Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside
Speaker 1: my co host Matt Miller. Every business day we bring
Speaker 1: you interviews from CEOs, market pros, and Bloomberg experts, along
Speaker 1: with essential market moving news. Find the Bloomberg Markets podcast
Speaker 1: called Apple Podcasts or wherever you listen to podcasts, and
Speaker 1: at Bloomberg dot com slash podcast. Let's bring in right
Speaker 1: now Frank Sorrentino. He is Shairming, CEO at Connect one Bank.
Speaker 1: It's Nasdaq traded the ticker CNOB And Frank, Wow, what
Speaker 1: an insane week or you know two or three? Or
Speaker 1: how do you deal as a banker with the rates
Speaker 1: volatility like this?
Speaker 2: Yeah? How about a year? How about an insane year?
Speaker 3: Yes, that's fair.
Speaker 2: It's been an interesting environment.
Speaker 4: You know, certainly there are lots of things that Connect
Speaker 4: One that we try to control, but what the FED
Speaker 4: policy is and where rates are going and how the
Speaker 4: market reacts to those rates is something that's somewhat out
Speaker 4: of our control. And so yeah, it's been very challenging,
Speaker 4: not just for Connect one but for banks in general.
Speaker 5: Frank, what sectors of the economy are you seeing actually
Speaker 5: absorb the effects of the fed tightening and what areas
Speaker 5: are maybe still waiting for the monetary policy lags to
Speaker 5: kick in.
Speaker 4: Yeah, I think when you look at it, I think
Speaker 4: that question would be answered differently from different bankers from
Speaker 4: different parts of the country, But certainly here in the
Speaker 4: New York metro market at Connect one, we certainly see
Speaker 4: that the vast majority of our clients are absorbing those
Speaker 4: rate increases and it's showing up in lots of places
Speaker 4: right Rents are up. If you've been to a restaurant lately,
Speaker 4: you see that the price of a meal is up.
Speaker 2: And I know, you know.
Speaker 4: There's inflation component to all this, but that's part of
Speaker 4: the rate increase, and so it's building into the economy,
Speaker 4: and I think we're seeing it in higher prices, higher costs,
Speaker 4: and being incorporated in every aspect of our economy. I
Speaker 4: think our builders, for one, are for the first time
Speaker 4: in a very long time having to figure out what
Speaker 4: are the interest rates and what's the interest component of
Speaker 4: a construction project.
Speaker 2: But they really didn't have to think about that too
Speaker 2: much in the past. So all these things are.
Speaker 4: Leading to higher prices and definitely a more normalized environment
Speaker 4: where interest.
Speaker 1: Has a cost but nothing normal about the current housing market, right,
Speaker 1: I mean in terms of residential, especially previously owned homes,
Speaker 1: that market seems to have grind to a halt.
Speaker 2: So connect one. We do a lot of new home building.
Speaker 4: We don't see a lot of the mortgage refinance although
Speaker 4: we do see some. And yes, for the existing home market,
Speaker 4: it's a difficult place today because folks have low interest
Speaker 4: rate loans. They really don't want to move and give
Speaker 4: up that rate where they can't. But on the new
Speaker 4: housing front, we do see a level of optimism. Where
Speaker 4: As you know in the New York metro market and
Speaker 4: by the way, as the nation, we are under housed,
Speaker 4: right There's just not enough apartments, not enough housing units,
Speaker 4: and so new product that's coming to the market is
Speaker 4: able to absorb the higher costs due to inflation, the
Speaker 4: higher cost due to interest rates, and there is a
Speaker 4: ready market buying that product.
Speaker 1: We hear all the time that builders offer incentives. You know,
Speaker 1: they're buying down points or they're giving lower rates. And
Speaker 1: I heard I was talking to a land developer the
Speaker 1: other day who said they are giving builders incentives, and
Speaker 1: I thought, you know, where does the buck stop, because
Speaker 1: obviously at some point somebody's got to pay the price.
Speaker 2: The end consumer pays the price, right, So with.
Speaker 4: Certainly seeing prices have somewhat leveled off relative to new
Speaker 4: home product.
Speaker 2: We're also seeing it in the rental market.
Speaker 4: Rents continue to go up over the last couple of
Speaker 4: years at a pretty drastic clip. We are, however, starting
Speaker 4: to see that level off and there are some places
Speaker 4: where we are seeing some level of concessions.
Speaker 2: So I do think we're getting to a more normalized place.
Speaker 6: And I think that's part of the message that came
Speaker 6: out of the FED is that the economy is beginning,
Speaker 6: as you first question you asked, beginning to absorb a
Speaker 6: more normalized rate environment.
