Speaker 1: Strap on your parachute. Is time for What Goes Up
Speaker 1: with Sarah Ponzick and Mike Reagan. Hello, and welcome to
Speaker 1: What goes Up, a Bloomberg Weekly Markets podcast. I'm Sarah Ponzek,
Speaker 1: a reporter on the Cross Asset team, and I'm Mike Reagan,
Speaker 1: a senior editor at Bloomberg. And you can think of
Speaker 1: me as the captain to Sarah's toneel. You might have
Speaker 1: to google that one, Sarah, I absolutely will have to
Speaker 1: google that before your time. But this week on the show,
Speaker 1: eight months into I can't believe it, Mike, but it's
Speaker 1: time to debrief. To do that, we're joined by Goldman Sachs,
Speaker 1: Asset Management's co head of Fundamental Equity, to discuss how
Speaker 1: the firm has approached the year and also how it's
Speaker 1: positions for the future, And of course we will close
Speaker 1: out the episode with our tradition the Craziest Thing I
Speaker 1: saw in markets and Sarah, as you said, great guests
Speaker 1: this week to talk about the equity markets, because I
Speaker 1: think the big question on a lot of people's minds
Speaker 1: this year is has this market gotten sort of detached
Speaker 1: from the fundamentals. So we have a very much a
Speaker 1: fundamentals expert this week. She, as you said, as the
Speaker 1: co head of fundamental equities at Goldman Sachs Asset Management.
Speaker 1: Her name is Katie Coch. Katie, welcome to the show.
Speaker 1: Thank you so much for having me. I'm excited to
Speaker 1: be here. So Katy, let's get right into it. You know,
Speaker 1: as we've all noticed, the valuation expansion in the market
Speaker 1: this year has been astounding, given the economic uncertainty and
Speaker 1: the sort of nasty recession that we've already seen, and
Speaker 1: who knows how long that's gonna last. Of course, at
Speaker 1: the same time, you have real interest rates are negative.
Speaker 1: It looks like interest rates will stay low, possibly negative
Speaker 1: on a real basis after inflation for a long time.
Speaker 1: I'll phrase it as simply as possible. Does the market
Speaker 1: make sense to you based on the fundamentals were um
Speaker 1: have what we've seen this year? Does it trouble you
Speaker 1: how how aggressive the valuation to spenching has gotten. The
Speaker 1: way that I would look at it is when you
Speaker 1: think about the markets overall, they're effectively flat on the year,
Speaker 1: and so a lot of people will look at that
Speaker 1: and say, how is that possible given all of the
Speaker 1: you know, challenging news that's out there that you alluded to,
Speaker 1: and I want I want to make three points on
Speaker 1: this connected to the headline that we can get behind UM,
Speaker 1: the sensibility of markets if we're selective about opportunities UM.
Speaker 1: And so you know, three things to observe is that
Speaker 1: while the markets flat on the year, there's a lot
Speaker 1: kind of happening underneath that really an exciting return UM.
Speaker 1: So we've had a huge draw down and and a
Speaker 1: tremendous recovery as you know that are involved in getting
Speaker 1: us flat. The media and SMP five hundred stock is
Speaker 1: still you know, somewhere around twenty off. It's high, and
Speaker 1: there's a little group of companies we all know called
Speaker 1: the Fangs, which are up over thirty on the year,
Speaker 1: while actually the rest of the SMP five hundred is
Speaker 1: still down about five. And then of course we also
Speaker 1: have this wide gap between growth and value UM, although
Speaker 1: that's narrowed a little bit in the last couple of weeks,
Speaker 1: which hopefully we'll talk about. So, yeah, the market's flat
Speaker 1: on the year, but then under that lots of different
Speaker 1: stuff happening, and so we can find great value, but
Speaker 1: you have to really hunt for it. The second comment
Speaker 1: I would make quickly would be around valuations. You alluded
Speaker 1: to the fact that valuations are demanding UM and in fact,
Speaker 1: the US market is trading right now on a twenty
Speaker 1: two times twelve month forward multiple, which puts it in
Speaker 1: about the ninety percentile of its its most expensive I
Speaker 1: want to make two balancing comments to that, just to
Speaker 1: put people's fears at ease about how expensive the market is.
Speaker 1: The first is, we really need to look at those
Speaker 1: valuations in other low inflation periods UM and so actually,
Speaker 1: if we look at low inflation regimes, today's valuations are
Speaker 1: really just above median levels UM. And then in addition,
Speaker 1: of course, we we do have depressed earnings because we're
Speaker 1: in a recession, as you mentioned, and so that's elevating
Speaker 1: PE level those two. And then the second point I
Speaker 1: want to make is equities relative to other asset classes.
