Chit Chat Stocks - Investing Power Hour #52: Will $AMZN Buy $AMC; Precarious Commercial RE; No Banking Crisis?

Episode Date: April 2, 2023

The CCM Investing Power Hour is a live-streamed show every Thursday at 9:15 AM PST. On the show, Ryan, Brett, and a rotating list of guests have an unscripted discussion on a variety of investing topics. You can watch the show on our YouTube channel here: https://www.youtube.com/c/ChitChatMoney Follow the show on Twitter: https://twitter.com/chitchatmoney Subscribe to our newsletter: https://chitchatmoney.substack.com/ ****************************** This episode is sponsored by Stratosphere.io, a web-based terminal for financial data, KPIs, and more. Try it out for FREE or use code “CCM” for 15% off any paid plan. Sign up here: https://www.stratosphere.io/ ****************************** Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or recommendation. Now, please enjoy this episode. Welcome in. This is the Investing Power Hour on Chitchat Money. It is 12 p.m. Eastern time, normally 1230, although most of you are not watching this live, so it is irrelevant to all

of you. My name is Brett Schaefer, and I'm joined by my co-host, Ryan Henderson, on these shows, which again are the investing power hours. We cover all sorts of investing, business, and finance topics with no set script today. Well, who knows what we're actually going to talk about, but we have a study on dividend payers. We have tech executives calling for a pause on all AI tools. We have blocks response to the Hindenburg Research Report, and then an update on the white-collar employment recession should be fun. But today's episode, first, we need to talk about our sponsor. Today's episode is presented by Stratosphere, our investing home screen for fundamental research. Stratosphere has fantastic KPIs,

as Ryan is showing the viewers right now. I wanted to pull up blocks for the advertisement today. They have all sorts of different segments, including hardware gross profit, Bitcoin gross profit. You can see that that one's quite small. You have cash app gross profit, and you can see it's caggered at a 97% rate for the last five years. So when Hindenburg comes out and says that, well, some of those numbers you're putting out might be a bit sketchy, people will get scared.

However, we'll talk about that as well. And this is for almost, I believe, every S&P 500 company, all the large companies in Canada, and a ton of companies around the world have, or Stratosphere has built KPIs for them. For example, with Block, we have transaction-based revenue here. We have all sorts of things that you would typically have to make yourself, but they're going to save you time and resources, frustration. When we use it, these are things we would have had to pull ourselves from SEC filings, and that can just take so much time and frustration.

So try out the platform for free. And if you want the upgraded KPI tools and long dated historical financials, go ahead and try one of their paid plans with promo code CCM and get 15% off. That is stratosphere.io. All right, Ryan, it's been somewhat of a not busy week. kind of had tough time i think that's just recency bias you're you're we're lapping the banking crisis so i think maybe it's just a comparisons problem let's start out first this might be a bit of a coin flip since we are outsiders within the industry and it's very

dynamic but was this a fraudulent banking crisis where everyone that called it a crisis was just getting too ahead of themselves. What's your take? I think it was what you'd call a fin-twit banking crisis where the normal person didn't really care. They just thought, oh, the Silicon Valley, people heard about it. I had a number of friends that don't give a rat's ass about finance

ask me about Silicon Valley Bank. But I don't think any of them thought, Oh, yeah. Wow. Yeah, this is probably time to analyze the interest rate swaps at my local regional bank and then see whether I should pull my totally probably insured deposits out. It's just never happened. No one was worried about it. So I think it was, yeah, a manufactured panic that just never came to fruition. Kind of similar to the rich man's panic, 1903. And there is more incentive for the rich man, in this case, to panic because of the federal insurance limits. Yeah, I agree. But I've always thought, too, unless you're getting ready for a transaction and unless you're uber, uber wealthy, why do you need to sit on millions in cash? Business is different.

But for the individual? Yeah, you don't have the payroll obligations. You can just buy, if anything, short-term treasuries. Yeah, it's interesting why anyone would do that. And I mean, thinking about if we were, say with our investment fund, it's not relevant now because it's so small, but say it became a sizable one 10 years down the line, when we have cash positions for our clients or for the whatever, the pooled money, if we're over the limits and if we had a significant amount we would definitely just put them in some sort of money market fund some sort of treasury something like that which is not you know that's not rocket science but it's way

simpler to do and yeah i don't know we could just totally be wrong this could be a giant banking crisis six months from now but my gut tells me everyone overreacted two weeks ago and things are going to be okay except in europe where the banking situation was already um let's just say, screwed. But let's go ahead. Anything else? Anything else on this? I remember looking, I think I read one article on Credit Suisse, and this was not just an interest rate problem. They had a number of mistakes over the last three years that were huge issues. I think they lost somewhere in the ballpark of like $5 billion From Bill Hwang

The Archegos Was that a fraud? That wasn't a fraud That was just kind of manipulation, right? Yeah Not a fraud, it was market leverage Excessive leverage and trying to manipulate the market I want, yeah I want someone to interview him

