Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm Pim Fox.
Speaker 1: Along with my co host Lisa Bramowitz. 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. Has
Speaker 1: President Trump had his Nicksonian moment? To weigh in? I
Speaker 1: want to bring an Eli Lake, a Bloomberg View columnist
Speaker 1: who has written extensively about the latest dramas in the
Speaker 1: President Trump administration. Eli, first take, I know a lot
Speaker 1: of people have compared what President Trump just did with
Speaker 1: James Comey, uh but firing him as the FBI director
Speaker 1: to some of the developments under former President Nixon, who
Speaker 1: was imp How is this similar and how is this different? Well,
Speaker 1: it's similar in that James Tomy was the head of
Speaker 1: the Bureau and was that was conducting an investigation in
Speaker 1: the president as Archibald Cox was a special prosecutor looking
Speaker 1: into Watergate. But that's really where the similarities end. Um.
Speaker 1: First of all, in Watergate, we always knew what the
Speaker 1: crime was. It was a third rate break in followed
Speaker 1: by a series of cover ups and lying. In the
Speaker 1: case of Russia Gate, for lack of a better word,
Speaker 1: we're not even sure what the underlying crime is at
Speaker 1: this point, uh, And it looks like there's a cover up,
Speaker 1: but it's like a cover up without a crime. And
Speaker 1: the second of all, one of the things that Nixon
Speaker 1: did and why the Watergate break in was so troubling,
Speaker 1: was that he was using because he used former CIA
Speaker 1: officers and people involved with Cuba operations for that break
Speaker 1: in as part of a kind of dirty tricks group
Speaker 1: in UH that that did things on behalf of the
Speaker 1: of the White House. So he was using the power
Speaker 1: of the surveillance state against his political opposition. You could
Speaker 1: argue that with the leak um of Flynn's conversations with
Speaker 1: Kiss leak and a couple other things like that, the
Speaker 1: power of the surveillance state was has been used against
Speaker 1: Trump uh to weaponize the allegation about Russia. UM. So
Speaker 1: that's another important distinction. UM. But the one thing that's
Speaker 1: very similar is that you know, in some ways what
Speaker 1: happened with Nixon and what happened with Trunk is that
Speaker 1: these were both sort of violating traditional political norms. I
Speaker 1: had written a column and said Comey was the most
Speaker 1: powerful man in Washington because I couldn't imagine after he
Speaker 1: announced an ongoing counor intelligence probe into the Trump campaign Russia,
Speaker 1: that the president would fire him. I thought it would
Speaker 1: be politically suicidal. Look what I know, um, well, I
Speaker 1: mean we haven't seen the full fallout, but I think
Speaker 1: that that this is the question you if it is
Speaker 1: not political suicide, If if it was inaccurate to say
Speaker 1: that this is such a dire political move that President
Speaker 1: Trump would not embark upon it. What does this mean
Speaker 1: for the independence of the law enforcement branch, especially at
Speaker 1: a time when a G. Jeff Sessions turned General Jeff
Speaker 1: Sessions has said that he would recuse himself, you know,
Speaker 1: as as Senator Schumer was saying he would recuse himself
Speaker 1: from the Russia probe. And then to make a move
Speaker 1: like this and recommend that James Comey be fired as
Speaker 1: FBI director, I mean, does this concern you? I don't
Speaker 1: think we're there yet. The acting FBI director is a
Speaker 1: guy named Andrew McCabe. His wife received a significant amount
Speaker 1: of campaign contributions from Terry mccauugh the current Democratic governor
Speaker 1: of Virginia and longtime Clinton associate and head of the
Speaker 1: d n C UM that would suggest to me that, um,
Speaker 1: you know that you're the first of all, the Russia
Speaker 1: probe isn't going away, and second of all, the FBI
Speaker 1: will continue to you know, do its investigations. And finally,
Speaker 1: I mean, I think another big difference on water game
Speaker 1: is that you know, you could you could, you could
Speaker 1: be critical of elements of Archibald Cox, but really there
Speaker 1: is a substantive case against Jim Comey that Democrats have
Speaker 1: made and Republicans have made that is it arguable? I
Speaker 1: think so? Um, in that respect, I mean there was
Speaker 1: cause in the case of Comy, um most recently that
Speaker 1: he misled Congress last week when he testified about whom
Speaker 1: Abideen and Anthony Meaner's computer. Um, So in that respect,
Speaker 1: you know, you could say it's a long time coming.