Speaker 1: So we look at something called the implied equity risk premium,
Speaker 1: which is just a fancy way of talking about how
Speaker 1: expensive equities are to other stuff like bonds, and it's
Speaker 1: at a very attractive three point eight percent premium, and
Speaker 1: that's only been higher about a third of the time
Speaker 1: over history UM and it certainly stands, for example, in
Speaker 1: sharp contrast to the negative equity risk premium we saw
Speaker 1: during the tech bubble. So yes, you know valuations are demanding,
Speaker 1: but it's a little bit more of a nuanced story
Speaker 1: than that. And again, if you are selective, you can
Speaker 1: find opportunity. And then the final comment I want to
Speaker 1: make is that I do believe, and we do believe
Speaker 1: at Coleman's successet Management and on our equity team that
Speaker 1: regardless um of any of the stuff we just talked about,
Speaker 1: equity markets really do need continued monetary support and fiscal
Speaker 1: support um to to be able to hold in at
Speaker 1: these levels. And they also need earnings to come through,
Speaker 1: at least to meet the low expectations out there for earnings.
Speaker 1: And of course we're in the middle of earning season now,
Speaker 1: so we should get a lot of interesting data on
Speaker 1: that front. So let's get back to that dispersion idea
Speaker 1: that you said. You look onto the surface of the
Speaker 1: stock market and clearly not every stock is the same,
Speaker 1: not every stock is a thing stock. So over the
Speaker 1: last eight months, throughout the coronavirus era that we've been
Speaker 1: living in, how have you guys been trying to find
Speaker 1: value within the market. This is a great question. And
Speaker 1: one of the things with the coronavirus environment has done
Speaker 1: UM is created a lot of differentiation between business models,
Speaker 1: and so there really has never been a more important
Speaker 1: time to embrace active management and navigate which of those
Speaker 1: business models are going to win and which ones are
Speaker 1: are going to lose. And so I think that stock
Speaker 1: specific dynamics really matter now more than ever, and we're
Speaker 1: seeing huge differentiation within narrow parts the market, and this
Speaker 1: really creates tremendous opportunities for for active managers. So I
Speaker 1: want to give you a couple of examples to help
Speaker 1: us understand that. So let's take restaurants, relatively narrow category. UM.
Speaker 1: We've been focused on the millennial preference for value, digital
Speaker 1: and delivery for a really long time, and COVID, of course,
Speaker 1: is accelerating a lot of these trends and drawing in
Speaker 1: more demographics beyond the millennial consumer as we have to
Speaker 1: consume more things online now. In restaurants, on the one hand,
Speaker 1: you have a company like Dominoes, and we think of
Speaker 1: Dominoes as a technology company that happens to deliver pizza.
Speaker 1: Seventy of their sales are digital UM. They reported earnings recently,
Speaker 1: same store sales up sixteen percent year over year UM
Speaker 1: and the share price reacting very positively on the year.
Speaker 1: On the other hand, in the same category, you have
Speaker 1: a franchise like Darden Restaurants. They own a bunch of brands,
Speaker 1: including Olive Garden, which probably most people have heard of. UM.
Speaker 1: They are a dine in establishment. The delivery and digital
Speaker 1: sales is very limited. They're reporting same store sales down
Speaker 1: and of course the stocks reacting quite negatively on the year.
Speaker 1: So that gives you a sense of how important in
Speaker 1: this environment it is to distinguish between business models. Another
Speaker 1: example would be big box retailers, and many of them
Speaker 1: were really struggling before COVID because of amazon ification of
Speaker 1: the retail market that's taken place over the last decade. However,
Speaker 1: there are a couple of big box retailers that are
Speaker 1: succeeding despite Amazon and UH, and despite the recession that
Speaker 1: we're in. The markers of those winning companies are are
Speaker 1: really two things. They usually have products that are in
Speaker 1: demand during quarantine UH and second, they have tremendous e
Speaker 1: commerce strategies. The pandemic is accelerating e commerce trends that
Speaker 1: were already in place, and as Toby um Luca, who's
Speaker 1: the c E Shopify, has said, e commerce has made
Speaker 1: a ten year jump in a matter of months. And so,
Speaker 1: on the one hand, you have a company like best Buy,
Speaker 1: which is an electronics retailer. They have sales that are
Speaker 1: up year over year both domestically and internationally. Now why,
Speaker 1: First they have that relevant products set for quarantine. They
Speaker 1: have the largest product category of sales for computing, working
Speaker 1: from home appliances because we're eating more at home, and
Speaker 1: tablets because we're learning from home, so great products set
Speaker 1: for the environment. And second, they have a tremendous e
Speaker 1: commerce footprint. Their online sales have grown two hundred and
Speaker 1: fifty five percent versus last year UM and they've even
Speaker 1: sustained that at close to a hundred and nine since
Speaker 1: stores have reopened, and the stocks obviously reacting positively on that.
