Chit Chat Stocks - Investing Power Hour #67: Iger Stays At Disney; $MSFT wins vs. FTC; Update on Real Estate Market

Episode Date: July 16, 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. Money Collaborative event: https://asymmetric-investing.beehiiv.com/c/money-collaborative 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. This is the Investing Power Hour on Chitchat Money, number 67. And it's a special one today because we actually have three guests. Two have been on the show before. One, we need to get on

the show to do an interview on a financial stock sometime soon. It is Jason Hall, Travis Hohium, and Matt Frankel. Guys, welcome to the show. Thanks. This is awesome. Glad to be back on. Yeah. And guys, you're on for a special, I guess, event, an announcement. What is this announcement and what do you guys have going on in Alexandria, Virginia on August 18th? You guys want me to go first? Yeah, I'll go first here. So it's interesting. This is something a lot of us have talked about. Travis, you and I have talked about doing something like this before, I think the most. But the idea is to create opportunities for regular investors. because like all of us, every single one of us on this, at some point, we were just a guy that was trying to figure out how to buy stocks, a guy that was trying to figure out how to manage money, how to make the right decisions, all of that kind of thing. And doing the podcast,

the smattering I do with Jeff, he is still like the regular guy. He has a full-time job working for a school district. And this is the thing that he does on the side. There are so many people like that, that they don't have access like all of we do. We can DM each other on Twitter. Half of us have each other's phone numbers. We can talk. And there just aren't a lot of opportunities to really engage, not just with us, right? The experts and the people in the know, but also just to engage with other people that

maybe you have proximity to that you just don't have in your regular life. So what we've decided to do, there's a group of us that are going to be in Alexandria, Virginia on August 18th. It's a Friday. I got the date right, guys? August 18th. And from 2 to 6, we have reserved a private spot at, oh goodness, now the name's falling out of my head here, Lost Boy Cider, which is in Alexandria, Virginia. It's easy to find. And we're calling it Money Collaborative 2023. If you go to moneycollaborative.com, thank you, Travis Hoyum, for putting the site together. you can reserve. Now, here's the thing. We have room for about 50 people at this event and you

have to have places to do this and nothing's free anymore. Nothing is cheap. So it's a hundred dollars a person, but what do you get for a hundred bucks? You're going to get Travis talking about asymmetric investing and his process to find asymmetric opportunities. He'll talk more about that today. You're going to get Matt Frankel, who is an absolute expert in financials, real estate. He is a value investor. He owns real estate himself. He is a chartered financial planner. He is a CFP. He is a real money expert. You're going to get me and Jeff Santoro. We're going to record an episode of The Smattering live in person. I'm guessing a few people that are watching this have probably heard our show. So we're going to get to do it live. We're going

to have Tyler Crowe, who does a lot of the YouTube videos with me. It's going to be a lot of fun. We're going to have Lou Whiteman, who does his Fits and Starts blog, which is a great resource for people how to think about investing and how to manage themselves. So you're going to get proximity to all of us. We're going to share some of our best ideas. We're going to do a lot of interaction. We're going to have food. It's Lost Boy Cider, so there's going to be plenty of cider flowing. And we're really, really excited about it. Travis? Yeah, I think this is really an opportunity for us to have the kind of discussions that we have on a semi-regular basis with a larger group of people, get feedback and sort of get a little bit more meta. The content that we create

on a daily basis, whether it's an article, you know, even I did a spotlight of a stock yesterday that was 2,500 words. I'm still just scratching the surface of what I think about that business, the process that goes into finding those kinds of investments, how I think about the strategy of of any given business or industry. So we can have longer form discussions that are maybe a little bit more high level that don't necessarily make sense for a specific article or video. And I think that's, what's really, really fun and interesting. You know, I did one of these almost a decade ago now, and it was just fascinating the things that people wanted to pick my brain about. And I'm not necessarily going to know what those things are until we get

there. And that's part of the fun of it, because a lot of times these discussions are very one sided. We're creating content. People are consuming content. But unless you send me a DM or a comment on YouTube or something like that, I don't necessarily know what you're taking out of anything that I'm producing. So this is a this is kind of a way for us to get some feedback. So I think that's what I'm really looking forward to is having a little bit more of a personal connection with everybody that joins us. I want to loop Matt in here as well. I think listeners are probably familiar with Travis, familiar with Jason. This is a good chance to plug that Travis's pitch on GM is up 30% since he came on the show. Jason's been on a couple of