Speaker 5: Your notes it says that you think the economy is
Speaker 5: on a soft landing trajectory. I'm wondering what you see,
Speaker 5: as the CEO of a bank that deals with small
Speaker 5: businesses and deals with lenders, what are you seeing that
Speaker 5: maybe some of the other Wall Street prognosticators that are
Speaker 5: still calling for recession are missing.
Speaker 2: Well.
Speaker 4: Look, I start with employment, and in all the markets
Speaker 4: that connect one serves, we're seeing a shortage of people
Speaker 4: to fill jobs. We're seeing very very low unemployment. We're
Speaker 4: seeing a strong labor market overall rising wages, and that
Speaker 4: to me underpins everything. People that are that have a
Speaker 4: job feel good about their job and see their wages rising,
Speaker 4: can absorb those, you know, changes in the economy, higher interest.
Speaker 2: Rates and everything else.
Speaker 4: They can absorb rising rents, They can absorb higher costs
Speaker 4: of food and housing and everything else. And so to me,
Speaker 4: that's the that that that's the foundation on which the
Speaker 4: economy is built. And no one's been able to convince
Speaker 4: me that that's going to change anytime soon.
Speaker 1: I just want to ask about deposits. How sticky are they?
Speaker 1: How do you fight deposit flight? Is it just a
Speaker 1: question of the rate you offer, or do you think
Speaker 1: that depositors also really look into services and the culture.
Speaker 1: I mean, what do you what's your view on on
Speaker 1: that look?
Speaker 4: I think there was definitely back in March, a reorganization
Speaker 4: of the deposit market versus large banks, small banks, medium
Speaker 4: sized banks where people had funds, The entire notion that
Speaker 4: interest wasn't being paid on certain types of accounts, FDIC,
Speaker 4: insurance coverage, lots of questions, lots of things came to
Speaker 4: the four in those few weeks of March. In early April,
Speaker 4: I think the market overall, though, has pretty much settled
Speaker 4: out and people are pretty much staying where they are.
Speaker 4: There is the ease of being able to move money
Speaker 4: from bank to bank, but folks, Connect One is mostly
Speaker 4: a business oriented bank. People come to us not necessarily
Speaker 4: for the highest rate. They come to us for services.
Speaker 4: There's generally we have clients who have multiple types of
Speaker 4: businesses with us, and so rate is not the number
Speaker 4: one thing. That doesn't mean we're not going to pay
Speaker 4: a market rate, but it does mean that folks are
Speaker 4: making decisions in banks like hours relative to things like
Speaker 4: service and availability and the ability to talk to decision makers,
Speaker 4: and you know what the other side of the transaction
Speaker 4: looks like, if there's a loan there, or a business
Speaker 4: loan or something else. So I think things in general
Speaker 4: have stabilized. Keep in mind, however, beside the FED raising rates,
Speaker 4: they've also been shrinking the money supply and shrinking the
Speaker 4: FED balance sheet. Right earlier this year we saw for
Speaker 4: the first time since nineteen forty nine that M two
Speaker 4: actually shrunk, and the FED is on a track to
Speaker 4: continue to reduce the size of its balance sheet. That's
Speaker 4: putting a lot of pressure on banks and other financial institutions.
Speaker 1: Frank, great to get your views, really helpful context there.
Speaker 1: Frank Sorrentino is the chairman and CEO of Connect One Bank.
Speaker 7: You're listening to the team. Ken's a live program Bloomberg
Speaker 7: Markets weekdays at ten am Eastern on Bloomberg dot Com,
Speaker 7: the iHeartRadio app, and the Bloomberg Business App, or listen
Speaker 7: on demand wherever you get your podcast.
Speaker 1: Katie Greifeld in the studio with me Paul Sweeney on
Speaker 1: an extended lunch break right now. I'll be back at
Speaker 1: three pm. Let's talk right now about There was a
Speaker 1: Bloomberg story the other day that said the shrinking one
Speaker 1: point three trillion dollar col market is bad news for bankers,
Speaker 1: and people have been talking about this market as if
Speaker 1: it's hit a speed bump or maybe even frozen. Got
Speaker 1: a guest here in the studio says, not the case,
Speaker 1: not so fast. Thomas Majuski is a CEO of Eagle
Speaker 1: Point Credit Management. He's got experience across the street from
Speaker 1: JP Morgan to bear Stearns and Mother Merrill and then
Speaker 1: obviously some smaller shops as well. Tom, Thanks so much
Speaker 1: for your time. What's your view of the CLO market
Speaker 1: right now.