Speaker 1: So that's a winner. And then on the other hand,
Speaker 1: we have a plethora of undifferentiated mall based retailers. Sales
Speaker 1: are down more than dee percent. In most cases, they're
Speaker 1: facing many of them are facing bankruptcys. On the product side,
Speaker 1: they're not selling particularly differentiated products or products that are
Speaker 1: in demand during quarantine, A lot of clothing and as
Speaker 1: as you probably would recognize, we're not all going out
Speaker 1: and buying new clothing unless it's sweatpants. Um. And then
Speaker 1: on the the the e commerce footprints side, really they've
Speaker 1: they've done too little, too late. So those give you
Speaker 1: some examples of how UM, there is a lot of
Speaker 1: bifurcation in the market between winning and boot losing business models. Um,
Speaker 1: this recession is really different from any other recession we've seen.
Speaker 1: But if you're selective and you can get on get
Speaker 1: behind the right business models at the right valuations, there
Speaker 1: really should be tremendous opportunities here for active managers. So, Sarah,
Speaker 1: a lot of great points in there, you know, I
Speaker 1: Katie especially like the point about best Buy. I know
Speaker 1: personally I've been looking to upgrade my TV during the pandemic.
Speaker 1: But so Katie, talk us through then, how your team
Speaker 1: looks at those giant gorillas in the room, the top
Speaker 1: five stocks in the SMP. You know, your Apple, Amazon, Alphabet, Microsoft,
Speaker 1: you know, taking up a record weight in in indexes
Speaker 1: like the SMP. I think less. I checked something between
Speaker 1: a quarter and a fifth of the SMP was just
Speaker 1: those five stocks. I mean, does it lead you to
Speaker 1: want to underweight those super richly valued heavyweight stocks, uh,
Speaker 1: and look for those value stocks like the ones you
Speaker 1: mentioned in retail and restaurants or is it the type
Speaker 1: of environment where you really can't afford to underweight these
Speaker 1: big names. We think the things are are great franchises,
Speaker 1: We own some of them, but we do believe that
Speaker 1: investors would be well served to diversify beyond them in
Speaker 1: the hunt for future tech leaders. UM. So, a couple
Speaker 1: of points to make here. Um. As you know, many
Speaker 1: US investors and a lot of people listening to your
Speaker 1: program have embraced passive investing. And what I would observe
Speaker 1: at the outset here is that we need to consider
Speaker 1: whether a passive investing has in fact become too aggressive
Speaker 1: Because to your point, there's lots of concentration in a
Speaker 1: little number of companies. So it's about twenty two of
Speaker 1: the market cap in the top one percent of the
Speaker 1: names that exceeds the eighteen percent we reached in in
Speaker 1: two thousand. Um. There's lots of of of different you know,
Speaker 1: ways of looking at this. But another way to put
Speaker 1: it into context for people is that the four largest Amazon, Apple, Microsoft,
Speaker 1: Google currently have a market capitalization that's bigger than the
Speaker 1: entire country of Japan. Uh, they're worth just shy of
Speaker 1: six trillion. Well, Japan's equity markets worth five point eight
Speaker 1: four trillion. You know, despite the sharpest session on record,
Speaker 1: these companies have added more than a third to their
Speaker 1: market values in and I think we really do need
Speaker 1: to pause and ask ourselves this question, you know, is
Speaker 1: it justified and will it persist? So let's break it
Speaker 1: down this way. There are some real positives for these companies.
Speaker 1: So on the one hand, they've got the cleanest balance
Speaker 1: sheets within the market. That's the first point I would make,
Speaker 1: more than two and sixty billion dollars of net cash um,
Speaker 1: lower leverage than the rest of the market, better liquidity
Speaker 1: and visibility. Uh. The second point I would make is
Speaker 1: that they do have strong growth prospects. Their near term
Speaker 1: growth expectations are about fifteen percent versus eight percent for
Speaker 1: the media and SMP five company, and their catering towards
Speaker 1: trends with both secular and cyclical tailwinds like cloud, e
Speaker 1: commerce and digital payments. So those are all, you know,
Speaker 1: very positive. And I'd also just mentioned From a valuation perspective,
Speaker 1: you know, these are valuations are just not as demanding
Speaker 1: as they were at the peak of the tech bub bole.