times, but I guess Matt- We will never hear the end of that from Travis. I just want to say. If it becomes an asymmetric stock, i'll just uh i'll just come on once a week and toot my own horn i guess listeners might not know as much about you matt um can you maybe provide some background kind of how did you get into the field of investing what do you do today what's kind of your investing ethos i guess yeah my internet connection hasn't been great today so i sorry if i fall out at all it's been good so no worries can you hear us matt maybe not i jinxed it you brett you broke his audio i know i definitely jinxed it uh yeah i can't hear you no audio yeah all right well you can't hear us okay

we'll just yeah we do these shows live for anyone that's listening on the podcast so it's a little chaotic but but either way we'll give a we'll give a pitch with matt he's an expert on financials He's been on industry or was on industry focus on the financial show for a long time. I used to listen to that all the time. I mean, definitely check out all the stuff that he's been doing. I mean, yeah, I mean, really, really knowledgeable about that stuff. Anything else, Ryan, do we want to pitch for Matt before we get into the show? No, I I've been clamoring to get him on the show, but he's a busy guy.

So I'll pitch his YouTube channel just real quickly. Go just Matt Frankel, CFP YouTube, just Google that and you'll find it. great content, great content. One of the things he does really well is he just has really easy to understand conversations about the things about the companies that compelling. If you're somebody that's trying to understand valuation better and thinking about finding value, Matt is going to help you be a better investor. I switched networks. Can you hear me now? Okay. We're giving you a good pitch though. Awesome, man. I appreciate that. No, I'm a certified financial planner. I've been writing for The Motley Fool and other

websites since, gosh, I'm going to age myself right here, since 2010 after a career as a high school teacher. So I call myself a reform teacher, but I decided, I started doing this kind of on the side while I was still a math teacher. I was a statistics professor at the college level and kind of really discovered that I loved, you know, applying my love of teaching to investing, which has always kind of been a hobby of mine ended up becoming a certified financial planner a few years back i guess wow seven years ago at this point time flies you know um you know jason and i both didn't have gray hair um you know back when we started this game and you know now we do now we're the old guys in the in the in the room um but no thank you for the nice plug um i do have

my own uh youtube channel matt frankel cfp um i don't have i haven't thought of a cool name if anyone thinks of a cool brand name for me please let me know but i am just keep it keep it the same keep the thumbnails the same keep the the name the same it is so on brand it's it's working it's working i love it hey i it's it's been going pretty well um we'll hopefully people will come out to see us but no and jason's absolutely right i feel like it's kind of especially over the past three years or so become kind of a lost art of getting, getting together in person and really picking each other's brain. And there's only so much of that you can do over, over YouTube and not to, you know, knock YouTube, but as we saw about five minutes ago, it's not a perfect system.

A lot gets lost in translation or lost in the shuffle. And, you know, how many times have you gotten off a YouTube call and you thought of a question you wanted to ask the other person just afterwards and things like that. And I'm looking forward to connecting with a lot of people in person. I know Jason and I were both in Omaha for the Berkshire Hathaway meeting and got to see some of our listeners in person there. And it was, in my mind, I don't know about Jason, I was there for four days. That was the most valuable experience out of the four days. Yeah, absolutely was. And honestly, I think that kind of planted the seeds for me for doing this. And then as Travis and I talked more about it, it's, yeah, this is pretty excited about it.

Yeah. And one more time, it is money collaborative. We'll put the website link for anyone in the show notes or, and in the comment section, just so anyone can get that specific link. Alexandria, Virginia, August 18th. So a little over a month from now. So anyone in that area, I mean, it's a perfect way, perfect place to go. Hey, Matt, we've got some comments in here, too, in the YouTube chat that say, frankly speaking, would be a good YouTube name. I like that. You better copyright that now. Like, if you're literally not going to the copyright. When WestJet first took flight in 1996, the vibes were a bit different. People thought denim on denim was peak fashion.

Inline skates were everywhere. And two out of three women rocked the Rachel. While those things stayed in the 90s, one thing that hasn't is that fuzzy feeling you get when WestJet welcomes you on board. Here's to WestJetting since 96. Travel back in time with us and actually travel with us at westjet.com slash 30 years.

All right, well, let's hit some news topics. Ryan, did you want to talk to Activision Blizzard or I don't know? Yeah, we can start there. I don't know if you guys have any thoughts on it, but basically it looks like, So the appeal from the FTC is not going to work out, I guess. Was terrible?