Speaker 8: Great, thanks for having me mat The market's far more vibrant,
Speaker 8: I think than the headlines suggest. There's always waysy can
Speaker 8: cut the data a lot of different ways. The actual
Speaker 8: new issue volume for colos remains quite robust. However, the
Speaker 8: activity of resetting or refinancing, which is where you go
Speaker 8: and reopen an old deal and re extend it, that
Speaker 8: slowed down significantly. So total volume is down, but the
Speaker 8: actual new volume created is not too far off from
Speaker 8: where it was last year.
Speaker 9: Well, let's talk about one of the ways in which
Speaker 9: they cut the data. About forty percent of issuers in
Speaker 9: this area of corporate finance are yet to price a
Speaker 9: new deal this year. When you hear a stat like that,
Speaker 9: what's your reaction?
Speaker 8: It's an indication perhaps of the state of their performance
Speaker 8: and a state of the market.
Speaker 7: Broadly.
Speaker 8: Markets investors in colos, including US, have certainly gotten far
Speaker 8: more selective in a raging bull market. There was an
Speaker 8: old saying two guys in a Bloomberg could print a COLO.
Speaker 8: The market needs a little more robust than that. And
Speaker 8: now that we have over twenty years of data for
Speaker 8: people's performance, it's easier to separate the top from the
Speaker 8: worst that forty is out of about one hundred and twenty.
Speaker 8: So the other way to cut that is two thirds
Speaker 8: of the market is operating kind of business as usual.
Speaker 1: What's your view on financial conditions right now? It seems
Speaker 1: like they were getting tighter. The Fed was letting the
Speaker 1: market do its job until the Fed told the market
Speaker 1: that's what it was doing. And now the market isn't
Speaker 1: doing its job anymore. So how do they look to you?
Speaker 8: Well, the underlying assets and clos are syndicated loans, small
Speaker 8: pieces of big loans to big American companies. Their floating
Speaker 8: rate and senior and secured, which means a problem, there's
Speaker 8: less risk of loss. The loan index is up about
Speaker 8: ten percent this year versus the Bloomberg ag is roughly
Speaker 8: flat for the year, down a tiny bit. That's investment
Speaker 8: grade versus loans are below investment grade. And there was
Speaker 8: a lot of talk early in the year with increasing
Speaker 8: interest rates and loans are floating rate, that companies wouldn't
Speaker 8: be able to service their debt. There was going to
Speaker 8: be a recession coming and rates are going higher. As
Speaker 8: an investor, great, we get a floating rate for the companies.
Speaker 8: On the other hand, they have to pay that floating rate.
Speaker 8: The reality though, is profits and revenue at most below
Speaker 8: investment grade companies continue to go up in this economy.
Speaker 8: Citybank just put out research that said more companies are
Speaker 8: getting upgraded than downgraded, and while there are some defaults,
Speaker 8: the default rate over this year has been roughly half
Speaker 8: the long term average. So it's the economy is at
Speaker 8: least the corporate borrower in leverage finances doing far better
Speaker 8: than the headlines would suggest.
Speaker 9: Okay, so overall, not too much consternation over increased in
Speaker 9: interest expenses and servicing that debt. But for the pain
Speaker 9: that you are seeing, there certainly are companies out there
Speaker 9: that are struggling with that. Do they tend to be
Speaker 9: concentrated to any industry or what is the common denominator there?
Speaker 8: Thankfully it's not one industry. Sometimes we've seen that, maybe
Speaker 8: in twenty fifteen we saw energy pose a problem. The
Speaker 8: problems where they do exist, and they're quite few, are
Speaker 8: generally broad based. In many case is it's due to
Speaker 8: either a company that just put on a little too
Speaker 8: much leverage or a company maybe with a less skilled
Speaker 8: management team would be some of the biggest things or
Speaker 8: change in regulation. One company recently, in Vision Healthcare, which defaulted,
Speaker 8: had a number of businesses. Every business line was coincidentally
Speaker 8: infected by adverse changes in regulation for them, So just
Speaker 8: a perfect storm against that company, you think.
Speaker 1: So, you think that regulatory capital reasons are the problem
Speaker 1: that some banks have, I guess bought other things than
Speaker 1: triple A clos. But you point out Japanese banks are
Speaker 1: still big buyers. Why is that? Why are Japanese banks
Speaker 1: notable here?
Speaker 8: Absolutely, Japanese banks remained some of the largest buyers of
Speaker 8: COLO triple as and holders in the world. US banks
Speaker 8: also own meaningful amounts. Some of the largest money center
Speaker 8: banks own more than one percent of their gross assets
Speaker 8: and COLO paper. Frankly, we joke that had some of
Speaker 8: the regional banks that are no longer with US bought
Speaker 8: floating rate clos instead of mortgages, they might still be
Speaker 8: with US in fact, but the banks in the US
Speaker 8: there's sometimes some stigma with the name. It's still a
Speaker 8: COLO that sounds like a cdo Many of those Japanese
Speaker 8: investors have been in the market for over twenty years,
Speaker 8: and across their triple A portfolios, what they've seen is
Speaker 8: everyone has paid off at par there's never been a
Speaker 8: default on any bond they bought in the COLO market.