Speaker 1: It's just you know, he was investigating Trump or not Trump,
Speaker 1: but I guess he was. Trump said he was assured
Speaker 1: he was not under investigation, but he was certainly investigating
Speaker 1: his search, which, which, by the way, I mean, Eli,
Speaker 1: we would be remiss if we didn't point out how
Speaker 1: odd it was for President Trump to even flick at
Speaker 1: the investigation in his letter to a former FBI director,
Speaker 1: James Comey. Now, I mean, I don't what's so strange
Speaker 1: about that is, if that's if, assuming it's true, why
Speaker 1: didn't Comey say that when he announced the investigation. Yeah,
Speaker 1: there are a lot of don't understand it. Well, one
Speaker 1: thing I wanted to get back to with the FBI
Speaker 1: acting director McCabe being a respected bureau employee. First of all,
Speaker 1: is he likely to be the successor, the permanent successor
Speaker 1: to James Comey? And also not a chance? Okay? Why
Speaker 1: because I think I've heard that they want to get
Speaker 1: rid of McCabe as well, and that they are looking
Speaker 1: to I mean, Trump himself said he's gonna nominate somebody new,
Speaker 1: So he's not. So McCabe is going to be the
Speaker 1: acting director. But keep in mind there's an active investigation.
Speaker 1: The active investigation continues, McCabe is going to be the
Speaker 1: acting director, and we can expect I would imagine a
Speaker 1: long political fight over the nomination of the next FBI director.
Speaker 1: It's gonna consume Washington. It's got to pass the smell
Speaker 1: test for Senate Republicans who distanced themselves from the decision
Speaker 1: she fired Comey, and it's got a past the smell
Speaker 1: test from Democrats who are really out for blood at
Speaker 1: this point. And in comparing this to the satura name
Speaker 1: asker Richard Nixon. So, in the meantime, couldn't President Trump
Speaker 1: ostensibly fire acting FBI Director McCabe if he didn't want
Speaker 1: him to be the one in charge? He could? I
Speaker 1: don't know if he will. I don't know if it
Speaker 1: would be politically why you're like, I can't make any
Speaker 1: more statements about political suicide, right, So going forward, what
Speaker 1: do you think is the most important thing for us
Speaker 1: to keep keep track of to sort of get a
Speaker 1: real sense of of what's going to happen here. Well,
Speaker 1: I would look for some sort of statement and reporting.
Speaker 1: I'm trying to get this myself. Is what is the
Speaker 1: status at this point of the counterintelligence probe into Trump
Speaker 1: and Trump campaign in Russia? I would look at, um,
Speaker 1: what the dynamics will look like for a for for
Speaker 1: the nomination fights for the new FBI director. And while
Speaker 1: we just have now new information that miss McConnell sent,
Speaker 1: there won't be a special prosecutor. Um. I do think
Speaker 1: it makes political sense at this point to have some
Speaker 1: sort of bipartisan special commission or something along those line.
Speaker 1: Maybe I mean a kind of special select committee, but
Speaker 1: something that will just allow for our country to have
Speaker 1: a respected group bipartisan that will just sort of present
Speaker 1: at a certain point, here are the facts about the
Speaker 1: election we can all agree on, and let's get it
Speaker 1: find it right. Unfortunately, we're gonna have to leave it there.
Speaker 1: I can speak with you all morning. Eli La is
Speaker 1: a Bloomberg View columnist talking about Trump's firing FBI Director
Speaker 1: James Come. Well, a lot of times there, whatever there's
Speaker 1: a blip in the market, people point their finger at
Speaker 1: this abyss called risk parody. They say risk parody funds
Speaker 1: are deleveraging, or risk parody funds are rotating out of something.
Speaker 1: To sort of clarify what actually is going going on,
Speaker 1: I want to bring in Rob Croche. He is the
Speaker 1: senior portfolio manager at Salient Partners in Houston, Texas. Salient
Speaker 1: overseas about fourteen billion dollars in assets. So Rob, I
Speaker 1: want to just start with talking about why risk parody
Speaker 1: funds are blamed for turmoil in the markets, and whether
Speaker 1: you have seen any instances of this. Sure, well, we've
Speaker 1: certainly seen instances of them being blamed. We haven't seen
Speaker 1: any instances where they really did exacerbate market drawnouts. Um.
Speaker 1: Risk parody is something that a lot of people haven't
Speaker 1: taken the time to try to understand, and therefore it's
Speaker 1: easy to blame it and and have it be credible.
Speaker 1: So so help us understand it. What is risk parody? Sure?