Speaker 1: And these stocks are driven not just by long term
Speaker 1: growth expectations, which we saw a lot more of in
Speaker 1: in two thousand, but actually by strong realized profitability again,
Speaker 1: lower leverage, and all these other markers of quality. UM.
Speaker 1: I'd also say, you know, something we should give them
Speaker 1: credit for is that they've shown offensive as well as
Speaker 1: defensive characteristics. They were leaders in the market correction and
Speaker 1: also the rebound, which you know generally warrant's higher evaluations.
Speaker 1: So those are all some reasons to feel good about
Speaker 1: the Fangs. However, as I stated at the outset, I
Speaker 1: do think we need to consider the possibility of UM
Speaker 1: that we need to diversify beyond them, and that passive
Speaker 1: has become too aggressive. So on the other hand, I
Speaker 1: want to point out some some balancing comments to that.
Speaker 1: I do think there could be some clouds forming on
Speaker 1: the horizon which could threaten their dominance going forward, and
Speaker 1: this should motivate investors to to diversify beyond the Fangs.
Speaker 1: There's tremendous turnover historically in the tech ecosystem. Over the
Speaker 1: last twenty three years, the largest tech company by market
Speaker 1: cap has changed eight different times. UM market leaders have
Speaker 1: historically not really been able to maintain their leadership positions
Speaker 1: for more than five or six years. So a decade
Speaker 1: ago with Cisco, Intel, IBM, Oracle, et cetera. Mark Zuckerberg
Speaker 1: himself alluded in his his congressional testimony that after ten
Speaker 1: years of fang dominance, you know the next ten years
Speaker 1: and big companies in the next ten years could look different.
Speaker 1: So ecosystem turnover historically has been high. We expect that
Speaker 1: to persist. The second point I'd make is, you know
Speaker 1: these companies, and this doesn't get talked about a lot,
Speaker 1: but they are catering to somewhat saturated markets. So if
Speaker 1: you take Apple, it's fully penetrated market for high end
Speaker 1: smartphones UM, leaving growth more dependent on replacements and services
Speaker 1: that are attached to to the phones. But it's hard
Speaker 1: to move the multiple on that. In the case of
Speaker 1: Amazon Aws, which is a real driver for that business,
Speaker 1: their cloud business obviously has real competition from Microsoft often
Speaker 1: and Google, so growth is going to naturally be slower.
Speaker 1: And then the company is involved with online advertising. UM
Speaker 1: you know, that's now fifty percent of global advertising, so
Speaker 1: one would expect growth to decelerate over time. So the
Speaker 1: third comment would be that there is potential for increased
Speaker 1: regulation and we're obviously seeing that play out right now.
Speaker 1: Uncertainty over government regulatory actions is generally not good for
Speaker 1: corporate decision making, and we saw that with Microsoft in
Speaker 1: the two thousands when it faced various antitrust investigations UM,
Speaker 1: and it makes doing M and A, which has historically
Speaker 1: been a driver of growth for these companies, more difficult.
Speaker 1: So that regulatory overhang, you know, we we do think
Speaker 1: UM could persist. UM. So taking all those comments together,
Speaker 1: some reasons to feel positive about the things, some balancing
Speaker 1: comments that, you know, give us pause. I think that
Speaker 1: the headline is that passive has become too aggressive and
Speaker 1: we really need to invest and look for opportunities in
Speaker 1: tech beyond the things. And I'll highlight two areas that
Speaker 1: that we're looking at UM. The first would be in
Speaker 1: companies outside the US. We particularly like local tech leaders
Speaker 1: and emerging markets. So e M consumers are getting access
Speaker 1: to fast, ubiquitous internet for the first time in history. UM.
Speaker 1: They're also now able to access the internet via their
Speaker 1: mobile phones, and this is giving rise to something we
Speaker 1: call the splinter neet effects. So this is local companies
Speaker 1: applying proven business models from the US in new, high
Speaker 1: growth markets um SO. Examples of these local tech titans
Speaker 1: would be Mercado Libre Um which is the Amazon of
Speaker 1: Latin America where online penetration is only five percent versus
Speaker 1: fifteen to twenty and most developed markets, or see which
Speaker 1: is the Amazon of Southeast Asia. Um and these companies,
Speaker 1: I would note, are also trying to become leaders in
Speaker 1: other fields beyond e commerce. So Mercado Libre is getting
Speaker 1: into payments and see um is getting into online gaming.