Speaker 9: And let's talk a little bit about what happened in March.
Speaker 9: Like you said, maybe if those banks had maybe shifted
Speaker 9: out of treasuries into colos, we'd still be with them.
Speaker 9: But when we talk about what happened in March, we
Speaker 9: talk about it as a boon to private credit. Certainly,
Speaker 9: private debt has been on fire this year. Where does
Speaker 9: the COLO market sit in relation to what we're seeing
Speaker 9: in private credit?
Speaker 8: Sure so we're a net beneficiary of that in a
Speaker 8: number of ways. Frankly, banks in general are putting less
Speaker 8: capital out as Basel three comes to fruition and higher
Speaker 8: capital charges on banks are unambiguously trends in the market.
Speaker 8: The steady hand of private credit, which is typically in
Speaker 8: the form of private equity style funds, not short term
Speaker 8: funds with redemptions, but long ten year funds that can
Speaker 8: see a credit through from start to end. A lot
Speaker 8: of capital going in there. They've frankly bailed out a
Speaker 8: number of triple C rated syndicated loans and taken that
Speaker 8: out of the syndicated loan market, brought it to private
Speaker 8: credit as one thing and another thing. We've seen a
Speaker 8: real increase in it. It's an opportunity we're very interested in,
Speaker 8: and I've been deploying a lot of capital in are
Speaker 8: something called regulatory capital relief transactions for banks. This is
Speaker 8: where a large bank will take a portion of their
Speaker 8: corporate loans, or their auto loans, or their fund subscription
Speaker 8: line loans even and put them in a synthetic securitization.
Speaker 8: Some very loaded words there, but a good way to
Speaker 8: raise capital and they can basically transfer the risk of
Speaker 8: owning those two investors. Basically a way to raise capital
Speaker 8: without having to go to the stock market and do
Speaker 8: a secondary offering. The reality is, over many years those
Speaker 8: investments have done very very well. And what we're seeing
Speaker 8: is banks are seeking more and more capital knowing they're
Speaker 8: going to be facing higher capital charges. They're coming to
Speaker 8: that market with greater frequency.
Speaker 1: But the private credit market is one that banks are
Speaker 1: It seems like they're losing that business to almost a
Speaker 1: shadow banking group of lenders. Is that market even though
Speaker 1: I mean you point out their long term lenders, you
Speaker 1: know they aren't facing like immediate redemptions in a lot
Speaker 1: of cases, but there's not a lot of regulation there
Speaker 1: for how much business they're doing. So does that look
Speaker 1: like a place where regulation is going to grow into
Speaker 1: the good.
Speaker 8: Part about it is it's a steady hand, and what
Speaker 8: goes wrong with banks as people take their money out.
Speaker 8: You and I can take our money out of our
Speaker 8: banks today with no consequence except for the person in
Speaker 8: line after us perhaps having these credits, even if there
Speaker 8: are riskier credits some cases in private credit or maybe
Speaker 8: a little more leverage, having a small number of owners
Speaker 8: in that loan, each with a long term mindset and
Speaker 8: a steady hand, I think is net beneficial. The investors
Speaker 8: in those vehicles typically are large sophisticated pensions and insurance companies,
Speaker 8: so the investor is getting involved in these underlying funds
Speaker 8: that are making these private credit loans are quite sophisticated themselves.
Speaker 9: Okay, so we don't have much time love with you,
Speaker 9: but I could see regulation being a potential risk here.
Speaker 9: Talking to you, everything sounds pretty rosy. But if you
Speaker 9: take a look at the CLO market overall, where else
Speaker 9: are you seeing risks lurk?
Speaker 8: Some of the risks continue to be frankly that the
Speaker 8: biggest thing is the change in regulation and the impact
Speaker 8: on companies. I cited that one company before something that
Speaker 8: makes medicare reimbursement slower or things like that, a regulation,
Speaker 8: which might be a very valid regulation, then has an
Speaker 8: impact and changes a company's behavior overall. Things that people
Speaker 8: often talk about, the wall of maturities and loans has
Speaker 8: been pushed way out, frankly, and the ability of companies
Speaker 8: to service their higher debts remains quite strong. Idiosyncratic risk
Speaker 8: is probably the biggest area that we look at, and
Speaker 8: then probably when we think about in our risk management meetings, frankly,
Speaker 8: continuing to look at our counterparties one of the things
Speaker 8: we look at, or what's the credit default spread pricing
Speaker 8: on banks that we do business with. While right now
Speaker 8: it seems most banks are on steady footing, again, that
Speaker 8: can change very quickly, so we keep our eye out
Speaker 8: at the margins. We don't see a large systemic risk
Speaker 8: facing us, but no one was talking about a banking
Speaker 8: crisis in January of this year.
