Chit Chat Stocks - Investing Power Hour #63: Fed Pause; $CAVA IPO Pop; Is Inflation Defeated?

Episode Date: June 18, 2023

The CCM Investing Power Hour is a live-streamed show every Thursday. 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/ ****************************** 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 a recommendation. Now, please enjoy this episode. Welcome in. This is the Investing Power Hour on Chit Chat Money number 63. No significance to that number, but we'll hit another round number at some point. We'll keep chugging along on these.

My name is Brett Schaefer. I'm joined as always by my co-host, Ryan Henderson. We're doing this live on Thursday. This time we're doing 11 a.m. Pacific time. We had scheduling just to change this time. Full disclosure, Ryan had a dentist appointment, so don't worry. We take care of ourselves over here. On these episodes, we talk about anything in the financial news, investing, finance stuff, interest rates, could be macro, could be micro, could be whatever. Today we're talking about Microsoft and Activision's merger. I'm looking at Ryan's other notes he's got kava going public it's a restaurant concept that i'm not aware about but i think it's popular and growing across the united states i got an update on inflation housing and

interest rates after the new report from the whoever does the inflation report forget the exact name and then the federal reserve's decision to pause interest rates and i'm also we got some extra things here about the bubble household savings um the potential or the how good you know treasury bill could be as an investment lots of stuff we'll get to it but yeah just for reference for anyone listening these go live on thursdays you can watch them on youtube or listen wherever you get your podcast of choice they will come out every sunday a few days later ryan i always ask how are you feeling today we good no cavities hey there you go i'm i feel like if you get a cavity after you turn 21 you need to have a mini intervention yeah that's a candy

and soda intervention does it feel you know we've uh as i don't know this week we've for some strange reason we've outperformed and does it feel good to just have a little a few updates for a while huh yeah it's like the that that meme where the person's celebrating with champagne on the podium and then they like zoom out and he's in fourth place or whatever that's kind of what it feels like right now but it's good to win one um definitely feels good i honestly haven't even checked today are we doing all right where are you at on the uh fear and greed odometer if you had one for me yeah well i try to be as best as possible to you know listen to the be greedy when others are fearful so i'm in the fear category i think that's we're gonna have a discussion after

this episode about what what our treasury strategy is gonna be so i think that kind of indicates what my thoughts are but i i don't see many opportunities out there for new stuff uh i really like right now to not purposefully rotate over to value stuff, but maybe rotate a little bit out of growth just because the opportunity, I mean, when stuff goes up 50, a hundred percent, I mean, the opportunity is just not as good. Yeah. And suddenly treasuries yielding five and a quarter start to look not that bad and risk-free. So I think it is a good point. And we, The, I mean, I'll take one, for example, there have been a number of the companies in the portfolio where it's like, man, we're like, gosh, these are, you know, just, they're pretty

cheap and it feels like you can get a comfortable 15% IRR rate of return. But, all right, let's take Dropbox, for example. We just went through and did a show on them. If you want to listen to it, go ahead and check it out. We've done it. It's somewhere in the, probably two months old at this point, month old, maybe two months. And we kind of got to the idea that, okay, 15% returns seem achievable based on fairly conservative assumptions. But the stock's up 20% in the last two months, 25% maybe.

Yeah, if it goes up 50%, then the math – yeah, do a little math there. What's my risk-reward here? Are they really, did they deserve to go 50%? How many, you know, is the business even better at this point? Especially when it seems to be a big time factor bet on a lot of these things. Sometimes everything just moves in conjunction, regardless of whether the business is actually improving. But in, you know, in some instances, I think if there's a, you know, 50% move can be warranted

because some sort of unlock on the business, something is way better than it was. I think it's a case by case basis, but what are your thoughts? You know, I'm sure you agree with that. Yeah, I 100% agree. And I feel like people are reluctant to trim. I'm kind of the opposite. I'm happy to trim. I know it might cut some of your winners short, but if something jumps 50% in a matter of days or a matter of months, two months, the forward returns are less, by a decent amount. So I don't think there's any harm in trimming or trying to reallocate to different opportunities. The other thing I wanted to ask you is if you're getting five and a quarter right now risk-free, five and a quarter percent rate of return with the treasuries, at what risk on return? So call it, you know, like if you're buying an equity and you expect it to say generate 9%, but obviously there's risk, there's execution risk, the world could change, that kind of thing. At what percentage do you start to say, nah, I'll opt in for the five and a quarter?

Yeah, and for reference, the three-month treasury right now is 5.23%, according to this link I got on CNBC. i think it would have to be above 10 but i think that's what we're targeting anyways right or wrong so what do you mean like my forward return rate right okay yeah so you're saying if it was below you'd start to i don't think that's it yeah like and it kind of changes the math for when i would want to trim something because if i can get out of something that i think either is low growth and trading at a you know more of a premium valuation now then the math is a lot different than when you couldn't get any yield on treasury especially if you're not upset with a five percent return right now and you wouldn't be like yes there's always the risk

that something can run up and double even you know from when you sell it that's the risk of selling something but when you wouldn't be upset if a stock drops you know after running up 100 typically i would say it's one of those opportunities that might be volatile in general and there could be an opportunity to buy it 50 down because the stuff that's just historically i think there's some stuff that's a lot more volatile than than others how long does it take to get a double on treasuries right now but probably i don't know 14 years um i can run the math but it would be a bit annoying to do this live and i would be worried about getting it wrong but maybe we'll come back on next episode i'll do the math for everyone yeah it is funny i think i