They had a number of lawsuits They had a number of Lawsuits that came against them Of like I don't want to I'm not smart enough to Go through all the problems because I don't really remember them, but

there was not just, it wasn't just negligence here. There was stuff that they actually did wrong and maybe some level of malevolence. So, I mean, yeah, Credit Suisse had its own problems,

but I would say if I'm betting now, the Rich Man's Banking Panic of 2023 lasted all of about two weeks yeah the history books are written we should look back because we did look into the rich man's panic of 1903 we should look back into that and see if there's any similarities because i forget exactly what happened but if i don't have the facts in my

head right now but the feeling was the same right it was 1907 was the real um uh banking panic that remember there was all those trusts that were collapsing. J.P. Morgan had to come in because the Fed hadn't existed yet. So there wasn't a federal backstop and it was all totally disorganized and stuff like that, the whole thing. Check out our show, History of Financial Markets. We cover it very thoroughly. But we're going to hit our topics today. No guests, unfortunately. I don't know if you saw mine. Did you end up seeing mine? well for some reason ryan you seem to not see when i make the document so i made i made a wrong document yeah you love making you love making wrong documents for us but that's my bad but it's

uh this is what is it what it's gonna be it's probably better if you didn't see it uh so amazon reportedly weighing the offer to buy amc oh yeah yeah that uh we'll see if that's rumor news or noise news or noise but before we get to the topics yeah that'll be a fun one remember these go live on youtube at 12 30 eastern time on thursdays you can also watch the replays right after uh and you can watch the replays yeah on youtube or listen on your favorite podcast player of choice but if you want to watch us on this zoom call go right ahead uh first item i have on the document is a study on dividend payers let me bring this up it's a nice little tweet screenshot and i'll share it for everyone so ryan can see it uh yeah there we go all right

this is from focus compounding okay yeah don't don't show my direct messages uh and yeah they're a great show as well they have someone uh jeff gannon who's like an expert in investing and And it seems, you know, everything like, it's just like, whatever, go listen to that show. It's super interesting. So here's a screenshot from focus compounding. I'll bring it up. More return with less volatility return and risk by dividend category from 1978 to 2022. There are two different charts here, or excuse me, it's a chart with two different, you know, bars, one's one color,

one's another, if you look at return and then standard deviation, they have dividend growers, S&P 500, non-dividend payers, and dividend cutters and eliminators. And if we look at the chart, if we go from dividend growers and initiators, they have better returns than the average in the S&P, the average of non-dividend payers, and the average of dividend cutters, where the return, and I'm assuming this is total return for dividend growers is 13.2% compared to the dividend cutters at 9.4%. S&P 500 total return was 12.3%. And then the risk measured by standard deviation, so in this case, low volatility, if people care about that, was the least as well at 15.3%. And then it steadily goes higher for

S&P 500 non-dividend payers and then dividend cutters. There were some really interesting comments on this one where some people said, yeah, it's obvious. Consistent dividend growers are the best place to be in. And if you own some of those and you buy at the right price, they can just be great lowest investments over the long term. However, other people are saying that this study is a little bit of hindsight bias because when you buy a stock that was a dividend grower, it has no bearing on whether it's going to turn into a dividend cutter in the future. You still have to do fundamental analysis on the business. So I don't know. What are your thoughts here on the consistent dividend growers? I kind of like the companies that have the magic

of consistent buybacks. They treat the buyback like a dividend and consistent dividend payouts, where they just do that combination where each quarter we're just going to steadily pay that, steadily pay it out steadily pay it out and then over time if the business quality is fine you know we don't need to mess with so many management teams mess with um like oh we're going to buy one is cheap and then we're going to sell some stock and and the ones that are consistent i think just keep it you know they lower uh they don't they don't make it too hard and then that actually ends up being the best strategy of the launcher but curious your thoughts on this and the dividend growers? I think the thing about a dividend,

having a dividend in place is obviously it prevents you from doing other stupid things with your money or your excess cashflow. Now there's obviously still the possibility to do that, but it's a lot. For one, you've now limited how much cash, you have less cash than you would to work with because you've committed to paying out the dividend to shareholders. But it's also, I think, harder to revoke or harder to – it's more difficult on the stock price to either pull back on than a repurchase program. A repurchase program, you could put it in place and then kind of be, I don't know, nonchalant about it or say, oh, why don't we stop on the A good example here is probably Match Group.

Match Group could be buying back stock, but they're kind of a little shaky about it. Yeah, they're off and on. Yeah. If they had a dividend in place, there wouldn't be – stopping and then restarting your dividend is a lot harder to do than just pausing your repurchase program. Is that good or bad, though? I think it's good because it prevents people from doing stupid stuff, and the majority of management teams do stupid stuff with their capital. Yeah. And then investors, what I've heard as a pushback to that is, well, what if the business becomes worse and then the dividend payouts become unsustainable and they're using debt to do that

and stuff like that? And my thought is, well, don't own it. That's pretty easy to see that if they're not funding it with cashflow, then you can sell it. So that has nothing to do with what, right? You should still do the fundamental work, if that makes sense. I don't know. If the concern is that, well, what if the business is in decline? Okay. I think with or without the dividend over the last 10 years, the business would probably still be in decline. Exactly. And at least you got cash along the way. If it's growing, I think the difference here is that a lot of businesses chose to put it back into employees or executive compensation or acquisitions that didn't make sense, as opposed to just paying out the dividend. And even at steep multiples, paying out a dividend is just a good way to not do something stupid. Yeah, exactly. Look at the CPG company.