Yeah. Courts basically just gave them the approval to go through with the deal. The only holdup, and I'm not 100% sure on how it functions in the UK, but they kind of have to, I guess, evaluate the merger one more time. Um, the CMA, which is the competition and markets competition for markets authority in the UK basically protested or appealed against the deal a couple of months ago. And now they're kind of looking like they're going to revise that. Um, so the stock's up, looks like the deal is going to go through, I guess we've Brett and I have owned this.

We have owned Activision in and out at just the worst times. throughout its history, but I guess any closing thoughts here? Do you think it makes Microsoft a better business? Do you think it actually changes the video game landscape at all if this closes? Yeah, Travis, it seems like you followed this.

Do you have any thoughts on it? Microsoft is going to have to create a streaming business. I mean, that's the point of this, right? That they had to get the content not only from their own studios, but then acquire another major studio like Activision Blizzard to create the Game Pass

streaming structure that they're trying to build out to compete with Sony because they haven't been able to beat Sony in the console wars. I think that is basically over. And at this point, I don't see anything changing that. I mean, we're basically going to have Sony be the high-end console. Then you have Nintendo as kind of the niche doing Nintendo type things. And then And, you know, this is a perfect example of something that happens on the internet called the smiling curve, where you have the big platform companies have a ton of power. The small niche companies have a bunch of opportunity. You know, so this is like the small indie developers who can now pick and choose where they want to put their stuff, but they can have a staff of five, 10 developers and build a game. the ones that are kind of stuck and this is what i think is most interesting about this deal actually

closing is what happens to ea and take two because now they're in the middle you know they're probably too big to get acquired by sony or microsoft so they're they're out of the platform side they're too big to be a niche player so that's what's going to be interesting to see how it plays out because i i don't think it's certain that microsoft is going to be successful in this streaming gaming business. They might be. I think it's probably pretty certain that Sony is just going to kind of keep doing what it's doing in dominating the console business. But those companies that are really big names are just kind of stuck in the middle. You look at their financials and they're not great. Yeah. I think I want to hit on that point as well as the other game publishers that

are still out there. I mean, the big ones are EA and Take-Two, but there's Ubisoft, a few others. There's a lot in Japan, I guess, that are of a decent size. There's Capcom, which has been very successful. Their stocks all went up on this deal, or at least on the FTC's decision. And I think investors were projecting that now it would be open season for these companies to get acquired. But I think Travis makes a great point where, okay, Sony's not going to acquire these because they're already even more, they're already doing the stuff that they're telling or trying

to argue against for Microsoft. microsoft's not going to be able to acquire them because they have activision blizzard i mean who's going to acquire these companies now who who's the one that makes sense is it luna what uh you mean uh amazon's cloud gaming oh boy i mean i was going to say big tech could make sense but it seems like they've all been pulling out of except microsoft obviously uh pulling out of the gaming market i don't i mean is there a little you know a realistic acquire for these publishers? Because it seems like investors think with the stocks up like 5% on the news that, I don't know. Jason, do you have any thoughts? I saw you on mute there.

Yeah. I want to circle back to Microsoft real quick. I think this is important. Historically, Microsoft's been really bad at big acquisitions, but not because Microsoft is bad at big acquisitions because everybody's big acquisitions. I think that's bad at big acquisitions. They almost never really do what anybody promised that they would do. I think that's important to remember. I have a ton of faith. I don't own Microsoft stock, and I probably never will. It's just not the kind of company that I buy. But I have a ton of faith in Satya Nadella. I will say if there is a manager of a very large company that could generate some value out of this, it is Nadella. And I think the reason where I think it could struggle though, is because it

doesn't fit inside, like really the enterprise obviously is, that's Microsoft's bread and butter. They're trying to build something like that for the consumer side. I just don't know that they're going to be successful at doing it, right? I think that's the biggest question I've got. When it comes to all of the other ones, it's almost uninteresting to me because the industry has gotten so mature at this point that besides an Amazon, who, again, this is an ecosystem company, maybe they go after a take two, even though EA would make more sense because there's a more broad portfolio. Or Meta can make sense for Oculus, although, again, that's still been stagnating. But let's just burn more money. Yeah, exactly. I think that's kind of the point.

