM,
Speaker 1: that's a very good question. Right now, we are having
Speaker 1: a little bit of a difficult time finding and essence,
Speaker 1: so we're about nine invested, we've got about ten percent
Speaker 1: in cash. So that's a good barometer of how enthusiastic
Speaker 1: we are about the market right now. UM. That being said,
Speaker 1: every day the market offers many opportunities. There's a stock
Speaker 1: that UM ressembles for for for lack of a better word,
Speaker 1: a good example that was I'm sure listeners remember the
Speaker 1: Carnival Cruise Lines reckoned the Mediterranean a few years ago
Speaker 1: with the cost Concordia. That's exactly right. So when we
Speaker 1: looked at that, we had Carnival crews on our our
Speaker 1: radar at the time coincidentally, and realized we could fairly
Speaker 1: quickly assess what the damages were going to be environmental, uh,
Speaker 1: personal injury, et cetera, and those are capped for better
Speaker 1: or worse. So it looked like a great opportunity. We
Speaker 1: bought the stock. It was about ten percent off after
Speaker 1: that accident, and it contrasted with the BP oil spill
Speaker 1: that happened here in the Louisiana area where that was
Speaker 1: very difficult to put a number on what that costs
Speaker 1: would be. So we about Carnival Cruise Lines given that opportunity.
Speaker 1: So that doubtless will be opportunities in the market on
Speaker 1: on any given day, and just a question of us
Speaker 1: being able to recognize those opportunities and act quickly upon those. Well,
Speaker 1: thanks for sharing your views, your thoughts, and some of
Speaker 1: your investments. George Young as a partner and portfolio manager
Speaker 1: at a Villary Funds, Thanks for listening to the Bloomberg
Speaker 1: P and L podcast. You can subscribe and listen to
Speaker 1: interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer.
Speaker 1: I'm pim Fox. I'm on Twitter at pim Fox. I'm
Speaker 1: on Twitter at Lisa Abramo wits one. Before the podcast,
Speaker 1: you can always catch us worldwide on Bloomberg Radio