Speaker 1: Risk parody is an asset allocation strategy that tries to
Speaker 1: take risk in asset classes that are really different from
Speaker 1: each other. So rather than having six stocks and bonds,
Speaker 1: it tries to take risks spread pretty equally across stocks
Speaker 1: on credits, UH and sovereign debt. So you know, that's
Speaker 1: sixty forty portfolio, sixty stocks bonds that the average investor
Speaker 1: holds in their portfolio. That is like equity risk, and
Speaker 1: so you know the next time stocks drawn on, it's
Speaker 1: very clear what's going to happen to that portfolio. So
Speaker 1: the idea is to sort of remove correlation to a
Speaker 1: particular move up in one direction or or down in
Speaker 1: another direction. I do have to wonder, though, what has
Speaker 1: the track record been like have these has you have
Speaker 1: your risk parity funds truly been uncorrelated to some of
Speaker 1: the major markets. Sure, so anytime one market moves a lot,
Speaker 1: you're gonna be correlated to it. But at the same time,
Speaker 1: if you look over the long run, our beta two
Speaker 1: stocks are beta two, bonds are beta to to credit,
Speaker 1: our beta to two sovereign debt is exactly what it
Speaker 1: should be. We're getting exactly a quarter of our risk
Speaker 1: historically from each of those asset classes, and that's the goal.
Speaker 1: We don't want to put all your eggs in one basket.
Speaker 1: So what if it turn has been like returns have
Speaker 1: been good. I mean, we're up four percent or so
Speaker 1: year to date in in our mutual fund version of
Speaker 1: risk parity um They're exactly what you would expect from
Speaker 1: from a balanced portfolio that allocs to all the classes.
Speaker 1: What has institutional interests been like for these types of funds.
Speaker 1: Institutional interest it continues to uh increase in risk parity strategies.
Speaker 1: What we're seeing is institutions recognizing that to make that
Speaker 1: seven percent bogey that they need to make, they need
Speaker 1: to do something different. They can't afford to double down
Speaker 1: on stocks. We all know that stocks are are fully
Speaker 1: priced right now. Bonds are fully priced right now, so
Speaker 1: you know that what they've been doing is unlikely to
Speaker 1: get them seven percent on a go forward basis. So
Speaker 1: what should they do? Should they double down on stocks
Speaker 1: or double down on private equity or do should they
Speaker 1: do something a little bit different from that? And so
Speaker 1: they've been allocating to what we see called risk miday
Speaker 1: gaining asset classes or equity risk mitigation, And so that
Speaker 1: doesn't mean usually when I hear equity risk mitigation, I
Speaker 1: think lower return. But that's not what this is. This
Speaker 1: is actually seeking return, but doing it in markets that
Speaker 1: aren't stocks. So walk me through a meeting that you
Speaker 1: would have with an institutional investor. I'm wondering what are
Speaker 1: the biggest questions? Sure, so, in general, when you go
Speaker 1: and talk to an institutional investor about a strategy like this,
Speaker 1: you know that they're already looking at it, and so
Speaker 1: it's really asked answering questions about what makes our implementation different.
Speaker 1: In general, the answer is that we try to have
Speaker 1: a more adaptive portfolio, so we have an overlay. We
Speaker 1: don't We think spar it's a good starting place, but
Speaker 1: we don't think it's where you end. We think that
Speaker 1: you start from there and then you apply some common
Speaker 1: sense approach to tilting the portfolio based on market sentiment.
Speaker 1: And so we explained that approach uh to to potential allocators.
Speaker 1: So how do you do that through algorithms or do
Speaker 1: you do that through a human being looking at the
Speaker 1: market and saying, you know, we should probably do this.
Speaker 1: Algorithms is a scary word, but it's not nearly as
Speaker 1: scary as that thing where we go with the human being.
Speaker 1: You know, so computer is less scary than humans actually
Speaker 1: kind of behaviorally, it's for sure, right, and so you
Speaker 1: know it's it's systematic um, but it's not a it's
Speaker 1: not some crazy black box. We use momentum. Uh. Momentum
Speaker 1: gives us an edge over time. Momentum tells us which
Speaker 1: asset classes are in favor right now and which asset
Speaker 1: classes are are for sure out of favor right now,
Speaker 1: and they help us step out of the way of
Speaker 1: stuff that's not working. So, uh, do you end up
Speaker 1: trading quite a bit in these funds? I mean it's
Speaker 1: a turnover pretty pretty high. Sure, anytime you're training futures,
Speaker 1: turnovers high relative to a sort of buy and hold
Speaker 1: equity portfolio. But yeah, turnovers high. How do you get
Speaker 1: diversity with a model when the implementation can be somewhat
Speaker 1: challenging when you talk about specific corporate securities, for example,
Speaker 1: that may not trade as frequently as say, you know,
Speaker 1: futures or other contracts. So I just wonder theoretical models
Speaker 1: do they ever not translate because of sort of the
Speaker 1: liquidity concerns? For sure, when you're when you're building a
Speaker 1: portfolio like this, liquidity's paramount um and so the credit
Speaker 1: that we trade is a derivative contract, it's an index,
Speaker 1: it's a swap on an index. Uh So it's something
Speaker 1: that is totally liquid by the billions. Uh So we
Speaker 1: we put liquidity first when you're building a portfolio like this.