Well, CPG companies sometimes do stupid things. But OK, here's, I think, the pushback. A lot of replies were to this tweet, which I think were quite smart. I didn't think about it at first. Here's a response from compounding investors. Oh, there's about 10,000 of those on Twitter. Clearly, survivorship bias at play in that analysis. You can't know in advance if they will continue to increase their dividends or stop at some

point. Easy to say with hindsight, but impossible to say in advance. I think my question to you would be, and maybe I'll have some thoughts on this as well, what are some strategies or ideas for finding these prospective dividend growers, a company that is likely to keep growing its dividend per share, I'm assuming, say for a 20-year period, sort of like historically a Coca-Cola, a Pepsi, some of the tobacco companies. I'm forgetting, there's plenty others that I can't think of at the top of my head, but what are your thoughts on that? Well, I think generally companies that have raised their dividend over history, and as long as cashflow to the business is still growing, are more likely to raise their dividend

in the future too. And it always seems like if they've raised their dividend for 20 years and cashflow has grown for 20 years, it's probably going to happen over the next five. Unless it's like some business with like a huge terminal issue or something like that's being disrupted. But I think those are good indicators. Companies that recently, probably within the last five years initiated one, probably have room to grow it. There might be some companies where it's difficult for them to grow it because they've been doing it for so long and maybe the business is in some sort of a difficult situation. But I would say trying to identify dividend growers is look at companies that have raised their dividend in the past and simultaneously grown

cashflow. Obviously, you don't really want some huge dividend payout while cashflow is diminishing because that means the business is probably in a difficult spot. Or recent initiators. If you're a recent initiator, it probably means you have the excess cash to continue paying it out and paying more of it out. Yeah. Here's, I think, the three criteria I would have, and these are probably the most basic criteria, but it's really harder to find that you think. One, history of consistent cashflow generation. Two, history of consistent dividend payouts, because if they have the consistent cashflow generation and they weren't paying out the dividends before, I don't know if you should expect them to continue that in the

future. Maybe they're wasting on M&A. Maybe they're being inconsistent with buybacks and buying back a ton at a super high price and not buying back. They're buying high, selling low on their own stock price. And then third, and this is the hardest one, is doing the fundamental work and saying, is this business still going to have that durable cashflow coming to it in the future? And if you can kind of answer all three of those, I think that can be a really good dividend payer. We have a comment here. I think, I agree with this. This is from Lars. Thank you for joining. Says, looking backwards and selecting only companies that grew dividend is like saying companies that grew their earnings per share perform better. As you said, there's no way to

know that they will continue doing so. So I think, yeah, it's good to look at the ones, like Ryan said, that paid the dividends, but you also have to have other criteria in there. You can't just go, oh, dividend high, I'm going to buy. No, you have to do a little more work than that. Yeah, I think that's accurate. I mean, you still have to, unless it's like a crazy dividend payout, like, I don't know, 20% or something like that, like a dividend yield, you got to believe that the business is going to grow over the next five years. Yeah, I agree. All right. Other comment from Sandeep. Here's the question. Do you guys think the recent closing of a business unit at Nelnet has an impact on its intrinsic value?

Yes, but pretty darn small. I would listen to our full show on Nelnet that we go for over an hour, kind of going through the ins and outs of the business, why we own it, the big risk we saw. This was one of the big risks we saw where looking at that student loan servicing business, we really applied a very low single-digit multiple to it because the regulatory stuff is quite shaky. And that's what happened to them this time where they lost some earnings on that. But again, it's going to be small compared to the size of this business. Hopefully, that covers it. Ryan, anything else to add there? Yeah, I think closing of a business unit might be a little inaccurate.

That is inaccurate. Yeah, yeah. The business unit, so Nelnet Diversified Services, I think that's the one. That's the loan servicing. That's still operating. They had like 17 million borrowers or something like that. Now they'll have 16 million borrowers. The federal government took some of that and gave it to a new loan servicer. But the price per borrower is coming down as well. That's more of the concern. And they laid off some people in association with that, which makes sense. But I wouldn't see it as a huge – they're not closing the whole business unit. And on top of it, not all of their loan servicing customers, so the people that are using Nelnet to basically pay for their loans, are federal customers. Not all of them are under the FFELP program. There is still value to that business aside from just the federal student loans. It's much smaller, but I think it's like 25% of revenue comes from non-federal customers. There's still some value in the business, but yeah, we think it's kind of a small percentage of Nelma overall. All right. Do you want to talk about the fun topic? Amazon apparently, and I'm putting in apparently air quotes here, is going to buy AMC, not AMC Networks, excuse me, AMC, the theater chain and the meme stock. What were the sources here? Who was reporting this? Maybe get into that because I'm already going to call BS on this.

yeah i think it's right to be skeptical um so the the initial source was a and you're gonna laugh when you hear this a sub stack called intersect um or the intersect it's it's run by a guy named joe del bruno who used to work on wall street um i'm not entirely sure on his background but Basically, he had sources familiar with the matter. Here's the quote from his sub stack. Amazon founder Jeff Bezos has dispatched his investment advisors and top entertainment chiefs to explore acquisition plans for embattled theater chain AMC Entertainment, according to multiple senior sources familiar with the discussions. Now, this might just be some random rumor. That's all.