I think Amazon has kind of gone through that period. It's like, they're really like, Andy, what's the CEO's name? Jassy. Jassy. Everything they're doing is focused on generating operating leverage and making money, right? So I don't see them making a big multi-billion dollar buy, even though these are across the cycle, right, of their game release dates. These are really profitable businesses. I just don't know that they necessarily create the kind of value that any of these big guys are looking for. And there's just more interesting things to think about for me. Yeah. I agree. And I was going to say, I think some of the brands that some of the big publishers have like Call of Duty, FIFA, any of the big titles, grand theft auto those are very durable and i think they can generate a lot of cash

but given that the space is becoming more competitive even for triple a games or console games the building blocks are there like travis said for indie developers to to build something that competes with this um i think fall guys was an indie developer probably you know at the end of the day ea and take two they're competing for time spent i don't know if it's the best i used to think, well, these brands are so durable, just own them and they'll generate more cash. But it's starting to feel less and less predictable because development talent is so expensive. Like EA, we were talking about this last week, I think, Brett, but EA, their hit title is FIFA. And really it's FIFA Ultimate Team. It's diverse, but mostly FIFA Ultimate Team is

their biggest driver. They- Well, they're losing the FIFA name, right? So they're gaining a little more control over it i think right yeah and then i don't think it'll make much of a difference but the um that was the biggest driver of their business four years ago and it's grown double digits every single year and then this year i think it grew engagement or bookings like 31 partly because of uh the world cup driving engagement in soccer again but or football wherever you are um and if you would have told me that that business is their main cash cow is going to grow double digits every year for the next five years and cashflow is going to be stagnant, it would have, you know, I probably wouldn't have believed you at the time, but I think that kind of

is a testament to how competitive these markets are getting and you got to pay a lot for development talent and it's hard to build a successful game. Yeah. This is something that me and Ryan debate a lot. I kind of fall on the other side where that, yeah, they're low growth and you got to buy it at the right price, but these are really, really, I think very predictable brands, at least at the top end, I think whatever you call it, FIFA, or as what we're calling it now, EA Sports FC, or with Take-Two's businesses like Grand Theft Auto and Red Dead Redemption. I mean, mainly Grand Theft Auto, Nintendo, you have a few in there. Activision Blizzard, Call of Duty is a bit strange because they really, really juiced that title. I think they'll still

be around and be the dominant brands 10 years from now. But the growth is really the big question, And as Jason mentioned there on the maturity of the console market specifically, we have a comment here that said, you know, on the acquisition front from Kelly saying that in college, I had a class that went over exactly how Microsoft overpaid for Skype. So I think that's an example there that acquisition probably made sense at the time. But in these industries, you know, so much is unpredictable. And I'm kind of coming to the conclusion that this is probably a bad deal for Microsoft because honestly, even though it went through all this FTC stuff about monopolization,

that was a lot of baloney. And I don't think this is going to change their position in that industry whatsoever. But before we go to a new topic, Travis, it looks like maybe you have any final thoughts there. I just wanted to comment on your paying the right price. I started following Activision Blizzard because I think it was trading for about nine times earnings. This would have in the early 2010s, that was really compelling to me. Any of these companies at 25, 30, 40 times earnings is an absolute no-go for me. And to your point about, is Microsoft able to generate value? You're right. They are going to have to dominate the streaming gaming space and then also get a whole bunch of cloud Azure kind of business as a result and insert AI, whatever, whatever.

there's a lot of, and then, and then, and then to make this a success. We don't even know if cloud gaming, how long it's going to take for that to, you know, become a viable consumer product. Let's go to another entertainment company. This was my topic because it came out yesterday, another news report. And it's basically what's up with Disney's executive suite, which is really what's up with Bob Iger. The report, or I guess they did a filing yesterday that the Disney board decided to keep Bob Iger as the CEO until 2026. I think that's really it. Anyone follow this company closely? And I kind of think, does this change anything about Disney? Do you want Bob Iger around Jason? Any thoughts? sir yeah it's it's it's this one's so tough and i think it confounds a lot of people because if you just start with disney itself and you think about the intellectual property it's a good

conversation coming off talking about activision blizzard and that stable of ip they have disney has the most valuable long tail collection of entertainment intellectual property on earth it's and it's not even close right in terms of what they they own and then you think about I'd push back on Disney or with Nintendo. I'd make an argument, but that's the thing. Okay. You know what? That's fair. I think you could argue that it is one of the most, right? And it's certainly in that conversation. But then you think about the way that it monetizes them and everything that's going on with linear TV, right? That's a business that's in decline. Sports content is so important. ESPN has been such a cash cow, but again, because of what's