feel like i'm leaning more towards fearful on that little odometer thing and the thing i find interesting is we're at kind of peak well peak rates over the last what when's the last time we've had races high i would believe maybe let's let's look it up i'm gonna look it up and share the screen federal reserve discount rate chart that's my google search sorry didn't use in recent history it's the highest it's ever been and yet i feel like you're getting a much lower earnings yield on the s&p than you were a while back so it's like and maybe that's just kind of anchoring but i find it weird that with rates this high price on equities is continues to run up yeah you know because i remember i remember you posed the question you were like i think it was

when we're in the zero interest rate environment, you're like, would people really start opting in for bonds or treasuries if the yield was 4%? And everyone was like, kind of, maybe. And now it's like 5%. I mean, I'm doing it. We're doing it right now. Maybe it's worth it, you know? Yeah. But here's the thing. So let me, I'll share the screen. Actually, let me give you access just in case you want to do it later share the screen describe it here one it's obviously we all know this at this point it's been the most aggressive hiking in history but if we look back it's kind of where it was in late 2006 and it's kind of where it was for a lot of the time during the 90s which again is when a bubble occurred i also want to look at okay zoom really needs to fix where

they put their screen sharing thing because it always pops up and it makes it so you can't on chrome uh type in something new okay i want to look up the pe ratio of the s&p 500 we're at 25.5 call it 25 and that's just i believe just trailing no cape no schiller no whatever 25.5 okay say it's 25 invert that one divided by 25 that's a four percent yield so you're getting a the yield on the S&P

500 is less than treasuries I think that that's going to make me fearful now obviously the expectation is that earnings grow you know I mean I guess that's what's getting priced in right now but yeah

every individual stock is different and I'm sure everyone has the same take as me where I'm like no my stocks are going to grow but it does make me a little bit more nervous and want to target, say, something in the value camp at this point when in late 2022, even though it felt shitty, you knew it was right to go after more growthier stuff,

even though if it was a harder, you had to plug your nose a bit if you did it. Yeah, and you might have to endure another 50% drawdown because there was really no bottom to a lot of the growthier unprofitable tech despite you know some of them maybe having uh real futures but um anyway that's our macro talk or part of our macro talk yeah why don't you go into your topic what do you want to hit first i guess do whatever you want yeah not the newsiest week to be honest the uh i guess there's more microsoft activision drama so apparently this week the ftc the federal trade commission uh asked u.s courts to stop

microsoft from acquiring activision blizzard while the government's bigger case to block the merger plays out um apparently i believe they call this a preliminary injunction am i saying that right yeah yeah yeah preliminary injunction and you know a part of me is going through this for the first time we no longer own microsoft we never we we never owned microsoft we no longer own activision um but the uh we did at one time and i you're kind of we're we're going through it and thinking about like from the ftc's point of view and we we don't understand the process very intimately but still feels we understood kind of their their justification for why they're trying to block it and we thought it was wrong but the uh this article says both a

temporary restraining order and a preliminary injunction are necessary because microsoft and activision have represented that they may consummate the proposed acquisition at any time i believe that would mean they're doing it without doing so in the uk right It's saying that they could just without UK approval, but that would be a significant loss probably for both businesses or something like that. So basically, this is just a further push to stop the deal. Interesting kind of background on Activision, Diablo 4, which has been this long awaited AAA game, kind of a console and desktop, right?

That's kind of where they dominate. Preston Pysh , Yeah, over five years in development. And yeah, it came out this week and it crossed $666 million in sales within the first week. The reason they use that figure is 666, kind of the devil. And that's kind of what the game's based around. It's very like dark kind of. You're in hell. You're literally in hell.

That's the game. Right. But that is a huge, that's a huge number. The stock's up a little bit. Activision now trades at $81. It's 18 and a half percent away from the acquisition price. basically the market is saying there's very little chance this goes through. So if you're buying here, you're buying specifically to own Activision as a standalone business, right? Isn't that how you

think about it? I'd probably think so. And I think a lot of people aren't really betting on the acquisition to go through, but I think they are betting on getting that $3 billion breakup fee from Microsoft. It seems like Microsoft has now, maybe they were looking for regulators to be a bit more rational but they seem to have bungled bungled this a lot i know there are a lot of microsoft shareholders out there that wouldn't be upset if the deal didn't go through but it is a waste of three billion dollars kind of pennies to them but still activision though yeah it's driven by call of duty yes you know it's driven by candy crush a bit but yeah the majority is call of duty and that's call of duty war zone the premium game and call of duty mobile

And that's for their business. I believe, what are we at? It's typically around $8 to $9 billion from revenue a year. This Diablo first week or say first few quarters after launch will be a nice little bump for them in the near term, but it's not going to be a game changer for the financials. I think the key, and this is what they discussed, is making it more of a live services offering after launch. So they have these really in-depth campaigns and stuff like that.