Speaker 1: And one might argue this would be like investing in
Speaker 1: Amazon five to ten years ago with big addressable markets.
Speaker 1: And then the second place would be going further down
Speaker 1: the market cap spectrum UM looking at small and mid
Speaker 1: cap companies versus the mega cap So we like innovative
Speaker 1: and differentiated, pure play small cap companies that are developing
Speaker 1: highly differentiated and superior technology to service new markets. Um SO.
Speaker 1: An example here would be Ping Identity, which is a
Speaker 1: provider of intelligent identity solutions and is disrupting identity and
Speaker 1: access management market, which is you know, identity being a
Speaker 1: very big focus now and this is a very specific
Speaker 1: provider with a high growth rate and obviously not something
Speaker 1: captured when investing UM in the fangs UM and so
Speaker 1: in some way, well, I think the Fangs are are
Speaker 1: fine franchises to own. Again, some reasons to be positive,
Speaker 1: but certainly some reasons to be concerned. What investors need
Speaker 1: to do, UM is think about allocating some capital away
Speaker 1: from those dominant franchises in search of you know, new
Speaker 1: emerging tech leaders which we can find both outside the
Speaker 1: US and with in the US down the market cap, Katie,
Speaker 1: I find it really interesting that of the industries that
Speaker 1: you've high lighted so far, so that being restaurants, retail,
Speaker 1: and tech, I mean two of them are presumably completely
Speaker 1: coronavirus losers, except where you highlighted you can find winners.
Speaker 1: And tech has just developed into the star of once again,
Speaker 1: two ends of the spectrum. I mean between those two spectrums,
Speaker 1: are there any areas that you would just absolutely stay
Speaker 1: away from you think it's too difficult right now to
Speaker 1: really find something that's worth it to throw capital at.
Speaker 1: I think it's really important that in this environment, and
Speaker 1: really any environment, that investors run balanced portfolios and that
Speaker 1: they capture both growth and value ideas. And I guess
Speaker 1: my my overarching point here would be that I think
Speaker 1: it's possible to find winners in every sector, but you
Speaker 1: really have to get behind the right business models. Um,
Speaker 1: and that difference between winners and losers is going to
Speaker 1: express itself in every single sector. If take energy, for example,
Speaker 1: there's a lot of reasons that everyone listening to this
Speaker 1: knows that we shouldn't be super excited about the future
Speaker 1: of energy, and that's reflected in share prices. But what
Speaker 1: about renewable companies within the energy space. Some of those
Speaker 1: companies are up thirty to renewable fuel companies for example,
Speaker 1: which we think is the future of the energy market.
Speaker 1: So even in the sectors that are at least loved
Speaker 1: within the market, you can actually find winning franchises if
Speaker 1: you hunt, and again, you know, you get behind the
Speaker 1: right business models. I think that's always been important in investing,
Speaker 1: but this crisis has made that more important than ever. Yeah, Katie,
Speaker 1: that mention of renewable energy is uh, it's a good
Speaker 1: segue to the topic of E S g uh And
Speaker 1: for anyone listening, who's I don't know, been asleep for
Speaker 1: the last five years and doesn't know what that is.
Speaker 1: It's basically investing with the idea of the environment, social issues,
Speaker 1: and government governance issues in mind when you're picking out companies.
Speaker 1: And I'm kind of fast needed at how you look
Speaker 1: at that at the E s G world through the
Speaker 1: sort of the goggles of a fundamental investor, because I
Speaker 1: do think there's a case to be made that, Hey,
Speaker 1: if your company is less likely to get say a
Speaker 1: big fine for an environmental issue, or uh, you know,
Speaker 1: less likely to be boycotted over a social issue, or
Speaker 1: less likely to you know, have the CEO forced out
Speaker 1: in a governance issue, that type of thing, that there
Speaker 1: is very much a fundamental case to be made for
Speaker 1: incorporating E s G factors in your research. Is that
Speaker 1: a big part of the reason why E s G
Speaker 1: is so hot? Is it not just sort of a
Speaker 1: clear investing with a clearer conscience, And not to say
Speaker 1: there's anything wrong with that, I'm all for that, but
Speaker 1: is there also, you know, from the work you've done,
Speaker 1: is there a fundamental case to be made for why
Speaker 1: this stuff is important? Absolutely at Goldman Success that management
Speaker 1: and in particular within our our fundamental equity team, we
Speaker 1: think that consideration of E s G issues is often
Speaker 1: just correlates to quality UM, and we have a strong belief.