That's all they got. i think he talks about like having insiders at the company throughout the article but and he talks about some of the rationale the the thing is like amazon didn't comment on this at all um and maybe it's not large enough to comment but when the ea news came out that they might buy Electronic Arts I think they shut down they said we have not had any of those discussions

so the fact that they didn't say anything shows they might be in some talks maybe they just buy the I don't know if they said anything for Peloton so it might depend on the size whether or not someone could just start a rumor any day but yeah I would be

skeptical of this I mean I think embattled theater chain is a good way to describe it obviously theaters are kind of up against a difficult just operating environment and I love theaters

now when air and and the Mario movie comes out we got two movies I'm interested in the biggest dad movie of all time air and then the Mario movie is going to crash but no you're right I mean it's such a tough yeah it's so hard but they're not making any

money off of you It's all going to whoever, it's Disney, right? They're just getting, I mean, they're going to get squeezed. I think that's pretty foreseeable that with all the access to new movies right from streaming providers, it's going to be a tumultuous next 10 years for them, I'd imagine. Blockbuster was still a business that a lot of people liked, but just, you know. at the right price and i'm assuming this would most likely be a price of just giving the debt holders some value at the right price if sorry sorry i interrupted but how funny would it be if they said they're they're gonna bid for it and they just like bid half the price

and adam erin sold yeah well that might be i mean he's got a fiduciary responsibility wow we don't to get into the meme stuff stuff but does it fit within that business because i can't i could see some arguments that it does fit within their media strategy because they're trying to do stuff but i also see like they can this is not going to help them succeed they've really just been throwing a ton of money at you know fire tv uh amazon video sports and basically the the the home screen stuff you know outside the hardware for amazon uh fire tv yeah you can make the case like yeah how there's some parallels between them and prime video but you could also make the case that this is at direct opposition to their strategy which is yeah streaming video from the home

yeah and maybe i think there's a possibility where they could make it you know prime members get a benefit and stuff like that and they increase the value there but is it really going to change turn move the needle for them i don't think so and i want to know what's going to happen with the the the whole media division within this company because they they're making a lot of big deals you know they bought that mgm uh asset which is you know had james bond a few other really historical you know well-known franchises They have made the big deal with the sports stuff, and they're increasing potentially their sports commitments. I just want to know what their long-term strategy is here.

Well, the concern for me, more so than anything else, is the headline here. Amazon founder Jeff Bezos has dispatched his investment advisors. Is he really still calling the shots capital allocation-wise? I'm a bit skeptical on who that source is. Yeah. He seems to be, quote-unquote, living his life on his yacht, so I doubt it. But that would be a concern if he was kind of pulling an Eiger and stepping in still. Or maybe not necessarily stepping in, but just kind of treating Amazon as his piggy bank to buy what he wants.

Yeah. That would be more concerning. But I just like, throughout all of Bezos' history, he's never really been that kind of a person. So I have my doubts. Yeah, reading the two books, that does not seem like him. But I think as the executive chairman, he still probably has a say in capital allocation. There's nothing wrong with that. Yeah, that's true.

But it made it sound like it was just basically his decision. Like he's dispatched his investment advisors like Logan Roy or something like, go buy it. I just watched this new episode of Succession. We need to scale up. We got to have the Succession wrap up. Yeah, maybe like once. Yeah, if we have time at the end, we should talk about it. That was so funny. It's a funny episode.

I'm going to pull up some Amazon stuff on Stratosphere and see if there's anything interesting. But yeah, keep going. Yeah, to me, it doesn't make a whole lot of sense. The acquisition or its rumors, especially at a time when they're closing or shuttering a lot of their other bets type of segments, or there's at least big layoffs in those segments.

it would feel weird for them to just bet on something like this randomly. So, yeah, my gut would be that this is wrong. However, Amazon hasn't shut the idea down officially. So, you know, it could be. I guess it's always possible. AMC stock, unsurprisingly, did jump on the news. Here's the thing that's frustrating to me. Well, that is a manic.

I mean, that thing is, that could be at 20% any day. I'd be like, oh, there's some, you know, someone's doing something. How – it's so – literally anyone can come up with these rumors and it affects the stock. It's mind-blowing. It's like a hot potato, so yeah. And it's happened with Amazon a number of times now. Remember when they made the rumors about Peloton? Peloton stock jumped.

Remember when they made the rumors about EA? Stock jumped. Now AMC? Stock jumped. It could be anyone. There's like – all you have to say is sources familiar with the matter told me. And the stock will jump. It's remarkable.