you know and it's a great story and and people buy the the premium game to play this story it's a well-loved franchise the the last ones have sold a lot this one seems to be the best-selling game in blizzard history but the key financially for activision is to make it a four to five year or longer live services game with add-on content bonus stuff that they have they say is coming down the line they say they prepped years to make and if that happens and they can bump say this to a billion dollar seller every year if you include live services yeah they can meaningfully affect activision's financials and they can probably hit that three billion dollar cash flow target that they've been targeting yeah agreed anyway i think it's but that's one of those ones that

that's one of those with it's it's i feel like it's lower growth and i think it's a durable i think the brands are durable and i think that stuff with the um you know the workplace culture stuff was terrible but it looks like they're slowly getting better with that and it's still a problem but i think the biggest indication that things are getting better on that front is that they're rolling out games on you know there's less delays yeah they're you know you're not seeing the voluntary resignations people trying to leave people uh because obviously that slows game development you're seeing them kind of hit that regular cadence and so i think that's probably proof that things are getting better yeah and unless you really trust some sort

of you know you think the management team is a berkshire s capital allocation savants out there if a stock right now is trading at 15 to 20 times earnings i guess maybe closer to 20 times and it's low growth or you kind of think it's you know growth is not going to be a big factor in uh for earnings i don't know why i would want to own it right now activision yeah activision i'm saying that as an example of that scenario that basically describes activision at least in my mind some people might be more optimistic on the future earnings but yeah and the other thing that i'm we've owned activision we have kind of a long history of ownership with them uh well not really that long but basically we rode them down sold at the worst possible time buyout rumors got

boosted the stock bought it kind of broke even on the merger are but i think we lost like one percent after the uk deal broke um or after the uk uh what a trial to stop the merger uh i have found that the worst time to buy activision is right after a big game launch like like they they have a ton of success with one one hit game um and i think the stock jumped a little bit because of uh diablo 4 success i feel like it's better because these are long-standing franchises to do it when to to acquire shares when it's trading at it um when they announce the date and you're confident that it's going to be like they announced the release date and you're confident i mean same thing with nintendo right after a hit game like when they

kind of the trough of the development cycle yeah it would have been say six months ago for both nintendo and activision where you know the game's coming out you know that these are guaranteed sellers we're talking zelda and diablo yeah yeah i mean that's a much better time at least to think about it because typically historically yeah i think a lot of if you follow the gaming industry closely a lot of investors on wall street are not really following it as closely and there can be some opportunities for i mean it's usually not fantastic but yeah it could be present buying opportunities if you like the long-term prospects we do have two questions if we're going to before we transition to another topic. First one from, this is a funny name, Mr. Dapper Capper. Thoughts

on the drawdown in healthcare insurance stocks? Is CVS looking like a good risk return from here? We do not know anything about health insurance. I'd say we don't know much about insurance in general, but health insurance would be the least. I know a little bit about car insurance, a little bit about home insurance, but even those, I don't think I can say much. But what I've been seeing in the news is that you know costs for a lot of these companies insurance in general have been going up we saw the two companies in california kind of get out of the market so i think people are worried a bit about that in general um there's a lot of uncertainty now i think there's a narrative out there about you know ozempic and all those things so i don't know if it's a good

risk return from here but if you like the companies yeah i mean if they're down because Is it some narrative? I'm not going to be able to tell you whether it's a good buy, though. Yeah, I'm with Brett. I have absolutely zero idea. I'm looking at CVS right now. $20 billion in operating cash flow, kind of $18, $17 billion in free cash flow. Enterprise value of $148 billion.

So seven, eight times free cash flow. I mean, I don't know. Who is that, CVS? Yeah, I mean, the free cash flow looks pretty durable. yeah i mean it's a bargain i guess if you think free cash flows going upward from here or if it's just the same here's yeah but here's the next question uh mark from scotland says he appreciates the show thank you mark for listening and tuning in here's a famous hypothetical question if you can only buy one stock from the arch portfolio for the next year what would it be i think if i

100 one stock i hope this is what the question would be look i'm always going to say the conglomerate we own which is nail net because that's very diversified we trust the management so the management team i trust the most in the world um but in regards to what i'm most bullish on in the near term i think that's gonna that's really hard to predict and i think that's all based on feeling if you would have told me three months ago like what stock i was least bullish on in the portfolio it would have been dropbox because i was worried about small business recession and all that sort of deal and they've actually been the best performer probably since then so i don't think you should base it off that but if i was going to say today

like my favorite one is probably match group has the most upside in the near term but again you should probably fade that because again whenever i have all time bad at short term yeah whenever we have these feelings or whenever i have these feelings about what something's going to do in the next two three quarters um yeah i don't it doesn't usually work out but if i had to cop out and have a real answer i would say now that i'm curious what your takes are ryan because and again this is nowhere near how we invest so you know we usually invest at least on a three term three year horizon. I like the question. And it's interesting because Nelnet is probably a safer bet, but I'm probably going to own, barring any massive change in management and capital

allocation strategy, I'm probably going to own Nelnet for a long time. And I don't really care what happens over the next year. And I don't see any huge catalysts coming that are going to make some incredible performer there are i think a couple of companies in our portfolio where it's like there's these big lingering problems right now that are kind of hovering over the stock and and people are kind of worried about buying it let's i mean ally financial is kind of the one that comes to mind the the loan book on uh i mean they're one of the biggest auto lenders subprime i believe uh one they're one of the biggest subprime auto lenders right in the us who sorry who said ally yeah yeah they are um but they do it depends they are focusing more yeah they are