Speaker 1: Uh and you want to be adaptive, everything you're trading
Speaker 1: has to be very liquid. So going back to sort
Speaker 1: of how we began with the idea that whenever there's
Speaker 1: a blip in the market, people point their fingers at
Speaker 1: risk parity funds is having to de leverage or getting withdrawals.
Speaker 1: Have you seen anything from either from your competitors even
Speaker 1: that have made you think, well, in the hands of
Speaker 1: the wrong person, this could be a dangerous strategy. I
Speaker 1: wish I could throw up my competitors under the bus here,
Speaker 1: but I really can't. All Right. The truth is that
Speaker 1: when when you're a actional portfolio manager and you're trading
Speaker 1: a lot number one, you have to manage market impact costs,
Speaker 1: and you have to manage trading costs, and you know,
Speaker 1: the type of trading that's been sort of assumed of
Speaker 1: risk parity managers during these these periods is implausible from
Speaker 1: a trading cost perspective, And so I'm confident that risk
Speaker 1: parity managers aren't adding insult to injury when when markets
Speaker 1: are drawing down right now, Um, what what I think
Speaker 1: is much scarier is discretionary managers throwing in the towel
Speaker 1: or getting getting fearful and selling stocks. I think that
Speaker 1: that's something much more likely to happen in a discretionary context.
Speaker 1: Was sort of an old school equity manager than it
Speaker 1: is a systematic risparity manager. What do you think is
Speaker 1: going to be the biggest challenge for the rest of
Speaker 1: the year for your risk parity funds? Fortunately, the funds
Speaker 1: don't ask me that. You know, uh, we very much.
Speaker 1: I can't tell the future. So we think that having
Speaker 1: a plan and sticking to it is the way to
Speaker 1: generate performance over time. That said, anytime the market environment
Speaker 1: changes quickly, it can be challenging for a portfolio that's adapting.
Speaker 1: So our portfolio today is ideally situated for the market
Speaker 1: we're in today. As it changes, it will take us
Speaker 1: a little a little bit of time, a couple of
Speaker 1: days to reallocate the portfolio for the new environment. And
Speaker 1: during those periods when when the level of risk changes
Speaker 1: or correlations change, we can be misallocated for a couple
Speaker 1: of days. Fortunately, periods where the market is sort of
Speaker 1: calm and stays in the same state are much more
Speaker 1: frequent and persistent than the sort of jumpy transitory states.
Speaker 1: So we think that over time, being adapted to the
Speaker 1: current environment ends up working much better than being scared
Speaker 1: and sitting on your hands. Thank you so much for
Speaker 1: joining us. Rub Crocha He is managing director of Quantitative
Speaker 1: Strategies and a senior portfolio manager at Salient Partners in Houston, Texas.
Speaker 1: Salient Partners overseas about fourteen billion dollars. We want to
Speaker 1: take a moment to let you know about something new
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Speaker 1: scan any news story on any website, instantly revealing relevant
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Speaker 1: Download our i O s app or search for the
Speaker 1: Bloomberg extension on the Chrome Store to try it out.
Speaker 1: Learn more at Bloomberg dot com slash lens. Well. As
Speaker 1: Jay Clayton takes the helm of the Securities in Exchange
Speaker 1: Commission of the U s UH, it is important to
Speaker 1: realize one of his main concerns, as he has outlined
Speaker 1: on several occasions, is the dearth of i p O
Speaker 1: of initial public offerings in the US, talking about how
Speaker 1: this market has been shrinking and yet we are getting
Speaker 1: some signs that this might pick up. And not only
Speaker 1: is it US companies I p O in here, but
Speaker 1: European company is deciding to come to the US in
Speaker 1: order to raise equity. Ed Hammond is here with us.
Speaker 1: He has a deals reporter for Bloomberg News and joins
Speaker 1: me in the Bloomberg eleven three oh studio in New York,
Speaker 1: and can you give us a sense of why acca?
Speaker 1: And also preta do you say? Pretamon are like? What
Speaker 1: do you say? How do you say? Because it's a
Speaker 1: French word, we just call it prep alright, fine, Princi
Speaker 1: pretty bad when it comes to sort of French or
Speaker 1: foreign pronunciation anyway, because they tend to be lazy when
Speaker 1: it comes to foreign languages. Um, so yeah, which is
Speaker 1: why are they coming here? We just call it PREP,
Speaker 1: So I'll start with prep. Um. It's obviously huge in
Speaker 1: the UK. It's this kind of store of the high street,
Speaker 1: very very popular sandwich shop. I think it may be
Speaker 1: maxed out in terms of what it can do in
Speaker 1: the UK with growth. Obviously, cec Us is potentially a
Speaker 1: huge market for this whole um grab and go as
Speaker 1: they call concept. I think is is obviously huge here.