happening with linear TV, its ability to monetize that is absolutely getting shredded. Think about movie properties and everything that's happening with the domestic box office is a challenge. China's growing like crazy and that's an opportunity. So thinking through all of these different ways that they monetize that stuff. And I'm sure there's a lot of people, myself included, that are questioning, have we just overvalued what it's really worth? Sure, you can say it's one of the most valuable on earth, but are we hedging too much on that. And then I think about Iger and thinking about what he accomplished and like the lightning in a bottle of his time with Marvel and Pixar. And ESPN was before that,

but he was there, but it was before he was the CEO. And all of those roll-ups that happened that generated the seven or eight year period of incredible, incredible returns, right? And then he walks out the door after the Fox acquisition, which is pretty clearly an overpay and also acquiring some assets that may be, same thing, great assets, but maybe we've all overestimated what they're worth. All of that to say, the idea that Iger's magic is going to be back, he's going to fix the operations, he's going to get the company pointed back in the right direction. And if you look at any other seven-year period, hat tip to Tyler Crowe, by the way, for sharing this with me. If you look at any other seven-year period in Disney's history as a public company, it's never really been a market-beating stock. It had a good seven-year run. That's it. That's it. Interesting. Matt, any thoughts on Disney? Well, that good seven-year run was mostly under Iger. I'll say that much. It's historically been a bad move to bet against Disney. Not that it will necessarily outperform the market over long periods of time. It's a mistake to bet against Disney's ability to monetize its IP. and i i love eiger's track record of not necessarily innovation but of finding the

best opportunities at attractive prices he was someone who presided over the pixar acquisition the lucasfilm was an eiger idea um he was the one who started disney plus like that was his his brainchild it was poor execution under the subsequent leadership that that really derailed it if in my opinion um i i think this theme parks are a big underappreciated area um jason was at disney world i know not that long ago and he could probably confirm this disney could be twice the size disney world could be twice the size and still be full yeah um they could charge twice as much and still fill up their existing parks i don't think they've maxed out the theme parks yet. There are a lot of plans to build on the theme parks in coming years.

I think that's a big underappreciated part of the business, regardless of what happens with streaming. And I think they will figure out streaming. So Disney is the one that I wanted to chime in because it's the one I always get pushed back on whenever I include it in a YouTube video. You'll see a list of comments that say, I agree on everything but Disney. But I think Disney is going to surprise investors over the next decade or so. so i'll go ahead traps i want to give you some numbers behind this because i i think that some of what jason said is not right uh 1980 to 1990 this is not including dividends uh disney stock was up 900 percent uh from 2010 to 2020 it was up 350 i didn't add in the s p total return i assume

that beats the market um did not beat the market in the 90s and then the 2000s uh the 90s it was up 213%. I didn't pull all the comparisons. But what I think we need to look back on with Disney is understand that this is a very cyclical company, not only its returns and sort of the hits and misses of its studios, but also just the stock performance. I mean, a lot of Iger's success early in his tenure was just multiple expansion. So a lot of times the narrative of the market it becomes then the narrative of the company, whereas it should be the other way around. So I don't think there's any question that Disney Studios are in a lull right now for probably a number of reasons. Like you move into streaming, stuff changes, right? The stuff

that worked at the box office doesn't necessarily work on streaming. The things that worked on Disney Channel doesn't necessarily work. So you've got to kind of reconfigure and relearn what you're doing and that may take a few years um you know the pixar movies i think have been that that's like a business that needs to just rethink itself uh after the last last few movies but we go through this over and over again you know if you look at the movies before i think it was like lion king was the first major one in their comeback in the 90s right in the movie like five movies before that all were just disasters and then the next five movies were icons so disney does this it goes up it goes down it goes up it goes down and right now i think

matt's i would i would lean towards matt's direction that we're in a down point for a number of different reasons from the media landscapes to the studios the parks are the the rock solid core of disney they will have that forever nobody's building parks like that um so i i tend to take a long-term view and just say like i'm hanging on to it it's going to be a wild ride, but I think things are a little better than a lot of people think right now. Has anyone performed the S&P 500 for the past 23 years?