Speaker 1: Absolutely, Thomas, thanks so much for your time, Really appreciated.
Speaker 1: Thomas Majuski is the CEO of Eagle Point Credit Management.
Speaker 1: If you want more from him, he's going to go
Speaker 1: on Bloomberg Television in a moment and talk a little
Speaker 1: bit Lisa Bromwitz about this as well.
Speaker 7: You're listening to the tape. Catch our live program Bloomberg
Speaker 7: Markets weekdays at ten am Eastern on Bloomberg Radio, the
Speaker 7: tune in app, Bloomberg dot Com, and the Bloomberg Business App.
Speaker 7: You can also listen live on Amazon Alexa from our
Speaker 7: flagship New York station, Just say Alexa Play Bloomberg eleven thirty.
Speaker 1: Katie Greifeld here with me in the Interactive Brokers studio.
Speaker 1: Paul Sweeney is out today. Well he'll be back, yeah,
Speaker 1: but not until three pm. He's taking an extended break
Speaker 1: right now. Gina ting in the house as well. She
Speaker 1: is the head of Global Index Portfolio Management team over
Speaker 1: at Franklin Templeton ETFs, and she will be a guest
Speaker 1: on our next week's ETFIQ program that's on Bloomberg Television
Speaker 1: every Monday at one pm.
Speaker 9: So this is the warm up.
Speaker 1: This is a deep tease, basically, Dina, just before we
Speaker 1: get into the important stuff, I wanted to address a
Speaker 1: story that Katie and Eric Belchunas they don't think it's
Speaker 1: that important, but I think it's very interesting and kind
Speaker 1: of a big deal, and that is a big push
Speaker 1: by regularly to shift to T plus one to faster
Speaker 1: settlement is going to drive up costs and create a
Speaker 1: lot of operational challenges for ETFs. What do you think
Speaker 1: about this drive to move to at some point will
Speaker 1: be on tea. We'll just settle as soon as you
Speaker 1: make the transaction.
Speaker 10: Yeah. I think all changes always have repercussion, right, So
Speaker 10: in the case of T plus one, I think at
Speaker 10: the end of the day, when everybody is prepared for it,
Speaker 10: it should not be causing an issue. I've seen an
Speaker 10: example in India where they move from T plus two
Speaker 10: to T plus one earlier this year and everybody was worried,
Speaker 10: especially because India the currency is restricted. Currency is a
Speaker 10: little bit more difficult. So I would imagine with more
Speaker 10: preparation in the US dollar in the US especially, that
Speaker 10: it's less of an issue. And I don't know if
Speaker 10: you're aware, but in China it's actually T plus zero. WOWK, Yeah,
Speaker 10: good for them.
Speaker 1: The concern is actually international settlements. So there are many
Speaker 1: US listed ETFs that are going to have to be
Speaker 1: settling plus one, but they hold you know ETFs that
Speaker 1: hold European assets for example, or international assets that settle
Speaker 1: plus two or plus five, how do they square that circle?
Speaker 10: Yeah, so those are the balancing act that a portfolio
Speaker 10: manager has to do.
Speaker 5: Right.
Speaker 10: So when you're investing in the global markets, they all
Speaker 10: have different settlement cycles. So and if you're in the
Speaker 10: midst of rebalancing, how would you balance something that settles
Speaker 10: in three plus three if your funding is coming in
Speaker 10: at even longer settlement than that. But it's nothing unusual.
Speaker 10: So it's just about like, how would you handle the
Speaker 10: mismatch between where you're getting your funding versus where are
Speaker 10: you going to deploy that particular cash. Right, So if
Speaker 10: you think about your example, so if let's say you're
Speaker 10: investing in European countries and you're buying a US equity, right,
Speaker 10: so the US equity will settle T plus one. But
Speaker 10: let's say to buy the US equity you require funding
Speaker 10: from selling the European equity. Then you have to short
Speaker 10: stand the cycle of that one in order to be
Speaker 10: able to fund or you can have a line of
Speaker 10: credit to kind of handle that. So it's one of
Speaker 10: those things that at the end of the day, it
Speaker 10: is complicated.
Speaker 9: Yeah, gosh, good thing that I the end investor probably
Speaker 9: don't have to worry about.
Speaker 10: This, right, It's true, Like that's why you trust your
Speaker 10: money managers.