Speaker 1: You have tons of competition, but actually nothing quite like Prep,
Speaker 1: both in terms of the menu and also just the
Speaker 1: style of the place. Unlike a lot of US sandwich
Speaker 1: shops that you go into, you know, whether it's your
Speaker 1: your Jersey mix or your Subway. In Prep, you don't
Speaker 1: actually see them making the sandwiches. It's all pre prepared food.
Speaker 1: You just literally go in and you kind of grab
Speaker 1: your baguette or your you know, you roll out of
Speaker 1: the fridge, go up to the counter, pay for it
Speaker 1: and leave. So you don't have that thing of sort
Speaker 1: of like you do here where you you know, you
Speaker 1: would order something and they actually build it up for
Speaker 1: you in the store. But why would you need an
Speaker 1: I p O in order to expand? I mean, is
Speaker 1: it just basically to get some more capital in dollars
Speaker 1: or is it something else? Yeah, I think it's to
Speaker 1: get some more capital. I mean, like the private ecty
Speaker 1: owners of this for a while have been have been
Speaker 1: looking at for an exit. I think there was some
Speaker 1: discussion around whether or not they would sell it. Obviously,
Speaker 1: some of that has been reported in terms of potential buyers.
Speaker 1: I think an I P over them is it's an
Speaker 1: obvious way for them to get you know, get it
Speaker 1: out there, obviously exit the business over time. I think
Speaker 1: this is is also a reasonably good time to take
Speaker 1: like this in particularly sort of consumer rounds public that
Speaker 1: seems to be deep appetite for it, and they're actually
Speaker 1: benchmarking against um Starbucks obviously but also against shake Shack,
Speaker 1: which was one of the biggest sort of success stories
Speaker 1: of the public markets in recent years. Interesting, so it
Speaker 1: could be chucked up to a private equity UH exit
Speaker 1: strategy as much as anything else. What about acces, It
Speaker 1: said that it intends to do an initial public offering
Speaker 1: of its US operations. Why now, again, I think, you know,
Speaker 1: there is a sense that the public markets are reasonably
Speaker 1: robust at the moment. We went through a long period
Speaker 1: where they were not wherever. You know, obviously everyone was
Speaker 1: very panicked and you saw a lot of ip as
Speaker 1: being pulled. But I think the other thing that's driving is,
Speaker 1: and we're seeing this across all sextes, really is there
Speaker 1: is a concern that we have some volatility down the road.
Speaker 1: And obviously, you know, it's not necessarily that we're at
Speaker 1: the top of the cycle, but there's certainly a sense
Speaker 1: that you know, if you are if you are going
Speaker 1: to do something, now is probably a good moment to
Speaker 1: do it, because it's unlikely to get better from here
Speaker 1: on out, both in terms of the kind of valuations
Speaker 1: people can expect, but also the appetite in the public
Speaker 1: markets also in the M and A market, So we
Speaker 1: see a lot of the same trades happening in m
Speaker 1: and A, where not people are necessarily rushing to do deals,
Speaker 1: but certainly people are keen to execute stuff now because
Speaker 1: there's a sense that, hey, you know what, in a year,
Speaker 1: maybe the opportunity has gone Yeah, well I'm talking about
Speaker 1: g LS, T Mobile and Sprint now might be back on. Yeah.
Speaker 1: So we've we've had this period obviously, this sort of
Speaker 1: perday period where none of the carriers could speak to
Speaker 1: each other because it was a spectrum launching going on.
Speaker 1: I think that in the last week and so now
Speaker 1: there is this expectation that, look, these guys are going
Speaker 1: to be back in dialogue, that there are any number
Speaker 1: of combinations that could happen in the space. TEAMO Sprint
Speaker 1: obviously was one that has been attempted before unsuccessfully, and
Speaker 1: therefore there's a sense of, look, maybe now with the
Speaker 1: expectation that we have a looser regulatory environment under Trump,
Speaker 1: certainly a looser enter trust environment, maybe this could come back.