Speaker 1: We're long term investors and have a very strong belief
Speaker 1: that quality will outperform over time, and so we consider
Speaker 1: E s G across the entire sixty billion dollars of
Speaker 1: of of assets that we manage UM, in addition to
Speaker 1: our our dedicated E s G portfolios, because focus on
Speaker 1: these issues should be a way to UH avoid risks
Speaker 1: but also to generate alpha for all investors, regardless of
Speaker 1: how focused the organization or the individual might be on
Speaker 1: on E s G UM. I'll take a step back
Speaker 1: and maybe make a couple of quick points about the
Speaker 1: space UM. The first would be that we believe very
Speaker 1: deeply that the world is on the cusp of a
Speaker 1: sustainable investing revolution and UM we think it could be
Speaker 1: one of the biggest investment opportunities ever. It had the
Speaker 1: magnitude of the industrial revolution coupled with the speed of
Speaker 1: the digital revolution and a tale from from COVID. You know,
Speaker 1: how do we account for that? As I mentioned earlier,
Speaker 1: we we integrate consideration of E s G issues into
Speaker 1: all the assets we manage. We also have a lot
Speaker 1: of idea generation on the back of this UH emphasis
Speaker 1: on e s G. So, in other words, we invest
Speaker 1: in solutions providers to E s G issues. And then
Speaker 1: of course we think about this a lot when we're
Speaker 1: engaging companies. So just from an environmental perspective, UM, we
Speaker 1: think that's going to continue to grow in an importance
Speaker 1: and an emphasis. A winner on this front, by the way,
Speaker 1: is Europe. So you know, there's a lot of bad
Speaker 1: news over time around Europe UM, but this is actually
Speaker 1: a place where Europe can really excel and own and
Speaker 1: and and succeed UM. The EU estimates the additional yearly
Speaker 1: investment required to achieve the EU Green Deal targets UM,
Speaker 1: which are are mostly environmental focus, is more between a
Speaker 1: hundred and seventy five and three hundred billion euros for
Speaker 1: the next couple of decades. And this will be met
Speaker 1: with the mix of both public and private capital UM
Speaker 1: so giving rise to a lot of interesting opportunities at
Speaker 1: the company level. And again Europe, with its combination of
Speaker 1: UM you know, taxes, UH incentives, government and academic partnership,
Speaker 1: is going to give ride continue to give rise to
Speaker 1: a lot of companies that will win in this space
Speaker 1: in the US. I would also just just mention um
Speaker 1: we talked about the dominance of the fangs companies. One
Speaker 1: of them knock on impacts of that from an E
Speaker 1: s G perspective is that when these sizeable companies choose
Speaker 1: to do something about their environmental responsibility, it has unbelievable
Speaker 1: impacts on the market. UM. So Amazon recently announced that
Speaker 1: they're going to target a hundred percent renewable power for
Speaker 1: their operations. By they've actually moved that goal forward, they're
Speaker 1: currently at forty two percent. They've leaeve that they'll be
Speaker 1: carbon neutral by including using for transportation a lot of
Speaker 1: electric vehicles. They've already ordered a hundred thousand units of
Speaker 1: electric vehicles UM. And so you know, these these types
Speaker 1: of announcements can have given the scale of these companies,
Speaker 1: will have an incredible impact UM. And so that gives
Speaker 1: all together gives you some sense of just that the
Speaker 1: scale of the opportunity and the environmental part. Successful companies
Speaker 1: will UM integrate the way that they think about environmental sustainability.
Speaker 1: And then there's also this investment opportunity for US to
Speaker 1: to invest in companies that are going to be the
Speaker 1: solutions providers in this space. UM. I will actually give
Speaker 1: a quick example here on a sustainable environmental company called
Speaker 1: Ball Corp, which you know may not be known by everybody.
Speaker 1: It is an aluminum can manufacturer UM relegated to to
Speaker 1: the boring value bucket. For for most of the last
Speaker 1: ten years, UM it was it was x growth because
Speaker 1: most products UM were that they made were soft drinks
Speaker 1: and then domestic beers, which we're both effectively rejected by millennials.