focusing more i guess on on prime but whatever yeah i'm trying to i don't know if they're the largest but they offer a lot of prime and subprime and different financing basically around the auto market and so um there's been a lot of questions around that especially because used car prices got so elevated kind of the last three years that people are concerned that used car prices are going to come back down they have to repossess the cars they're going to have to sell them at a significant loss that kind of thing so that's the lingering concern but the actual bank itself seems to just continue to attract more and more depositors um and so it seems it it's kind of it feels like a really good bank on that side um and it's online only so it's able to offer a

higher rate to a lot of the customers than a lot of the kind of brick and mortar type branches or the physical branch bank so i like that side and if they're able to kind of thread the needle on this on their uh loan portfolio and kind of make it through because obviously the rate rate rate hike has hurt them. It feels like that is probably the one with the most upside I imagine in our portfolio in the short term. But like I said, and like Brett said, that isn't how we invest and we're not shaping the portfolio around that. I'd say that's also one of the higher risk companies in our portfolio. Usually the higher opportunity in the short term does come with more risk for downside in the short term as well. And I mean, you can check out our portfolio

allocation online. It's archcapitalfund.com. You can see everything there. Nelnet is our largest holding. I think it's 15% of the fund today. So I think we're speaking the truth when we say we invest for the long-term. I think our money's kind of where our mouth is when it comes to that, because that's probably the one we have the best outlook for over three to five years. So we have a lot more questions in here. You want to take any of these, Brett? yeah let's type it in response to the uh nintendo ones but we have a question here about industrials says industrial setup here looks compelling pmi seem to be bottoming um i would reference last week we did talk about that chart of of industrial manufacturing

spending just blowing out to the you know upside uh it's just getting way larger as a percentage for the entire u.s economy the question is have you guys looked at any industrials or interested in any um we have not but we probably should do that for a theme for a not so deep dive month i don't know the sector very well but i would like to know it more i generally like asset light businesses typically as those are generally and not all the time generally the ones that can lead to you know some of the best business models out there over the long term that can lead to the best stock performance over the long term.

But there have been some strong performing industrials as well. But I don't know it too well. Ryan, have you looked at any of these recently? I would exclude airlines. I kind of look at airlines. I would separate that. I like to follow that industry because it seems sometimes there can be some extremely cheap stocks out there.

Yeah, no, I don't follow it that closely. i kind of just vaguely follow one general contractor called moss tech um just because you know someone right yeah and then i there's a lot of stuff that we own that's kind of tangential to the manufacturing industry so autodesk procore those are both software providers that we don't we don't own procore to be don't own procore yeah follow um those are two that benefit from increased spending in the manufacturing sector and for industrial companies largely so and it takes a while to trickle through but we kind of have some exposure to the industry that way we just i don't know i don't think we've ever been great at following the industrials and it really

is all those feel like they have a lot of cyclicality and a lot of bumpiness in their earnings yeah and there's some factors that can come in like commodity prices you know their input prices, energy prices that can affect them. I like looking at whether right or wrong because sometimes these stocks can trade at premium valuations. Autodesk, good example, hasn't been a big winner for us and has been a slight loser, I'd say, versus the market. I much rather would look at software companies that serve construction, software companies that serve engineers, software companies that serve the manufacturing space because I think those can be fantastic businesses with high switching costs, especially as we move.

And it's one of those where I think the tailwind of digitization is going to be durable for multiple decades, unlike, say, the adoption of some consumer internet thing that's really easy for anyone to switch into. These ones take time, and I just think it's a great hunting ground, although typically these stocks can trade at premium valuations, but they're ones that I have on the watch list. For example, ANSYS is a simulation leader. You know, aerospace companies use them.

A lot of other companies use them. For example, Formula One teams use them for simulation software. That's always traded at a premium valuation. And I think it's one that's on my watch list as a key. Like if we go into a prolonged 08, 09 type drawdown, that's one that I would want to buy if earnings multiples across the board totally collapsed. Yeah. Yeah. We actually did a whole engineering software month where we looked at basically all those businesses, Ansys, Dassault Systems, Autodesk. Who else was in there?

PTC, Bentley Systems. They're all good businesses. They typically trade at premium multiples. With high switching costs. Yeah. That was really the big theme that we saw was once a company uses these on a regular basis and across the entire organization or all their engineers do or whatever it's hard to switch yeah and they're ones that i would love to get at the right price but it's a classic example i think of our strategy that we're trying to be a little bit more disciplined on price because again we've talked about on the show or just in general how our biggest mistakes have been not being price

disciplined and i think you got to be okay if you like these type of businesses even those industrials as well and say hey look i'm going to keep it on the watch list if it hits the price that we think makes sense we'll buy but if it doesn't it might sit on there for a long long time yeah i mean you think about some companies you go back to like buffett and think about how long he waited on certain companies there was situations where he would read their annual reports for more than a decade because it just simply wasn't the right price. It wasn't in his, uh, whatever it wasn't in the strike zone to swing at. And then he finally got it at a good price and the returns were still good from there. So if you're, if you're right

about the long-term projections of the business, you can wait, you can afford to wait, uh, for a proper valuation. Big deal. Yeah. And the big thing I think for everyone else's position, sizing probably shouldn't be as aggressive as Buffett but everything else yeah he's you know he's a little better let's go to the next topic though

Kava what do you hit on this what even is this thing no but it sounds like something I'd like is it is it in do we have any in Seattle I don't know about Seattle I don't think so check check right now