You're picking it at a low point. There's also the reports that, I don't know if anyone saw the analyst report that predicts someone is going to buy Disney. I think it was Apple they specifically said. Does anyone think that that's an actual possibility? No.

I don't think so. I want to Okay. So I think we got a market cap today of $165 billion. They have some debt, so you add back on as well. The parks business, as Matt mentioned, I think, well, a couple of you guys mentioned, is so profitable that a lot of the value in the stock right now is probably just betting on the parks business plus the other consumer product stuff. And it seems like investors are betting that or thinking that the streaming business is really not going to be that good for them what you know matt maybe matt what what changes for the streaming business to get

it to profitability how how do they get there what's your thoughts as someone that follows the company closely i think they don't need to invest in as much in new content as they have been first of all i think that between one the existing ip they have you know everything they've made so far and what they're already making to put out in the in theaters you know that's almost enough to sustain Disney Plus by itself. I think it was they over-invested in content, number one. And number two, now that they're kind of done the ramp-up phase, they could scale back. I mean, I hate for people to lose their jobs, but they could scale back how many people it takes to run Disney Plus once now that its scale-up phase is done. One of my neighbors actually is a Disney

plus engineer. So he tells me that they have more people than they need. So I think that it's really an efficiency question and using what they already have to better advantage. They could use the streaming as a compliment to the other parts of their business better, like the parks, especially. If you go and you just want to walk through Disney World before you get there so you know where everything is, that doesn't exist yet. It could be more of a compliment to what Disney already has going on. So I think that the streaming is, it's early in its evolution. Yeah. And they could do the bundle stuff that people talked about, giving discounts on cruises and stuff like that. I think one thing that comes to mind is, and maybe anyone can hit

this because me and Ryan talk about this from time to time, and we really don't know what's going to happen. What is the end state of ESPN? That's a massive question, but I want to cover what I talked about that, right? It's tough. Like that's the entire economy of sports is going to change over the past decade. There's a couple of things in sports ties into this, but advertising is something that has effectively not been turned on yet at most of the Disney properties. And this is a company that should be able to monetize just as effectively, if not more effectively than Netflix. And Netflix said that their advertising service was making so much money that they were, they were just like, ah, we, you know, we need to increase our prices because

this advertising business is so good. Um, you know, you talked about bundling the apps together. They're supposedly going to do that by the end of this year. The sports business is one where the more that I think about this, the more like almost confused I get because the old world is not going to exist in 20 years. But are we going to go down a path where if I want to watch an NBA game, I have to sign up for the NBA app and then pay whatever? I don't think that makes any sense. So the question is who re-bundles this? And the only company that makes sense is ESPN and Disney. I mean, you could argue like the TNT that's in the Time Warner business, but they don't have the financial wherewithal to be able to do that right now. So I still think all of these things, again, if we talk about like the smiling curve, there ends up being these big companies on one end and these small companies on the other.

And Disney in both sports and streaming, I can't see a world where they're not one of the big companies, along with Netflix when it comes to streaming. or you know theme parks you talk about like universal is really their only competitor there so i think as as we mature jason is right we don't know what sports is going to look like but i think that everybody at disney including bob eiger knows this has to make financial sense for us we can't bankrupt ourselves by keeping the nba so there's gonna be a lot of give and take there because if we learned with this diamond sports deal right just because you say you're going to write a big check doesn't mean that you're going to actually fulfill that if your business goes under i think yeah i think that's a really good point travis because this is where the bundle

becomes so important in my opinion where you could lump in espn disney plus hulu because sports rights on their own are not that attractive from the streaming perspective. You look at Fubo, basically, I forget where I read it, but you're essentially just paying upfront this big risk for league rights. And then at the end, if you get any margin out of it, when you renegotiate, they take that margin back and it's probably more competitive the next time around. Other companies are going to bid for those same rights. So on its own, it's not that attractive, but if you can use it as sort of a loss leader within a more profitable ecosystem, something like what Disney has, where if Disney's traditional IP is really profitable,

you can afford to run some losses through ESPN, but you're going to make it up by, by adding them to the bundle as a whole. So the only problem now is that they can't really afford to, or maybe they could, but they can't really afford to use sports as a massive loss leader. If Disney plus is also losing money and they're pouring money into that. So I don't know, I feel like it's kind of a tough puzzle or it's a, it's a tough investment because I don't know where Disney Plus or Disney ends up in the streaming world. And it seems like that's where everyone's heading. And it just feels like it's more competitive for content, more costly. But the parks is wonderful. So I could see the other side of that.