Speaker 1: I think that one thing to say on that is
Speaker 1: this deal was previously kind of was was deboggamed by
Speaker 1: the government of the day, and it's actually been something
Speaker 1: that has been a really, really good thing for consumers
Speaker 1: because you've seen prices come way off by having these
Speaker 1: two carriers as separate carriers, You've you've actually seen the
Speaker 1: consumer benefit hugely. So I think making the argument now
Speaker 1: putting them together and going from what you have of
Speaker 1: like four carriers to three is going to be somehow
Speaker 1: good for the U S. Consumer is gonna be a
Speaker 1: very very difficult sol right, But I guess that then
Speaker 1: My question is do the people who would be approving
Speaker 1: the deal or not in government care about that? I mean,
Speaker 1: is that part of the discussion, because frankly, the company
Speaker 1: has cited potential willingness to allow this kind of deal
Speaker 1: in the US administration currently. Yeah, and that's you know,
Speaker 1: that's that's something that I think we are seeing a
Speaker 1: lot of companies they feel that there is a much
Speaker 1: more business friendly environment, particularly among the regulators U and
Speaker 1: I think there's gonna, you know, someone who's going to
Speaker 1: try a big deal and it will be a test case. Obviously,
Speaker 1: under Obama that was it was a fairly tough antitrust environment.
Speaker 1: We saw lots and lots of deals get blocked, not
Speaker 1: to be all the kind of big health insurers who
Speaker 1: tried to merge and were pulled apart Staples Office depot. Similarly, um,
Speaker 1: I think there is an expectation it will be slightly
Speaker 1: easier to get these big deals done, but it's also
Speaker 1: there's a lot of uncertainty. There's also a lot of
Speaker 1: jobs in d C that are not filled that would
Speaker 1: affect these kind of deals. So I think until you
Speaker 1: see some more of those jobs filled and therefore some
Speaker 1: more clarity around exactly how the antitrust environment is going
Speaker 1: to be, it's going to be difficult for someone to
Speaker 1: pull the trigger on a huge deal like this, especially
Speaker 1: one that's already been blocked. And just going back to
Speaker 1: the I p o s real quick, do you get
Speaker 1: a sense that the volume of I p o is
Speaker 1: will continue to accelerate through the rest of the year.
Speaker 1: I think, barring any sort of shocks to the system,
Speaker 1: and obviously there is under this administration is potential for
Speaker 1: a large number of shocks to the system, I think
Speaker 1: we probably will see a decent run of I p
Speaker 1: o s through the rest of the year. There's certainly
Speaker 1: a lot that we hear in the pipeline things being
Speaker 1: talked about. There are also things that people looked at
Speaker 1: last year got quite close to doing in some cases
Speaker 1: and pulled, and I think there will be in you know,
Speaker 1: there is an expectation that those things come back. There's
Speaker 1: also a ton of you know, what we call dual
Speaker 1: track processes out there at the moment, where people like
Speaker 1: you know, private exity owners are exploring a sort of
Speaker 1: an I P O simultaneous to an M and a exit,
Speaker 1: and it will be interesting to see which of those
Speaker 1: gets favored. Thank you so much for joining me. Ed
Speaker 1: Hammond is a deals reporter for Bloomberg News, and he
Speaker 1: joins us in our Bloomberg eleven three oh studio. Pretta
Speaker 1: Brett mona, I'm gonna be practicing that. Just prepped, just
Speaker 1: prep Just stick with Prett right now. However, I want
Speaker 1: to take a look at the media world with Paul Sweeney,
Speaker 1: US director of Research and senior Media and Internet analyst
Speaker 1: for Bloomberg Intelligence. He joins us in the Bloomberg eleven
Speaker 1: three oh studio in New York. Thank you so much.
Speaker 1: I want to start with time you were telling me
Speaker 1: offline about a rather interesting moment on the earnings call.