Sources familiar with the matter, that entry-level employee in HR that I vaguely know, friend of a friend. But here's a nice screenshot from Stratosphere that I think, and not all of this is obviously media, but a good chunk of it is. Amazon subscription services revenue since 2014 has grown at a 37% compound annual growth rate and is now at $35 billion a year. They have a lot of wiggle room to make mistakes here and make some big investments within media. I just wonder what that long-term ROIC is going be like how are they gonna because you can't the margins are on subscription services it depends well it depends it depends how you calculate i'd say pretty high in a vacuum but if you realize that some of that's going to fund delivery costs then it's hard you

know it's pretty difficult but i think they're still spending and look the numbers they they have a lot of numbers so without the numbers in front of me i could be way off but they're spending what upwards of $10 billion a year on video content for Prime Video. So I mean, they can't be that high. And then you have music stuff that has variable costs. So I'd say it's pretty good margins if you don't include delivery fees, but then a lot of it is going to returning that surplus. But I think here's the question though, if they have all these new media assets within the subscription division, are they going to be able to drive this bundle and raise prices for everyone over time without increasing churn?

Or are they going to have to maybe separate out the Prime subscription more where you have these add-on stuff outside of the course thing? If you get what I mean, because not everyone likes to go to the movies if they add something like this. If you kind of get what I'm saying here. The only add-on that I know of is the RX stuff. There's also Twit. No, there's a lot.

There's a lot. i mean you can subscribe to show you know a lot of streaming services and oh and that's just like an additional 10 a month or something like that or what yeah whatever it costs yeah i mean grocery grocery i think groceries yeah the uh either way they got a lot of weight they got a lot of uh recurring revenue coming in and a lot of this is a good good or bad thing a lot of money to throw at stuff to see what sticks and that seems to be their strategy that's probably the most full disclosure we are shareholders today the most frustrating thing as shareholders is you know how about we focus on like three things and then

print money for a while and maybe you know have a couple of long-term projects but they're like no why don't we just buy some movie theaters that's good infrastructure i did see an interesting stat that I think Prime has now more than 200 million subscribers globally

which was up I'm pretty sure that's up significantly from like the last two years it

what is the number one thing you subscribe to Prime for at this point delivery same one I don't watch Amazon Prime

video you don't watch Thursday Night Football except Thursday Night Football that's the only time I'm on there They said that was a big driver of Prime subscriptions, which is kind of surprising. Well, I don't know if that's surprising because there's the core football fan that watches all the games.

And if they didn't have it, they're going to get it then. So I don't think it's very surprising. But I mean, the key value drive is the delivery. I think it's worth, to me, 300 bucks a year, at least. Just from all the time it saves, saves me dozens of hours. Yeah, I agree. I got some other news, too. Lululemon reported earnings, and EA is laying off 6% of their staff.

Yeah. What do you want to hit? Let's talk Lulu, because I got to say, this might end up being the one that got away. I hate retail, but they seem to just have unlimited pricing power. Yeah. Like their comp sales are really pretty remarkable. Yeah. And it's been steady.

Yeah. It's so hard for me to like analyze them. I just don't like the numbers always look good. And I just, it feels unpredictable to me. Like they're executing phenomenally, but I just don't know such a, it's in the too hard pile for me.

I think Under Armour has just scarred you from retail forever. No other ones. and just the fact that I don't know I'd buy Nike at the right price which is pretty low given the China risk but Lulu look

there's a difference between executing phenomenally and they've executed so well the growth in men's has been great but like this is a business if they get a new manager in

i think it totally they could screw it up within a year i don't know it's so it feels like they're kind of with retail it feels like there's this chasm between like chasing the trend of whatever's popular at the time and sort of being the retailer that determines the trend and i would say for men's retail and probably women's too lululemon feels like like if i go into that store and i see something like i guess that's what's popular now like what's their men's what's their men's revenue you have it go to stratosphere right now yeah i mean because i i can't i i mean i think you're maybe blinded by your personal habits because the apparel is for trillions of dollars.

And if they're only doing like a billion in men's revenue, I do not think they're setting the trend, but obviously the growth there has been phenomenal. Probably is something like a billion, but let's see here. Men's product revenue. Sure, that's... Do you want to share the screen?

Basically 2 billion. It's grown at 30%. Oh, shoot. Go full screen. Oh, my gosh. I'm trying, but it loves to get in the way. Yeah. $2 billion?

30%. Yeah, I mean, let's see them get to $10 billion before we say they're the trendsetters. But, I mean, obviously, 30% growth there is super strong. What's their United States revenue? Closing on six? Yeah. I mean, they're escaping the subscale and becoming one of the few scaled brands out there. I mean, who are the scaled ones outside of luxury?