The ecosystem piece, just a couple of words on that, because I think that's the key. Because if you think about linear TV, it's the same thing. It was all about building a large network and keeping people in the ecosystem. If you were Comcast or whoever, right? Exactly the same thing. And sports is big enough in the aggregate that ESPN made sense because they did have a bunch of NBA games, a bunch of baseball games, college sports, like all they had all of that stuff. And it's across enough people that are of the right demographics that you have to do it. Right. So it's different now because that meant that you could kind of hide the money across people that were uninterested too. And that gets harder. Right. That's the thing that gets really, really harder for the Amazons of the world to do is they're building out their ecosystems because then they start all the carding the sports stuff as we've seen with like F1 and with soccer, with, you know, with Apple, you start all the carding it and all of a sudden the value of an ESPN where you have all the

sports gets cut down, right? So you don't have that, the sum of the parts is greater, right? Or it's actually greater than the sum of its parts, I guess, is the thing about an ESPN. And what I'm really interested to see is what are the implications for the bigger sports out there like baseball, right? Where, you know, these league deals are such a big part of the total revenue pie that how is it going to affect their ability to maintain the contracts that we've seen for players? You know, you got a guy for half a billion dollars for a 15-year contract. What's that going to look like nine years from now? if the revenue picture has changed because baseball isn't now being subsidized by every

other sport that's also being subsidized by people that just want cooking channels, right? So it's definitely in the too hard pile for me. Travis? I want to add one thing. This is what I think Bob Iger should lead with, with the negotiations with all of these leagues. You are maximizing your revenue by taking the biggest check. you're maximizing your revenue from older viewers and you're losing younger viewers

baseball i mean good example baseball perfect example nba doing the same thing yeah why is f1 popular it was on netflix right every like hundreds of millions of people have netflix what do kids watch disney plus my daughter knows two words when when we pull out the ipad because going in the car or something netflix and disney netflix doesn't seem interested in sports she knows disney if disney has the attention of the next generation of viewers that has to be part of your calculus if you're the sports leagues okay one more question uh this is from kelly again so thank you kelly for the uh good comments here we'll maybe start with matt and go around with everyone because i'm really interested to see this is kind of a speculative question uh

and i don't think any of us know the exact answer but here's the question do you guys see disney plus possibly merging i think it means kind of disney as well with other streaming platforms in a combined effort like paramount plus or the warner borough discovery stuff uh maybe matt what do you think not really i could see disney potentially selling off the streaming business as a separate thing i think that's more likely than disney being acquired in its entirety Like, for example, I could see Apple buying Disney Plus or something like that. Essentially, Apple's selling that part of the business and licensing their content at the same time. But no, I don't really see them merging with another streaming service. Disney is winning the

streaming wars when it comes to subscription momentum and how many people consider it an essential service. I could cancel five other streaming services before my kids would let me cancel disney plus um it's a lot of american households consider an essential um and i i don't think that they're gonna the only company that maybe is beating disney is is netflix and i don't think that's gonna happen i don't think they're gonna merge with you know what i would consider one of the smaller and you know number three or number four streaming businesses okay travis any thoughts any other thoughts on that no i don't i don't think they're gonna um merge with anybody or partner with anybody, I think all of those other streaming services, the Peacocks, even

Macs are probably just going to go away. They're just going to crush them. And your sign there is that Time Warner Discovery is now selling some of its content to, I believe it was Netflix. They signed a deal a week or two ago, or maybe that was just rumored. But where we're moving is there's going to be a platform companies. So Netflix, I think we put Disney in there. maybe one other one emergence, you know, maybe like Apple just spends enough money to be

one of these platform companies. And then there's, there's going to be content companies and that's going to be the two ways to be profitable. You don't want to be stuck in the middle to just plug my, you know, I did a deep dive on Sony on asymmetric investing. And that was literally part of the thesis was they have already decided we're not building a streaming service. We're not wasting our time with that. We're just going to be a content company. We're happy to take the biggest check from Netflix or Disney, whoever, whoever has the most subscribers and can pay us the most money for what we have. So I think that's the way it's going to move.

And I think Disney stays one of the winners in streaming. Okay, we have another fun topic. I think Matt will enjoy this one. And I think everyone will too, because everyone has housing, I guess, on the mind. I'm going to share something with everyone. I think people have seen something like this from time to time.