Speaker 1: But they've seized on consumer discussed with the plastic UM
Speaker 1: in in landfills and oceans, and they've been lobbying more
Speaker 1: companies to to make what we call the the can
Speaker 1: king again. UM. Now, virgin aluminum is actually quite expensive
Speaker 1: to make, but aluminium can be recycled forever with no
Speaker 1: loss of properties, and it's pretty cheap to recycle. So
Speaker 1: there's a sixty five percent recycling rate of aluminium in
Speaker 1: the US. We actually recycle a hundred thousand cans a
Speaker 1: minute UM and it's actually even higher in other countries. UM.
Speaker 1: It has a lower energy consumption UM when recycling aluminum
Speaker 1: versus making new aluminum UM. And and just for comparison purposes,
Speaker 1: the recycling rate of plastic is in the low single
Speaker 1: digit and now because of people's focus on moving away
Speaker 1: from plastic, which is less sustainable, to aluminium, which is
Speaker 1: more sustainable, volumes are now growing again at five UM
Speaker 1: per year and um. As a result, the share price
Speaker 1: has has really moved upwards, uh quite aggressively. And so
Speaker 1: that's an example of a solutions provider to this environmental issue.
Speaker 1: Great points all around, Katie. You know, yeah, you hear
Speaker 1: a lot about that culture at Costco and I think
Speaker 1: you know, people that work there really treated as a career,
Speaker 1: not sort of a a mick job that you hop
Speaker 1: from uh and and have a lot of turnover. Um,
Speaker 1: so uh, kudos to them. You did miss a big
Speaker 1: catalyst for them, Katie. I'll tell you what it is.
Speaker 1: Their roads history chickens are incredible. Have you had have
Speaker 1: you guys had one of their roots history chickens. They're
Speaker 1: delicious root history chicken. But I have been known to
Speaker 1: sample all those those free samples. Next time we go,
Speaker 1: I I will. My husband's actually the the CFO and
Speaker 1: our family he tracks are spending and I do know
Speaker 1: that we're spending uh much more now on Costco than
Speaker 1: than we used to um and that will have to
Speaker 1: add the rotisserie chickens to the shopping list. Samples are
Speaker 1: the best part of Costco, but I would imagine that
Speaker 1: that's had to be up pulled back in these days. Yeah,
Speaker 1: I'm gonna start bringing a disguise so I can hit
Speaker 1: the samples twice. They won't realize it. Alright, Sorry, you
Speaker 1: know what time it is. I think I do stand
Speaker 1: clear of the craziest things we saw in markets this week. Alright,
Speaker 1: So mind dates back to our conversation that we were
Speaker 1: having about the Fank stocks and really just mega caps
Speaker 1: in general. So the statistic is a little bit dated,
Speaker 1: but it's as of late July. So I'll give you this,
Speaker 1: and I just find it pretty mind boggling. This comes
Speaker 1: from Michael O'Rourke over at Jones Trading, and he pointed
Speaker 1: out that so far this year, on sixty two and
Speaker 1: a half percent of trading days, the Nasdaq one hundred
Speaker 1: has actually closed in positive territory and that is a
Speaker 1: record for any year in the last thirty four years.
Speaker 1: And I think it's just pretty crazy to think at
Speaker 1: in the year of we're dealing with the coronavirus. We're
Speaker 1: dealing with such deep recession at the same time, then
Speaker 1: as E one hundred has had its largest share of
Speaker 1: positive trading days ever at least uptil this point. I
Speaker 1: got ahead at you, Sarah, that one's pretty good, Katie,
Speaker 1: can you top that one? That's a pretty good. Crazy thing, though,
Speaker 1: I would say one of the craziest things that we're
Speaker 1: seeing in this market is just really a typical behavior
Speaker 1: for a recession, and so I would I would call
Speaker 1: out here, for example, home builders. During a typical economic downturn,
Speaker 1: people hold off surprisingly from buying homes and home builders suffer. UM. However,
Speaker 1: the home builders have been doing really well, growing profits
Speaker 1: and stocks have have been rewarded. And why because in
Speaker 1: the COVID specific recession we've got record low mortgage rates
Speaker 1: and also mass exoduses from cities, so mortgage applications at
Speaker 1: and the median listing price of homes up up seven UM.