I think there's only like there's only 18 stores in the west which is their geography that they define so i imagine a lot of them are in california um but it's basically a fast casual mediterranean restaurant concept also oh yeah okay so it's kind of um i know every fast casual concept gets this designation but it's a bit of a chipotle for mediterranean food 100 times earnings let's put it let's give it 100 times earnings already all right i'm sold there's 263 stores across the country today versus 89 stores in 2019 so it's grown quickly um the average unit volume or the average revenue per store uh each year is 2.4 million dollars so i think that's kind of average in terms of

auvs i think the largest one we've ever seen was that like hot dog place you know remember what i'm talking about portillo's yep portillo's yeah they had probably the highest average unit value of uh we've ever seen so we're at 2.4 million yeah i mean i think chipotle's at about three so maybe they have a little bit room to grow that yeah they did uh 564 million dollars in revenue last year, 17% gross margins, negative operating income. They're looking to raise, I think, just over $300 million in their IPO. They IPO'd this morning. So let me check this real quick. Kaba stock. Come on, Google, don't do me. According to the New York Post, which is, as we all know, the best source for financial information, it soared in its stock market debut

and hit a $4.7 billion valuation on $564 million in revenue. I mean, wow. Yeah, it was up. I mean, yeah. So they priced it at $22. I believe that was the original. No. And this is classic.

They always go, we're going to aim to price it at $16. Then like a day before, they're going, actually, we're going to up the price to $22. We feel like there's a lot of demand. But it, I don't know, it worked. First of all, I think the IPO system is just broken. But up 112% during their first trading day. So I think it's at like 40. I saw someone said it was at $40.

So yeah, I think we're back. The bubble's officially back, right? Yeah, it is. Yes, 100% as an IAC bag holder, I'm begging Turo to go public. I know that sounds desperate, but I am. i'm looking at your numbers here though i haven't read the s1 don't think i'm gonna i just because the price right now but maybe at some point the gross margins on kava here are 17 you have and they're probably still trying to scale feels a little bit uh sweet sweet greeny

talked about that where they're not losing nearly as much money but yeah but it seems like they're bit of aggressive on their cost structure. But I'm seeing about $4.7 billion market cap. I'm sure EV is a little bit lower, but they are losing money. So maybe we'll just use that. Let's say $5 billion market cap, $560 million in revenue. We're getting close to 10 times sales. And a company like this is probably not going to do much more than 10% profit margins. So we're looking at 100 times earnings. 10% is optimistic. So yeah, 100 times. Well, at least in the near term. As they scale, you could probably see them getting closer to Chipotle at 15%, but after tax, they'll be less, and that is many, many years from now.

Yeah, I don't see how – this reminds me of 2020, 2021, when companies were going public with just the most atrocious unit economics. I'm going to pull up the SPAC list. Do you want to see that? That'll surprise you, even though you keep going. I just have a hard time getting comfortable with these retail concepts, especially paying a premium for these retail concepts. I don't know how you own something like this where it's trading at a hundred times theoretical profits because they aren't profitable.

An unprofitable retail concept where they're kind of spitting out their adjusted margins, their store level operating margins, kind of stuff like that, where it doesn't really like, it doesn't matter for shareholders. Yeah. It's a useful input for shareholders, but again, that's not actually what they're taking home in earnings. Correct. So I just don't see how you get comfortable and own something like that because you got

to be able to assume that they can turn the corner to profitability and you have to be to assume that they can just endlessly grow store count which it's usually hit or miss depending on different markets so it's like i i feel like a lot of the people that end up buying like kava or sweetgreen or allbirds if you want to call them retail um are just like avid customers they're like oh yeah i really like the product so i'll buy shares like i don't see how you look at it it and think like yeah i i can own this based on any sort of valuation work yeah the chipotle one i mean yeah kava does have potential seems like you know there's opportunity for mediterranean out there but at least in the neighborhood i live there's a lot of mediterranean places that are

not expensive and i'd rather go to they all have digital ordering now it's not like there's any sort of advantage and yeah but whatever besides this besides the point i think chipotle is sort of like the amazon where people go it's they you know it's the it's the chipotle of x it's the chipotle of whatever it's the chipotle of mediterranean it can be dangerous when a theme goes like that i think chipotle was one of those where it's like yeah i like the concept and it did scale across the country but that doesn't mean everything will there are a lot of concepts out there that don't scale to average geography like Ryan mentioned, and until it gets proven,

like in Chipotle's case, I don't think you can bet on, hey, they're going to get 5,000 locations across the country. Very, very few. Dutch Bros is another one. Yeah, who knows? It seems like they're making good progress. Is that going to land in Alabama? Well, maybe.