There's Nike, obviously, Adidas. I think Lulu might do more than Adidas. No way. No, no, no, no, no. Soccer plays a loner. Go on. I'll check it. But the, yeah, I'm probably wrong on that, but I wouldn't be surprised if they did more in earnings.

adidas well after the kanye stuff it's possible but who knows i also could be talking out of my ass oh yeah lulu's in it it's an enigma to me it's an enigma to me i just can't get you know it's one of those like other people might make a ton of money on it but i just can't get comfortable i just have no insight of whether the brand is strong or not besides like oh a lot of people are wearing it right now but the competitive i can't i can't just be like my competitive advantage can't be girls think they look cute in the outfits there has to be something else there for me why it works yeah but oh like i can't yeah it's just not something i like look like i said other

people can make money in it but it's not something i feel comfortable being good at yeah uh no adidas is much larger in terms of product sales but uh come on you're a messy guy come on messy stuff a lot the messy ads alone probably pay for that a little lemon does earn more yeah well what's yeah normalized you know i don't know if there's a normalized here for i don't know what the normalized would be i would say it uh it looks like kind of at their peak I don't know what the peak was you have a gross profit number yes it's loading

11 billion in gross profit yeah that's double Lulu's revenue right or was that just US it's not double their revenue no they have like 8 billion

but it's more that was US only that you were looking at yeah but yeah they're catching them Yeah, I would not be surprised if they were larger in the future, although the valuation is a little steep. Yeah, that's also tough for them. It'll be interesting to see

if they can succeed in footwear because that is such a big market. Lululemon, I mean. Yeah, Adidas certainly has succeeded. Other one that's kind of interesting is EA laying off 6% of their staff. Yeah, I also saw Roku. Yeah, EA, it looks like Roku's doing it again.

I saw a couple of others. It seems it's just a consistent flow each week. And it seems like during this kind of white collar recession that got kicked off, or maybe it's just a white collar popping of the bubble because we're not really seeing any true recession indicators yet. But the white collar, let's call it slowdown, that who started Meta, the big tech companies kind of started it. it's giving these other companies wiggle room to get rid of stuff that wasn't working and where

they might have overhired. Because when we're looking at the stock reactions, typically when someone leaves off their workforce, that shows that something totally went wrong. But a lot of times now we're seeing this flat stock price, no reaction, even the stock might be up. So when the companies are laying off, if they're within a certain sector, within tech, usually consumer internet i'm thinking okay this is probably a good thing because most likely if they're like all the other companies that we've heard stories about they hired too many people in 2020 and 2021 when the bubble got the best of them yeah i mean a lot of them were hiring people to hire people you know like they were literally hiring people to be in charge of hiring i know

Every company's got hiring coordinators, but the more people you hire, the more, let's say developers you hire, the more people you have to hire in order to get them acclimated to the business. And it just becomes this horrible, you need people to manage people. Yeah. What did we say? What did I come up with before? We need all these people to manage all these people.

It's shocking that it took so long for people to realize that a lot of people leads to bureaucracy, makes it more difficult to operate efficiently. Maybe not as quick. I mean, Mark Zuckerberg sent that whole letter about it. He's like, wow, we just learned how much better we can be with less people. and so they laid off more. And it's not like I'm rooting for these because I don't want to be that person. Yeah, for the individual job.

My occupation is not very noble. You feel bad when someone gets laid off individually, but as an investor, you look at it through an investment lens. I'm also not rooting for them to overhire. I don't think it's ever a good idea for businesses to have more people than they need. Yeah. Do you think it's funny that McKinsey-

It's not good for them. it's not good for the company yeah do you think it's funny that mckinsey which is supposed to pride itself on economic forecasts is now laying off like i don't know how much of this is their staff could be a small amount but like 1400 people isn't i know i'm a mckinsey basher but you're supposed to be the economic forecaster for all other companies and yet you're gonna lay off people because you made a mistake in over hiring maybe just maybe it's all just BS and consulting just outsources the risk that you don't want to take in as executive team.

Match group's down 6% today. For what reason? I think it's probably the end of quarter rebalancing. Yeah. It's down like 7%. All right. Well, we are going to be doing a show tomorrow on match group. So that'd be kind of interesting. Yeah. I think whenever something's moving without news that you can immediately see on the last day of the quarter, got to be reshuffling for funds. You know what we should have looked at? Sorry, I'm all over the place today. Commercial office real estate stuff. For what?

People asking for bailouts. Yeah. Yeah. And it is an interesting idea that what kind of ripple effects would this have? Well, give some context. I'm a little confused. I'm not – gosh, I'm going to sound so ignorant on this, but some guy came out who was like a head investor at some big firm that like invests in commercial office real estate. And apparently a bunch of renewals are coming due and a bunch of stuff's coming up where the projections are that nothing's going to get paid and basically they're going to lose tenants. And so this guy called, he said, like, this is going to be systemic. The government needs to step in here.

It was this on like CNBC, one of those guys that I think I kept seeing. No, this was like all over Twitter. He may have gone on CNBC, but. It was a letter he sent or something like posted publicly, something like that. I'll try to pull it up, but it's – and then a whole bunch of commercial real estate people were like, yeah, that's – we need this. This is a problem for everyone. I'm like, this is a problem for you. It's not – you can't get – I don't know.

It frustrates me. I can't stand that shit. You shouldn't be bailed out on investments. I know. They're so rich. You were like, well, oh, you were sort of a fan of the bailout for Silicon Valley Bank. I am a fan of depositors being made whole. FDIC is an insurance.