Speaker 1: Well, unless you take to hit on the margins, she's
Speaker 1: going to have to pay a higher fee.
Speaker 9: Frankly, perhaps, Yeah, all right.
Speaker 1: Franklin Templeton ETFs. What are you guys pumped about?
Speaker 10: So we are looking at dividendal strategy. So we're pumped
Speaker 10: about that strategy because very rarely a strategy that focus
Speaker 10: on dividend focus beyond just dividend. So a lot of
Speaker 10: the strategies out there all they care about is a
Speaker 10: higher dividend yield, right, But in reality, when you only
Speaker 10: singularly focus on higher dividend yield, you forget that you
Speaker 10: may be underperforming in some periods by a significant amount. Likewise,
Speaker 10: so the tracking era between your investment universe and your
Speaker 10: strategy could deview it quite a bit. So at Franklin
Speaker 10: Templeton we have a suite of dividendial strategies where you're
Speaker 10: balancing the tracking error versus the investment universe and the
Speaker 10: dividend yield. So you're still getting a higher dividend yield,
Speaker 10: but you're not limiting yourself only two companies that pay
Speaker 10: higher yield, you actually run an optimization to be able
Speaker 10: to balance out the tracking air versus the investment universe
Speaker 10: while still delivering on the higher yield.
Speaker 9: And so it feels like income has been one of
Speaker 9: the primary things that investors have been looking for, whether
Speaker 9: it's through t bills funds, whether it's through these options
Speaker 9: overlay ETFs. How does demand for dividends actually looked like?
Speaker 10: Yeah, so we're seeing over like three hundred billion allocated
Speaker 10: to like income slash dividend yield strategies. Within our lineup,
Speaker 10: our dv product dv I, which is international developed dividend
Speaker 10: tilt strategies, we were seeing like close to like half
Speaker 10: a billion in netflows coming through. So income is an
Speaker 10: area that, regardless of the environment, people are looking for,
Speaker 10: and especially in the higher volatility environment that we're seeing
Speaker 10: right now, it gives you a little bit of downside
Speaker 10: protection as well as providing you the income that you're
Speaker 10: looking for.
Speaker 1: You know, it was a lot of talk about the
Speaker 1: S and P today. Amligriffe Oros story about the fact
Speaker 1: that a lot of the companies in the S and
Speaker 1: P are smaller than companies in the S and P
Speaker 1: four hundred MidCap index, all of the games are really
Speaker 1: about the big seven getting bigger. Right, does diversification matter
Speaker 1: right now? Or do you just have to make the right.
Speaker 9: Bet the ication?
Speaker 10: Diversification always matter?
Speaker 9: Right?
Speaker 10: The fact that the S and P five hundred is
Speaker 10: driven by these seven companies actually is a challenge. Right,
Speaker 10: It's not like that for ten years ago. It's not
Speaker 10: like that twenty years ago. A company or an indices
Speaker 10: needs to be diversified because that's how you kind of
Speaker 10: believe in like the returns potential, Because if you're just
Speaker 10: relying on seven to drive the contribution of return, which
Speaker 10: I heard the number is like eighty five percent this year, right,
Speaker 10: it's not a balance because imagine when it's doing well,
Speaker 10: of course is good, but when it's not doing so well,
Speaker 10: then it's less so. So that's why we're always a
Speaker 10: big believer on like the MidCap segment and liver in
Speaker 10: a balance approach, whether that's through a smart bab or
Speaker 10: through a combination of strategies around.
Speaker 9: But even still, it just feels like all of the
Speaker 9: attention has been on the big seven, and I mean,
Speaker 9: how are you seeing a filter cross.
Speaker 1: These different and we don't have time for ohm questions.
Speaker 9: Oh no, I was just gonna started.
Speaker 1: There's only twenty seconds left.
Speaker 9: Okay, never mind, we'll ask it next month.
Speaker 1: We'll talk to you next week. Right next week at
Speaker 1: one pm, you can hear more from Dina Ting, head
Speaker 1: of Global Index Portfolio Management at Franklin Templeton etf She's
Speaker 1: going to join me and Katie and Eric Belchunis on
Speaker 1: Bloomberg TV Crypto Sorry etf IQ.
Speaker 7: You're listening to the tape can's our live program Bloomberg
Speaker 7: Markets weekdays at ten am Eastern on Bloomberg Radio, the
Speaker 7: tune in app, Bloomberg dot Com, and the Bloomberg Business app.
Speaker 7: You can also listen live on Amazon Alexa from our
Speaker 7: flagship New York station. Just say Alexa, play Bloomberg eleven thirty.
Speaker 3: Let's say at Heidaword nexkus Mark Douglas CEO of Mountain.