Speaker 1: The rather the call with analysts after they reported earnings
Speaker 1: where Leon Cooperman of Omega got on and had some
Speaker 1: interesting wants to tell us about them. Yeah, Time I
Speaker 1: reported earnings this morning and they were below analysts expectations
Speaker 1: and the stock was very weak. And this is a
Speaker 1: company that has been under m and a speculation really
Speaker 1: for the last several months. And uh, they kind of
Speaker 1: called off the process uh last week, and the stock
Speaker 1: dropped from near twenty dollars a share down to words
Speaker 1: trading today in the thirteen's range. So Leon Cooperman, a
Speaker 1: large shareholder of Time, Inc. Really challenged management on the
Speaker 1: call to provide a detailed uh financial uh strategic um
Speaker 1: kind of forecast or plan for the company, uh, to
Speaker 1: show shareholders mainly himself includcluding himself, how they would create
Speaker 1: value going forward that would cause them to you know,
Speaker 1: kind of turn away from potential deals that might have
Speaker 1: been in the eighteen to twenty dollar range. Again, the
Speaker 1: stocks in the thirteen dollar trading range today. So he
Speaker 1: really got on the call and challenged and called that management,
Speaker 1: challenged them to you know, give us some detailed forecast
Speaker 1: because they walked away from potentially a much higher price
Speaker 1: where the stock is trading now. And he said, I'm
Speaker 1: pretty angry, didn't he? Yeah, you know, he's basically saying listen, no,
Speaker 1: here's my recommendation to you. Um, you know, I'm sure
Speaker 1: he's not happy about the company not getting a deal
Speaker 1: done and what again, could have been eighteen and twenty
Speaker 1: of share So he's feeling the pain and he's just saying, listen, guys,
Speaker 1: because you walked away, you really owe it to your
Speaker 1: shareholders to come back with some detailed plans about how
Speaker 1: you intend to uh increase value going forward. Right, And
Speaker 1: they have been trying to sell some of their print
Speaker 1: products and some of their assets and sort of focus
Speaker 1: more on the online business. But they've got a lot
Speaker 1: of competition and this has sort of been the strategy
Speaker 1: for others, including ESPN. And we really have to talk
Speaker 1: about ESPN because they just recently fired a whole host
Speaker 1: of their uh, their personalities, right, in order to shore
Speaker 1: up profitability. Disney reported earnings after the Bell Disney, of course,
Speaker 1: as a parent company of ESPN. What did we learn
Speaker 1: about the progress of espns finances and what the path
Speaker 1: forward is? Well, the company reported, you know, very good
Speaker 1: earnings beat expectations. Um, you know, in the parks business
Speaker 1: and the and the film business continue to perform very well.
Speaker 1: Let's you know, two big businesses for them. The third business, however,
Speaker 1: is really what's the focus of investors, and that's the
Speaker 1: cable network business. Uh, specifically the ESPN. And in fact,
Speaker 1: I think thirteen out of the fifteen analyst questions on
Speaker 1: the call, we're about ESPN. So that's that's clearly the
Speaker 1: focus of the marketplace. And unfortunately, uh, ESPN, like most
Speaker 1: cable networks, continues to lose subscribers as consumers cut the
Speaker 1: chord and maybe go for skinny bundles or maybe just
Speaker 1: get their content from the internet directly. So uh you know,
Speaker 1: so over the last five or six years, ESPNS lost
Speaker 1: almost ten million subscribers. Um. And that's really a challenge
Speaker 1: for them because they have a very high fixed cost base.
Speaker 1: And fixed costs are all the rights fees they pay
Speaker 1: to the NFL and the NBA and uh you know
Speaker 1: for basketball and football and so on, and uh. Yet, um,
Speaker 1: you know, if they're losing subscribers, that means they're advertising
Speaker 1: revenues canna be under pressure. That means they're affiliate few
Speaker 1: revenues can be under pressure, and that really puts Uh.
Speaker 1: When you have a fixed cost like that, that really
Speaker 1: cramps your margins, and that's what investors are concerned about. Yeah,
Speaker 1: so what's what are they saying as far as going forward, Well,
Speaker 1: the real challenge for them going forward is to ensure
Speaker 1: that ESPN is on most, if not all, of the
Speaker 1: skinny bundles and virtual cable networks that are being created
Speaker 1: out in the marketplace, so that they can still get
Speaker 1: paid uh, no matter where consumers go. So that's challenge
Speaker 1: number one, and they seem to be having some success there.
Speaker 1: The second issue though, is um they really need to
Speaker 1: articulate to investors that they have a strategy to take
Speaker 1: ESPN direct to consumers to bypass the pay TV bundle,
Speaker 1: much like Hbo, for example, goes to consumers with Hbo
Speaker 1: now you don't need a cable subscription, you can just
Speaker 1: go online and so it's an over the top service
Speaker 1: like a Netflix. Uh, and this would be ESPN would
Speaker 1: be kind of the Netflix for sports. Now. ESPN has
Speaker 1: been reluctant to launch such such a product because that
Speaker 1: would really be a competitive threat to their existing partners,
Speaker 1: the cable companies and satellite companies that carry ESPN and
Speaker 1: which pay you know, over six dollars per subscriber per month.
Speaker 1: So ESPN is really running a kind of a tight
Speaker 1: rope because they don't want to cannibalize uh their existing
Speaker 1: cash flow stream coming from their existing distribution, but they
Speaker 1: recognize at the same time that they have to go
Speaker 1: direct a consumer to to reach some of these younger consumers.
Speaker 1: That's where they're consuming the media, and ESPN needs to
Speaker 1: be there. Uh So, talking about sort of the challenge
Speaker 1: of adapting to the new now, we would also need
Speaker 1: to really look at Tribune, which also reported earnings this
Speaker 1: morning that trails that trailed estimates. What's the problem with them?