It's different. The banks paid for it. The FDIC insurance pool was used and it's going to get raised. So the banks are going to pay for it through their profitability numbers. But yeah, I mean, look at commercial. look i can't stand when someone made an interest rate bet and then it's like oh my god bail us out i just i just can't i i it's so how do i say oh i hate this term because people use it for political nefarious reasons but it's so elitist i just i it's just look yourself in the mirror oh my god

you're going to be worth 10 million dollars now instead of 100 million dollars wow like you'll be fine. How about we make shelter and office and whatever costs, real estate costs affordable for people in this country? You know what I saw is that, and this is probably true for many markets across the country, in Seattle, our home market, with interest rates up, affording a home is now twice as expensive as renting. It's just out of the picture. Think about how expensive rent is there too it's like you you we'd have to pay twice what we're paying now so it's own a home but sorry i went on i do think well i think owning should be more expensive than renting generally yeah fair yeah ultimately you you know you end up owning the asset over however many

years but yeah double like just doesn't make sense i i mean there's obviously just less buyers out there like most people just can't afford it you know it's it's like the reality but at the same time i'm starting to realize i think i'm starting to come to grips with the fact that everyone kept saying there's a shortage of homes and they were saying that kind of at the peak and i kept thinking well yeah there's a shortage now but there'll be maybe an inventory glut when things get worse and there's less buyer demand but we're still not seeing it so either people are just sitting on these homes and don't want to sell because they're not getting the prices they were quoted at or there truly is a shortage and there there isn't enough homes being built i mean at least

in our kind of seattle experience i'm seeing way more rental places being built than homes oh yeah 100 100 i think that's in the data too but i don't have it in front of me the it'll be interesting to see how the variables go where there's that difference between how how much it costs to buy a house or finance a house versus rent and whether rent goes up or housing costs go down, whether the supply of rental properties skyrockets because of people opening up their low-rate mortgages for rent and all these new apartment buildings that are getting built across the country, or if the supply shortage restricts stuff again, or there's just developments with that dynamic with the people that are locked

in on their low-rate mortgages, there's a lot of variables, and we'll see. It'll be interesting to follow. Okay, I've got the thread. So this is from Scott Reckler. You want to share it? Chairman and CEO of RXR, director at the New York Fed, a whole bunch of credentials, really. He says, there is $1.5 trillion in commercial real estate debt maturing in the next three years. The bulk of this debt was financed when base interest rates were near zero. This debt needs to be refinanced in an environment where rates are higher, values are lower, and in a market with less liquidity. I have joined some in calling for a program that provides the lenders with the leeway and the flexibility from regulators to work with borrowers to develop responsible, constructive refinancing plans.

A similar program was implemented in 2009 and during the heat of COVID-19. This program will provide time for the markets to settle and enable the private sector to address the deleveraging that is required to reflect the new interest rate regime. I'm not going to go through all this. he did go on a number of platforms and like cnbc and say all this stuff thoughts well i would like a refund on my stocks that went down 70 my growth stocks that went down 70 percent yeah i didn't know interest rates were going to rise yeah i didn't know i didn't know that they weren't going to do well so i was actually in my model i had an expectation that the rates could rise but the stocks still dropped. So it's not my fault. Yeah. Look, I don't know what's going to happen

here. Don't know the real estate market that well. I know one thing about the real estate market though, is that there is a metric ton of regulatory capture and all these real estate investors get tax write-offs, get so many favors from the government. And I would not be surprised if this happens again here. I just can't believe that that's the excuse. Oh, we made some bad bets No, it's not we. It's the adverse environment was not accommodative to us. That's not fair. It's not our fault. The issue I take with this is that I really doubt when they were modeling the financial prospects for these properties they were going to buy, I doubt they were saying, well, assuming rates stay at zero forever, our property will be worth yada, yada, yada. It probably said our rates will rise, but our property just won't be as affected. And everyone thinks that

Everyone thinks that they're going to be better off In a rising rate environment They're bag holders These urban real estate What are the charts that have been floating around On the Urban real estate Commercial real estate

Occupancy rates They flatlined and now they're going in the wrong direction As Kind of the market redevelops after COVID And some people are choosing other cities and hey we're moving out of an office yeah i mean it just wasn't worth it for us probably devastating for that we are causing this crash yeah i yeah like i think what's i don't know i wouldn't touch the commercial real estate market with a 10-foot pole

there's no way i'm touching anything in real estate right now because there's not unless you have some sort of differentiated opinion or whatever you call that, there are so many variables at play right now that I don't think anyone that has any sort of prediction where we've been kind of talking about the risk of a housing downturn and how residential real estate prices might fall. We could totally be wrong on that. And that's really not something we actually have an investment thesis on. But if you're going to an investment in this space, I think you're being a bit foolhardy right now because it's the most uncertain I think it's been in a long time. There's so much uncertainty. Who knows what

the Fed's going to do? Who knows what supply is going to do? Who knows what all these companies are going to do with their workforces? Who knows if there's going to be a liquidity crisis? Who knows if the government's going to bail us out? And other stuff I'm missing. Preston Pyshko You're talking commercial? Jason Lowery Commercial, yeah, specifically with that, but also some of that affects residential too. Preston Pyshko Yeah, commercial, I don't know, the difficulty is, would it be, obviously, I don't think it'd be a good idea to just let every single commercial real estate place fail and have

all these- Why not? Put them in the receiver, put them in, it's like the banks- Maybe not the investment firms, but you're just going to have all this wasted space, would be my thought. Well, they refurbish into residential. That's what they're doing with a lot of that stuff now. It'd be better for, I think, better for the country if the downtown areas had much more residential areas because then the neighborhoods are much more lively.