Speaker 3: They call themselves the hardest working software in television. They
Speaker 3: build advertising software. I really do. I can remember back Mark.
Speaker 3: It had to be like fifty years ago when we
Speaker 3: were first getting cable in the area and my brother
Speaker 3: made the pitch to the old man saying it's great,
Speaker 3: lots of sports and they don't have advertising on cable now.
Speaker 3: It's just like, I feel the same thing as happening
Speaker 3: to me with streaming. What's the story.
Speaker 11: Well, I mean that works for the first three providers,
Speaker 11: which are willing to pay for maybe four, and then
Speaker 11: all the other cable channels they're not getting any of
Speaker 11: that subscription money so they have to have ads. And
Speaker 11: then it comes full circle and the ones you weren't
Speaker 11: getting ads from were like, well, we could double our
Speaker 11: revenue if we add ads too, So we're just kind
Speaker 11: of as back to the future. We're reliving that moment
Speaker 11: in cable, but we're doing it on streaming that.
Speaker 3: Yeah, but I don't watch those ads, and Scarlett, I
Speaker 3: know your kids aren't watching the ads.
Speaker 12: Gen Z is just angry about having to watch advertising
Speaker 12: because they've grown up where they haven't had to do it,
Speaker 12: and so when they're forced to sit through it, it's just,
Speaker 12: you know, something that really gets at them is the
Speaker 12: advertising that they're going to see on streaming services going
Speaker 12: to be markedly different than what we got on network
Speaker 12: television in the eighties and nineties.
Speaker 11: Yeah, I mean that's it's I mean, it's literally exactly
Speaker 11: what my company Mount does, so we democratize TV ads,
Speaker 11: So what you're going to see is a lot more
Speaker 11: advertisers and they're all competing to get your attention so
Speaker 11: that they're going to be more entertaining instead of it
Speaker 11: just being kind of the same old bear brands and
Speaker 11: car brands. You're going to see a much you know,
Speaker 11: a lot of merging brands that are actually using television
Speaker 11: now on streaming to kind of basically just show you
Speaker 11: the products they have, but do it in a very
Speaker 11: entertaining way, so it is a bit different. You're also
Speaker 11: starting to see the ads get shorter, and Netflix just
Speaker 11: announced like ten second ad formats for you know, their
Speaker 11: their property. So I mean just expect more entertainment from
Speaker 11: the ads, more university of advertisers, and hopefully over time
Speaker 11: they get a lot shorter just to connect with that consumer.
Speaker 12: Will it look more like Super Bowl ads or our
Speaker 12: Super Bobowl ads a thing unto themselves that that won't
Speaker 12: be replicated anywhere else because of the budgets, because of
Speaker 12: the big audience.
Speaker 11: Well, I mean some of the best advertisings coming out
Speaker 11: of my company have been for the you know, not
Speaker 11: huge amounts of money we have maximum mevro Ryan Reynolds
Speaker 11: ad agency is literally a part a mount then, so
Speaker 11: they do ads for as little as tens of thousands
Speaker 11: of dollars and they I think they might be doing
Speaker 11: a Super Bowl ad, so they do them for millions. Also,
Speaker 11: it just depends on how much special effects and the
Speaker 11: actors and all that kind of stuff that controls the cost.
Speaker 11: The bottom line is if you have something a product
Speaker 11: people interested in and you present it to them an
Speaker 11: interesting way, people do actually respond to the advertising and
Speaker 11: you know, go check out your product and potentially become
Speaker 11: a customer. And that's at the end of the day.
Speaker 11: You're just trying to correct connect like match consumers with
Speaker 11: brands are potentially gonna love. It's not like jingles anymore
Speaker 11: and just pushing brands on you. It's more about making
Speaker 11: that connection.
Speaker 3: Is it right to say Netflix has sort of taken
Speaker 3: the lead on this? And if so, based on that,
Speaker 3: what can we what is Disney hoping to achieve?
Speaker 2: Well?
Speaker 11: I wouldn't say Netflix has taken the lead. I would
Speaker 11: say they have the most green field because they have
Speaker 11: no legacy business. Disney is kind of trapped in the
Speaker 11: upfront and thirty seconds and fifteen second formats. When Netflix
Speaker 11: is starting from scratch and they can just kind of
Speaker 11: reinvent what television advertising looks like. But that being said,
Speaker 11: it's not easy to do, and so they're they're, you know,
Speaker 11: out the gate struggling a little bit. But I think
Speaker 11: they will wind up becoming as innovative on the ad
Speaker 11: side of their business as they've been on the consumer side.
Speaker 11: The thing to remember when Netflix is they kind of
Speaker 11: reinvented the relationship between the consumer and the content.