Speaker 1: And then of course there's also some UM associated companies
Speaker 1: that are are benefiting as we spend more time in
Speaker 1: our existing homes and buy new homes like UM, like
Speaker 1: Sherwin Williams, for example, who of course sells paints they're
Speaker 1: showing pain sales up in the second quarter as more
Speaker 1: people again focused on decorating the homes that they're they're
Speaker 1: spending more time in UM, which also supports the fact
Speaker 1: that UM in this quarantine, watching paint dry has actually
Speaker 1: become an exciting exercise. I mean, we have to get creative, right, Yeah,
Speaker 1: that's pretty good. The housing data lately has been pretty
Speaker 1: amazing to watch. I think it's caught a lot of
Speaker 1: people off guard as well. It is remarkable. Yeah, well, Katie,
Speaker 1: I hope my wife doesn't listen to this and get
Speaker 1: ideas about us repainting the house. I cannot stand painting.
Speaker 1: I as you said, your your husband's the CFO. I'm
Speaker 1: the official house painter of our house. My wife's actually
Speaker 1: our our CFO, and I'm the official house paint and
Speaker 1: the I T guy. I gotta fix all the kids. Uh, computers,
Speaker 1: they sort, they do. It's it's usually you know, if
Speaker 1: if you restarted and it doesn't fix it, then I'm
Speaker 1: out of ideas. So I don't know but that you'd
Speaker 1: be abased how many times that fixes it? All? Right?
Speaker 1: You guys, You guys came pretty pretty well this this
Speaker 1: week with the crazy things. I'll give you mine. Sorry,
Speaker 1: mine's a few weeks old, I confess, but I can't
Speaker 1: believe it hasn't come up in the Crazy Things uh
Speaker 1: episode yet or Crazy Things segment whatever. We call our gimmick.
Speaker 1: And it's a story from the Financial Times a few
Speaker 1: weeks ago about what they called mafia bonds and as
Speaker 1: their leader of their story says, international investors bought bonds
Speaker 1: backed by the crime proceeds of a Italy's most powerful
Speaker 1: mafia according to financial and legal documents. So basically the
Speaker 1: mafia and Italy had set up a bunch of sort
Speaker 1: of fake front companies and then issued bonds not on
Speaker 1: the not on public markets, but in private markets um
Speaker 1: basically backed by these fake front companies. So that sort
Speaker 1: of one billion euros worth of these bonds. Amazing story
Speaker 1: from the FT. I will say they left out. There's
Speaker 1: one big important thing they left out. They didn't say
Speaker 1: what the yield was. If I'm gonna buy some mafia bonds,
Speaker 1: I want to I want a nice yield, I want
Speaker 1: a nice spread. They did say that investors in the
Speaker 1: bonds included pension funds, hedge funds, and family offices quote,
Speaker 1: all looking for exotic ways of earning high returns at
Speaker 1: a time of record low interest rates. So that is
Speaker 1: certainly one exotic way. I don't know, Katie, if I
Speaker 1: don't know how mafia bonds fair in the in the
Speaker 1: E S G. I imagine that wouldn't fit your E
Speaker 1: S G bill, right, I don't think it fit the
Speaker 1: E s G bill. And if people are looking for
Speaker 1: better returns, I would encourage them to first look at
Speaker 1: equity markets. We we've got a lot of returns and
Speaker 1: on offer from some very responsible companies, and some of
Speaker 1: them trading at attractive euasians. That's right, it's all. It's
Speaker 1: all about risk adjusted returns. Your risk with these bonds
Speaker 1: is quite unique. I think. Yeah, from now on, when
Speaker 1: people say or talk about the Tina trade and say
Speaker 1: there is no alternative because interest rates are so low,
Speaker 1: Mike's going to go ahead and just point them to
Speaker 1: mafia bonds I have in New Jersey here, so you
Speaker 1: know there might be a different class investors interested in
Speaker 1: news than Okay, a couple of weeks old, but that
Speaker 1: one was worth it. I had Listerine perpetual bonds the
Speaker 1: other week. Mafia bonds beat that, all right? Well, I
Speaker 1: think we all came prepared this week housing Mafia bonds
Speaker 1: and then also just the Nasdaq continues to make its
Speaker 1: way onto the list. So with that said, Katie Cox,
Speaker 1: thank you so much for coming on the show this week.
Speaker 1: It was really fun. Thanks so much to both of
Speaker 1: you for having me What Goes Up. We'll be back
Speaker 1: next week. Until then, you can find us on the
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Speaker 1: me at at Sara Pantzeck, Mike is at Reaganonymous, and
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Speaker 1: of the New York City Subway System. What Goes Up
Speaker 1: is produced by Jordan Gospore. The head of Bloomberg Podcast
Speaker 1: is Francesca Levi. Thanks for listening, See you next time.