But they seem to be doing pretty well, but again, they're inching their way across the U.S. and TBD, if their average unit volumes are going to be the same. You mentioned the IPO market and how it feels a bit like 2021. I did have a, there was a tweet from someone, I believe it was Deep Sale Capital. If you're on Twitter, follow him. Fantastic. We've had him on the show before. Really, really good at looking at small caps, long and short. Whenever he posts, he posts a lot of short lists and I'm always like, okay, hopefully none of my stocks are on there. It's always a good filter, I guess, because he's

really good at finding those or basically bad companies that might be overvalued. But people have been talking about how it feels like 2021 again we have one IPO that seems to be doing extremely well I want you to guess how many SPACs uh IPOs were formed in the United States in the year 2021 SPACs or IPOs or SPACs and just SPACs it's a SPAC a SPAC IPO right not yeah oh how many SPACs were formed. Okay, I'm going to say what the chart is so you can get the full information. Number of special purpose acquisition company IPOs

in the United States, and the chart is 2003 to 2023, but I want you to do guess 2021. Okay. I'm going to go with 370. All right, let me share the screen. Whoops. the anticipation is building what's this the answer is 613 almost two per day in the year 2021 2022 only 86 year-to-date 2023 14 highest year any year besides 2020 and 2021 was 66

in 2007 I think we're getting a little bubbly here but this is nowhere and maybe it's the same sort of bubbly territory in the mega cap land we're nowhere near mid cap growthy unprofitable

so we're nowhere near 2021 yet yeah that's certainly accurate I can't believe everyone is drinking the Kool-Aid man and you know what okay yeah i talked to so much everyone was talking about how like spax were better for us yeah they're better for us because they finally give like there's a chance to like get in on the

private companies okay maybe it i think it gave everyone a chance to get in on people trying to dump the bag yeah just because there's some sort of psychological brainwashing that people have on that just because a company is private, just because it's a startup from Silicon Valley makes it a good company. Yeah. I bet the lion's share of public companies are a lot better than the lion's share of private companies. Yeah. I mean, the psychology among individuals is so different. I've talked to numerous people that aren't really in the investing world because we kind of know the people that maybe on Twitter or whatever we've had on the show before that actually care about investing. It's a super big hobby like ourselves. I've talked

to people where it was more of a side thing during the pandemic. And every time they say, man, I got a little carried away, but now I'm good. I'm just investing in index ones or something along that line. They're not back. They are not back in this thing. They're still scared, which is probably a good thing. Yeah. Maybe it's a little bit of a healthier IPO market now. For sure. For sure. Gosh, some of those SPACs, man. You remember how like they didn't they could just put whatever forecast they wanted oh that's great stuff remember that's insane quantum scape yeah uh i remember that that was a great name quantum scape right i just think about that one that that was the peak name of something yeah and putting

whatever they want i remember who was it oh man the tomato company was all-time bad we're gonna produce we're gonna do okay we have one warehouse that makes tomatoes indoors we're gonna disrupt the entire farming industry. Yeah. Berries. That's our next TAM. We got Martha Stewart and Snoop Dogg. Here's a good question.

Do you guys plan on looking at Pfizer, which is a payments processor for your payments month? While expensive, it is a great business. Enjoy the MasterCard pod. By the way, if anyone doesn't know who's listening now, MasterCard pod should be in your feed.

Interview with Matt Cochran, a payments expert who works over at Seven Investing. We do not have Pfizer on the list. I got to say, we typically try to go for stuff that's more eye-catching for people. And I know that Pfizer is a really good business and has been a very interesting one to cover.

You know what we could do? But we kind of leave that for writers and stuff like that because when we do the pod, we're kind of looking for something that may be a broad audience, but I know it's a good business and I know it's interesting. And I know they're the one with Clover, correct?

I believe so. Is that correct? Yeah, but there's FIS and Pfizer. It gets confusing. You know what we could do is Jacob Franklin, a friend of the show, I believe knows the Pfizer business quite well. Maybe we could try to have him on again at some point. So Jacob, if you're listening, feel free to shoot us a message and we can schedule a time. But the other thing I'll say is Matt Cochran knows payments a hell of a lot better than we do. So don't expect, even if we talked about Pfizer, I feel like those are the kind of companies where we want to do it justice, just because we don't know the landscape quite as well

as a lot of the interviewees. Yeah. And when we do a not so deep dive company, for example, this week we're doing bill.com and I guess it has acquired a company, but we try to do something that's not a, I don't know if I described Pfizer as this, but like a rollup or something with like eight or 10 products, because that's really, really hard to cover within a week. And we try to go for stuff that's less complicated. And part of the reason we do the Not So Deep Dive shows is, I'd say one of the largest reasons, aside from trying to entertain people, is to look at something where we think, like, it's something we honestly don't know a lot about, kind of the first layer of research.

Could this be something that we one day own? And Pfizer, you know, not to say we could never own it, but I've looked at it at least like just from a distance, kind of read some articles and thought it might be outside my circle of competence. Yeah, it's fair. But I still think we could do an interview on that for sure. I think multiple people are interested in that company. Clover seems like a good business. But again, I haven't looked at it lately. Now, I want to go to the next topic, Brian, which is the fun one, the one we got to put in the title.

to get new listeners, which is housing, inflation, and interest rates update. Well, housing, I guess we get updates on that kind of every month or really every week if you kind of look at different data sources, but we got big updates on inflation and interest rates. The big news from the Fed was that they paused their rate hikes, their keeping rates at around 5%. Remember, it's kind of a range, but I think for anyone that cares about this stuff, just think 5% right now.