Speaker 1: I mean, aren't they selling off Sinclair? The Tribune finances.
Speaker 1: The Tribune is one of the big television broadcasting companies
Speaker 1: that they spun off their new newspapers. So the Tribune
Speaker 1: company is really the the the the TTV business. Sinclair
Speaker 1: just announced this week that Sinclair is going to buy
Speaker 1: Tribune at at a big, big price. So, um the
Speaker 1: TV stations this is an odd numbered year, which means
Speaker 1: there's no political advertising revenue, so all the TV station
Speaker 1: groups have very difficult comparisons. Um So, but I think
Speaker 1: you know, the Sinclair sees a tremendous amount of value
Speaker 1: and Tribunes very large market stations um, which demand very
Speaker 1: high political advertising every other year. Uh, and which have
Speaker 1: you know, very valuable TV spectrum. So Sinclair has putting
Speaker 1: together a group that, with the Tribune stations, will reach
Speaker 1: seventy of the US population by far the biggest TV
Speaker 1: station group out there. So they think they can create
Speaker 1: a lot of value with that. So I think the
Speaker 1: results were a little disappointing today, but it doesn't change
Speaker 1: the fact that Tribune owns, you know, some of the
Speaker 1: best TV stations in the business. Well, but probably they're
Speaker 1: the best way to get an insight on the cord
Speaker 1: cutting phenomenon and whether people really are getting rid of
Speaker 1: their televisions in favor of just going online. Do we
Speaker 1: get any better sense of what that is like? Yeah,
Speaker 1: So it's it seems like an industry the about you know,
Speaker 1: two to three percent of the paid TV subscribers are
Speaker 1: leaving every year, um and um. So that's that's that's
Speaker 1: a problem. And and so if you're a cable networker
Speaker 1: or broadcast or to a lesser extent, that is a
Speaker 1: big issue because you know that directly impact your top
Speaker 1: line in terms of the affiliate fees that you receive
Speaker 1: as revenue from the Comcast of the world and the
Speaker 1: direct TVs of the world. UM. So that's a big issue.
Speaker 1: And so what the cable networks are trying to do
Speaker 1: in particular is trying to make sure that they follow
Speaker 1: wherever their consumers are going, if they're going to a
Speaker 1: skinny bundle or if they're going to Netflix, or if
Speaker 1: they're going anywhere they're going. UM. They need to make
Speaker 1: sure that that they're programming is on that offering, uh,
Speaker 1: and that they get paid for it. Um. And secondarily,
Speaker 1: they need to think about do I have a Netflix
Speaker 1: solution in my back pocket? Can I have Do I
Speaker 1: have programming that's compelling enough to go direct to consumers
Speaker 1: that they will pay me, you know, five ten dollars
Speaker 1: a month to get my programming, whether it's VICOM programmers,
Speaker 1: Time Warner programming, or in a case of sports ESPN.
Speaker 1: So it's really unclear as to how that's going to
Speaker 1: shake out. That's what's hurting. UM. That uncertainty is what's
Speaker 1: what's hurting TV stocks and media stocks in general, which
Speaker 1: have been week over the past couple of weeks as
Speaker 1: we started to see the cord cutting concerns. You know,
Speaker 1: resurface really with the Comcast earnings and the Charter earnings
Speaker 1: and the Time Warner kick Cable earning, So a lot
Speaker 1: of those issues kind of resurfaced a little bit. So
Speaker 1: that's the challenge facing the media sector. Would ESPN be
Speaker 1: better off alone? Both for Disney's sake and ESPN um
Speaker 1: You know, there's a lot of people. It's funny because
Speaker 1: as recently as a couple of years ago, by far
Speaker 1: the most valuable part of the Walt Disney Company and
Speaker 1: the reason most investors owned it was because of ESPN.
Speaker 1: Now it's become a little bit of an albatross around
Speaker 1: the neck of the company, particularly given the other two
Speaker 1: businesses are performing so so well, the theme parks and
Speaker 1: the film to uh and the movie studio. So yeah,
Speaker 1: I think there's definitely been some calls recently that maybe
Speaker 1: you spin it out to be a stand alone, standalone entity.
Speaker 1: There's not a lot of synergy between ESPN and the
Speaker 1: rest of the Walt Disney Company, which, you know, you
Speaker 1: may make that kind of reasonable. Paul Sweeney, thank you
Speaker 1: so much for joining us. Paul Sweeney as US director
Speaker 1: of Research and senior Media and Internet Analystic Bloomberg Intelligence
Speaker 1: Thanks for listening to the Bloomberg p n L podcast.
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