Speaker 2: Making it on.
Speaker 11: You know, you no longer had to wait for the show,
Speaker 11: you could just binge it all all those kinds of things,
Speaker 11: And now they have an opportunity to do the same
Speaker 11: on advertising. It's kind of reinvent the relationship between the
Speaker 11: advertiser which funds all this programming for the ad supported
Speaker 11: options on Netflix, and reinvent that relationship between the advertiser
Speaker 11: and the content. And I think they will if They've
Speaker 11: been a very innovative company for a very long time.
Speaker 3: But what counts as sorry, what counts for innovation in cystalizing?
Speaker 3: I mean an example, Yeah.
Speaker 11: So a lot has to do with the formats I
Speaker 11: think is like, again, you know, you don't have to
Speaker 11: sit there for thirty seconds. The if you look at
Speaker 11: social Like if you look at ads on TikTok and
Speaker 11: you look at them on Instagram, even though they're both
Speaker 11: somewhat feeds, the ad content is very different. I think
Speaker 11: on TikTok it feels much more like the content that
Speaker 11: you're scrolling through on Instagram, it feels a little more tradition.
Speaker 8: There's a mix of.
Speaker 11: Video, so it's it's subtle changes that just make the
Speaker 11: ad format again feel like a form of the entertainment.
Speaker 11: So you're not like dreading the interruption, You're like kind
Speaker 11: of like hopefully entertained by it. Yeah, and you know,
Speaker 11: one thing that makes the advertising like something that we
Speaker 11: do is what we call fasphatizing where the ads are
Speaker 11: and this is like the maximum effort where the ad
Speaker 11: the ad content is like just extremely culturally relevant. It's
Speaker 11: like like today's cultural news becomes literally tomorrow's ad. There's
Speaker 11: no delay. And so having that kind of support where
Speaker 11: you don't have to planet a half year in advance,
Speaker 11: you can just come up with something right now and
Speaker 11: get it on the TV. I think that's pretty important.
Speaker 11: I think that's something Netflix and pretty much all networks
Speaker 11: are going.
Speaker 2: To start to support.
Speaker 12: So as we look ahead to Disney earnings on Wednesday, Mark,
Speaker 12: I wonder if Disney has room to innovate advertising on
Speaker 12: Disney Plus or ESPN Plus that really takes advantage of
Speaker 12: its different businesses, including theme parks. What can it do
Speaker 12: innovation wise that other media companies, other streamers can't do well.
Speaker 11: I think that they, I mean, they can do whatever
Speaker 11: they want. I think bob Byger for quite a while
Speaker 11: now has been saying that he wants to kind of
Speaker 11: do away with the concept of an upfront, and he
Speaker 11: wants the advertising, the advertisers to have a lot more
Speaker 11: freedom and just kind of Disney be where they want
Speaker 11: to be, not where they're trapped into enough front contract.
Speaker 11: That being said, I mean, I think the first order
Speaker 11: of business that Disney is really to get all the
Speaker 11: business units operating like at their best, and you know,
Speaker 11: almost all of them have been struggling on some level
Speaker 11: for growth, for profitability. So I mean, he'll probably Disney,
Speaker 11: bob Byger that team there, they'll probably somewhat follow the
Speaker 11: same path on as Netflix in terms of like, Okay,
Speaker 11: we can innovate these app formats. We don't have to
Speaker 11: stay stuck in the thirty second upfront format. But that
Speaker 11: being said, they have to get the viewers. People have
Speaker 11: to want to go and actually see the content before
Speaker 11: they want to see the apps.
Speaker 3: Mark always a pleasure, appreciate it, good to see it.
Speaker 3: Mark Douglas, CEO Mountain. They call themselves the harness working
Speaker 3: software in TV. You know c the new CFO Disney.
Speaker 12: Hugh Johnson. He's a pepsiley, I don't want to say lifer,
Speaker 12: but he's been there for decades, for.
Speaker 3: Decades, and I inducted him into the Hall of Fame
Speaker 3: of our high school. Did he really my classmate at CBA?
Speaker 2: Wow?
Speaker 12: Look at you guys.
Speaker 3: Yeah, he's there and I'm Aaron.
Speaker 1: Thanks for listening to the Bloomberg Markets podcast. You can
Speaker 1: subscribe and listen to interviews at Apple Podcasts or whatever
Speaker 1: podcast platform you prefer. I'm Matt Miller. I'm on Twitter
Speaker 1: at Matt Miller nineteen seventy three and on Fall Sweeney
Speaker 1: I'm on Twitter at pt Sweeney. Before the podcast, you
Speaker 1: can always cut just worldwide at Bloomberg Radio.