And then the day before, an inflation report came out. I think the big takeaways from that were that inflation came down again, but that shelter, food, and automotive prices are what are driving inflation at the moment. Here's a quote from the report. the shelter index was the largest factor in the monthly increase in the index for all items less food and energy. So when they separate out food and energy, which are pretty volatile and can change month to month, they like to look at that what's called core inflation, which can be something that maybe shows a longer term trend in services or something that's driven by company psychology, consumer psychology, which on the other hand, energy a lot of the time is just driven on supply and demand. And you could get a big shock with something like Russia and Ukraine, or you get a big shock with Saudi Arabia could just say, hey, we're going to do something

different here. And that might be different than the long-term trend. But again, it seems like shelter, food, automotive prices are driving inflation. If we're looking at X, food and energy, it is shelter and automotive prices. But I think people need to remember here are the legs, which, Ryan, we've talked about this before, right? How they're not looking at, say, last month, they're looking at, and the calculations are, I think, more complicated than this, like, you know, the past year of data or the past six months of data in some cases. But either way, they're not looking at, okay, what are prices, you know, right now for shelter? And if we look at the, say, indexes or, you know, analysts that track some of these things,

And it looks like the real-time prices or stuff that's closer to now, it seems like we're getting a little bit more disinflation. So if you look at the main high used car index, maybe I'll share the screen. Yeah, it's a lot. It's a lot of words to talk about. So used car prices fell to start really 2022. but in 2023, they did start to rise again, which I think is getting reflected in inflation at the moment. But through May, they have started to drop again. So that's going to be a deflationary

impact that comes through over the next few quarters if this continues. And then if we look at the, let's see, we got a Redfin report here that rents have let's see nationwide rents declined 1% from a year earlier in May. So let's shoot for more.

Yeah. Sorry to all the landlords out there, but you've had your time. The time of the land. You've had your decade. You've had your century. The time of the landlord is over.

Now Now, here's the first question I want to maybe ask you. I guess just any general thoughts before I move on to any of the discussion questions before we close things out here. No, I kind of like, I think I like rates at 5%. I think one thing I wanted to say is it's fun to actually watch these meetings sometimes because there's so much hubbub made and kind of talk about Jerome Powell that you start to believe he's kind of someone who he isn't. And when you actually watch,

you start to think, okay, you know what? This is a competent individual that did a pretty damn good job. I mean, the team, the Fed as a whole did a good job managing through COVID. I think we can look back and say that with like certainty now right are you yes yes yeah are you team soft landing then i know that's it that's slow aren't we slowly getting there right i feel like this is a soft landing at this point but a soft landing can turn into a hard landing true but i feel like a few quarters from now so it's a dangerous take to have people talk about at least okay i'd say six months ago, people were talking about inflation nonstop, like not even investors. I mean, like you were seeing-

I mean, you could see it across the board, no surprise. Yeah. I think there's, I don't see that anymore in like, you know, I'm not, when I go to the grocery store, I'm not going, oh my gosh, every time now. So it feels like anecdotally, it's come down a little bit. We've seen the data. Obviously a lot of the data is sometimes flawed or there's different you know uh one-time bumps that can affect things but as for the influence i i don't know i like having rates at five percent because it gives people a real alternative to equities so a hundred percent and it creates actually like when there's zero percent interest rates it's not like it's like interest rates don't exist it's like they don't exist it's like lending doesn't

exist and that's not actually true but you kind of get what i mean there where when it's five feels harder to value things the the process of how the credit-based economy is supposed to work is how it's working how it's supposed to work when you have rates that are in the three to five percent range the other question i want to ask is that housing is still up we've seen it still staying high we talked you know rent i guess is kind of coming down and breaking but housing still high, especially affordability, which is factored into the inflation a bit. Again, it's complicated. I won't go through all the math here.

I don't know all the math that they do here. But what do you think about how a pause in interest rates affect the housing market? And what if rates, say, don't rise anymore? Or maybe they rise by 25 basis points and it doesn't really matter, but they don't go down for a full year? we finally see this can here's my question can the housing market freeze forever like is it going to just tighten it right with these i think it's going to look it's going to look like a slow plane crash i think it can i think uh the number of transactions across the housing sector can be

significantly lower than they were two years ago for a long time because you got a lot of homeowners that are not looking that maybe they're 15 years into a 30-year mortgage. Yeah, it's rational. Yeah. And they're saying, why would I go out and try to buy a new home and take on a new mortgage at 7% when I've refinanced mine to two or three? I mean, that's a part of the structure of a 30-year mortgage-based housing market. You're going to have in times where rates go up, there's obviously going to be less movement. My thing, when I think about housing, it feels like there's still, it's so convoluted and we've

been on the housing can't stay this high forever kind of camp. I say technically we've been right, but not as right as we thought. Not as right? Yeah, it's gone down a little bit, but not, yeah. I mean, it sucks for the new home buyer, but for the existing home buyers, it doesn't matter. Or for the existing homeowners, it doesn't matter. But I still stand by the fact that there's three factors that matter. Median home price or average home price in the US, median income, and the mortgage rate. That's going to determine who can afford a home and how many people can afford a home. But then I started to think, everyone talks about the housing shortage.

Maybe the median income earner doesn't matter because maybe homebuilders just are selling to the more affluent. Yeah, I guess. I don't know the data on that. Maybe there's just going to be less people that can afford a home. Maybe. And maybe the median homeowner is going to put more of their income into their home. I don't think that would be the worst outcome, but obviously we don't, you know, it doesn't seem like you kind of don't want someone spending so much on their home. Here's what I think is going to be, or finish your thought.