It's more enjoyable for people, but who knows? I'm just a guy. Plus the affordability issue would maybe resolve itself. No, we can't have that. We need landlords. Landlords need to make money. They need to make money. Have you seen the stuff about tipping landlords?

Oh, God. I can't. I can't with this. I think it's more of like jokes. It's just a joke, yeah. There's, yeah. It is funny when you see that stuff. Like, now, don't get me wrong.

I don't think land, a lot of landlords are hated like they shouldn't be. I don't, you know. Hated too much, yeah. Managing an asset that they are trying to invest in. But the, you know, I don't have, it's just an investment. Yeah, you could be wrong. Does everyone sympathize for me losing money on Spotify? Yeah, exactly.

It's like, you made a bad bet. Boo hoo. All right. You had the, like, the fact that you were able to make the investment in the first place shows that you're one of the most privileged people in the world. So I have no sympathy for you. Yeah. All right.

we've been harsh this episode so it's not fun i i got uh okay well no i my other ones were whether these ai models are going to eliminate all software jobs because that's what some person predicted but let me just share i'll maybe write about this more in the sunday newsletter which anyone subscribe to our newsletter we have it in every show notes it's free but let me just share the screen on this chart real quick and see um what you think let me zoom in come on zoom in see it okay and for the listeners for the listeners they have a two by two matrix of different types of jobs where you have predictable and grammatical versus disorders so it's basically creative

versus uncreative versus kind of busy work jobs. And there's one, the top right matrix, which is predictable and grammatical. And they think, this team of writers on Substack, thinks that within that graphic is what these large language models and AI tools, the new AI tools will disrupt. And within that one are software engineers,

tax prep, call centers, and contract stuff. So I'm assuming like people that prep contracts, I don't really know exactly what that one is. and the big one is software engineers because they're expensive jobs and there's a ton of them out there, especially in the United States, and they believe that

because these language models are extremely good already at writing code that there's going to be a huge unlock for companies, small and large, as the cost of developing software goes down similar to how Moore's Law worked with computing.

Rest in peace. Rest in peace. Yeah, legend Gordon Moore. But I know you're a software expert, but does this make, as a generalist, does this make plausible sense to you? As we close things out here, we got about a minute left. Pretending to be a generalist or calling myself a generalist and then talking about software engineering, I would feel, I just feel wrong doing that because I have no... Okay, what if they're right? What if they're right?

this help corporate profit margins or does it just even out throughout the economy uh i guess it would help i feel like there would just be a giant consumer surplus of software is much better you can deploy it much better around much quicker around the world and margins would be higher for some of these companies they could price things lower i don't know how it's going to shake out for like stock prices for any of these things but i feel if they're correct and you don't need a thousand software developers to develop something

you just need ten plus these AI tools I don't know it seems like that would be a great benefit for the world sounds mildly dystopian as well but why it's just a bummer for all the software engineers that spent time developing the AI to replace them

yeah but I don't have much sympathy for, well, I have more sympathy for them than real estate investors, but this has happened to jobs plenty of time. I mean, if we look at since the industrial revolution, this has happened to all blue collar jobs consistently. And now it's finally coming for white collar jobs.

And I think it's kind of interesting, but who knows? Who knows what's going to happen? It's probably, this is probably the top of the hype cycle. So I'm guessing it's either going to take much longer than people think, or we're at the top of a bubble or a hype cycle. Yeah, I'm calling.

You're calling hype cycle here? Yeah. I have seen so much now about people talking about how AI is going to replace everything. Time for the thread, baby. Time for the thread. It's been going on for the last 20 years, this conversation, probably longer. I'm not seeing it occur. I haven't really seen it occur at any sort of large scale where it's replacing employees. Yeah, yet, yet. TPD on that one, but I remember- Like small use cases, but... Now, there's examples of in the 1950s and the 1970s, I think like 2000 of these mini hype cycles that happened

about AI replacing all the software jobs. So this one, you know, this time could be different, but this has happened before and they've been completely wrong. We're at peak AI so far in history. Obviously, it's kind of always evolving and peak employment. Yeah, that's true. That's a good way to put it. All right. Let's close things out. I'm sure we're going to talk about that throughout future episodes. Commercial real estate is going to be fun to talk about. We

didn't hit the Square Research Report or the comeback on that. I mean, there's tons of stuff we're going to talk about over the next few weeks. Thank you guys for listening. Remember, we are not financial advisors. Anything we say on this show is not formal advice or recommendation. We are general partners at Arch Capital. Clients may hold securities discussed in this podcast. Follow us on YouTube every Thursday. It comes out live at 12.30 p.m. Eastern time. Give us a review on Spotify or Apple Podcasts and subscribe to the free Chitchat Money newsletter.

Thank you all for listening and watching. We'll see you next week.