If the home builders, let's say they've been selling their average home for $410,000 or something like that, $400,000. And if they're getting that bid just from the upper middle class, there's no reason for them to take it down and kind of go down market. If they're going to keep getting that and they think they can get steady margins there, they don't need to produce more homes and try to sell to the lower target demographic, right? I think that can work for a time, but eventually you're playing a little bit of a risky game in that regard. Let them be renters. I know, but again, I think that some of the rental costs do, if rental prices come down and stuff like that, it can factor into the equation or how many people are willing to make the leap into home ownership if the spread between renting and homeowning is so wide. I think the big question for me, and I'm not sure how this is going to happen because it seems like the housing market has been very, very immune, is the record works in progress under construction right now? that's going to come online depending on supply shortages, right?

Within the next few quarters. I wonder how that's going to affect things if it does, because it seems like it's having an effect already, you know, but slowly, but once that, you know, gets blown through, I wonder how that's going to. Yeah. If it's going to do anything to accelerate or, or not. These, these declines. increase the supply maybe yeah it's it just feels so unpredictable oh it i keep coming back to the

fact that affordability for the median income earner is the most important thing and it's record or record or record worst or whatever you describe i mean here's what i know for a fact is affordability is at a record low yeah i think i don't want to say record low because i think it's come down a little bit to like it was right before 08 i think was worse or maybe like right at the peak of 08 because oh 16 but yeah yeah or yeah yeah they stopped giving out the uh what do they call them ninjas ninjas no adjustable rate and the adjustable rate ninjas the yeah i know personally it feels i'd be i'm nervous about taking any leap into home ownership right now, especially because like, look, you have a mortgage rate at 7%, plus the down payment.

Are you confident with them? The reason you take on the debt is because you think it's a great way to delay your payments and you can earn if it's all based on investing, right? The reason you do it is because you can delay the payments of cash, right? But if you're paying 7% versus three, you have to earn a lot higher in your savings or your investments. And yeah, I can put into treasury is a five, but that's not beating my 7% mortgage. And can I beat that in investing? Can I be higher at 7% right now in investing with the market trading at an earnings yield of 4%? I think the math doesn't, it doesn't make much sense to me right now. I got a feeling most people are not thinking the way you're thinking when they buy a home.

The, I think we spoke with Jacob Franklin this week and he raised a good point. He said, there is no better debt in the world. Maybe, maybe this is, maybe there's something out there, but there's no better debt in the world than the mortgage in the U S because you're getting, first of all, just a, just a con as the structure of the concept. Yeah. Yeah. Because you're borrowing 30 years into your future. I mean, how many companies can do that? You're locked in your rates, not going to go up.

It can only go down if you want to refinance. I assume it's the fixed rate 30 year. Like that's a wonderful concept. So I guess it's not all that surprising that home prices continue to just balloon. Yeah. I worry about taking a good idea. You know,

good ideas are what people get into trouble though. What get people into trouble. True. That is true. It also keeps people in place. I imagine. Yeah. We'll see.

We'll see. We'll see. there's also going to be a whole lot of inherited homes that's right baby boomer generation so yeah and who knows what immigration stuff is yeah i mean that's going to supply or to fill into supply i mean there's so much stuff i think most of the factors contribute to more supply um then right i i think personally but all right we've got cbd yeah housing is such a giant question mark got two minutes one minute really i want to hit two things first of all netflix at least in my area finally cracking down on password sharing i haven't watched netflix in

a while i gotta tell you my first reaction was okay i guess i'll just go watch hbo but this feels like one of those things where everyone's outraged about it everyone says that's you know that's bullshit i'm gonna boycott and it's ultimately revenue accretive i think they are so smart on their timing because now all the juice has kind of been squeezed on basically sucking the air oxygen out of the room and now they're going to try to make as much money as possible and i mean they're just so much better than everyone else it was viral marketing it was free i mean you could you were letting people watch for free essentially by mooching the passwords off of family members last one i want to talk about too since we have a minute

we were wrong about bud light remember we said whenever there's like political controversy fade it yeah this one took hold wow it's lost its top spot as the best selling beer in the u.s i believe replaced by modelo especial vamos so yeah yeah it's uh i'm surprised it had that big of an effect honestly yeah i think it was and here's what i was trying to think about because typically those boycotts turn into nothing burgers and i think that's kind of the base rate or whatever you want to describe it i know base rates a little bit too intellectual for that but whatever right you kind of this is real thomas the boycotts don't work as much as people think and it's overhyped i think in this case it's really because unlike a lot of the other boycotts

these are ones where one you're you're consuming this and it's in your hands so it's a visual thing and when you're consuming this you're with your friends and a lot of times with your friends you might have the same political views so i think it was one of those were kind of it was really hard right don't want to be that guy if you're in that shows up apparently yeah yeah i don't want to show up with the bud light i think the other part here is maybe that people stopped drinking bud light and figured out oh there's some other reasons to boycott it which is there's better alternatives that's right and they cost the same yeah yeah whatever it's uh it's a minute over yeah we are one minute over i know ryan said that but we can go as long as we want so it is our show but yes

we wanted to keep this to an hour or around there this has been the investing power hour uh you can find it either on YouTube, Spotify, wherever you get your podcast. Show is out Thursdays on YouTube and then Sunday, wherever you get your podcast in audio format. We are not financial advisors. Anything we say on the show is not formal advice or recommendation. We are general partners at Arch Capital and clients may hold securities discussed in this podcast. Thank you everyone for tuning in and for all the great questions. We'll see you next time. Thank you.