This is from a tweet from Nick Gurley. And it basically shows, can everyone see this? Yeah. All right. It looks at basically mortgage rates. So the cost of, you know, getting your loan for, I think it's, this could be commercial, but again, you could, I think it's for like a part of the buildings or really anyone that's trying to, you know, rent out something as an investment. And then we have the cap rate of those, you know, basically the, the return or the, the earnings yield you're getting on say what you're buying. And typically, you know,

the cost of your debt has to be below the cap rate or else you're not earning anything. But recently, since mortgage rates have spiked, we're seeing this across a lot of your residential, all this sort of stuff. And we can talk about this as a broader housing discussion. The mortgage rates are above the cap rate. And from my point of view, as someone that doesn't follow the industry too closely, this seems grossly unsustainable. So maybe, I don't know, Matt, you sound like you want to hop in here. Any thoughts on this dynamic and how it might change? Yeah. This whole time I've been saying, let's get to real estate. Let's get to real estate. Let's get to real estate. Here we are. So no, that cap rate, I'm pretty sure refers to

residential for the most part. I don't think it's sustainable. You're starting to see cap rates come up, especially in other types of commercial properties. And the key is when is the debt coming due. Commercial properties are financed differently than residential in that companies, if you buy an office building, for example, you'll get a loan that's a 10-year interest-only loan that at the end of the 10-year term, you intend to refinance. So you're seeing a lot of this debt starting to come due and people are going to have problems because one big thing to know, you had the cap rate right there. Cap rate and property value you have an inverse relationship. So as cap rates start to come up, which they are

in pretty much everything but residential real estate, property values are going down and it's going to be tougher and tougher for companies to refinance their debt. No one's going to refinance a $100 million loan on an office building that's only worth $60 million. So you're going to have a lot of strategic defaults like you saw in the residential market in 2008 or so. That's where the real crisis is right now. Cap rates are coming up, which is good if you're an investor, if you have money to invest, because you're right. Your cap rate has to be less than your cost of financing for it to make sense, or it has to be greater than the cost of financing for it to make sense. If I can borrow money at 7% and get a 5% yield by investing it,

It doesn't make sense to borrow money to invest. So you're seeing a lot of pain coming in these markets, but a lot of opportunity as well for the companies that, for example, can self-finance. A lot of my favorite real estate investment trusts right now are the ones that have a billion dollars on their balance sheet and can finance their own development projects. That's a big competitive advantage in this market. When money is free, it doesn't matter who has a well-capitalized balance sheet because you can borrow money for next to nothing and build a property and make money on it, etc. But if money is expensive like it is now, the companies that have that financial flexibility and have very low leverage have room to absorb the higher cap rates on their balance sheet without having to go bankrupt or give some of their properties back to the bank. It's a huge competitive advantage.

So there's a lot of pain and a lot of opportunity at the same time. All right, Jason, anything to add? Yeah. So first thing, commercial real estate, residential real estate, these are all gigantic catchphrases to talk about really a lot of different things. I think that's super duper important. And you kind of hit it off on the head there. That chart was maybe talking about residential, but the situation with residential, there's no inventory of single family, right? we're seeing record levels of building from single family and multifamily construction. I think the records were in October, November of 2022. The current build levels are only behind those record levels because there's no inventory being listed for sale of existing family homes. We can argue all day about, well, maybe there's a bunch of property that's eventually going to go out, but a lot of it is just where stuff is. The Sunbelt's really hot. There's not enough

inventory in the Sunbelt, right? And there might be inventory in other places of potential, but it's just, it's not there. Where the pain is going to be happening is largely going to be in commercial office, right? And we've seen public REITs, the prices have come down a lot already. So there are opportunities for investors like Matt was talking about. Where the pain is happening is mostly going to be in privately owned real estate, okay? Public REITs front run that. We've known for a year there was going to be pain coming because the smart money already sold out of the REITs where there was going to be trouble. But those private REITs are not liquid, right? So they're the ones that are going to struggle. And thinking about where to avoid the risk, there's a lot of

regional and smaller banks that own a lot of that commercial office space debt. It's in the little town in the mid-market that the local bank financed the commercial office building. It's not B of A or one of these other big ones. So I think that's a really important way to think about And then there's some other really good commercial real estate, like industrial real estate. We talk about Amazon, right? Think about everything that they're doing with e-commerce. There's massive demand on, you know, on-shoring of manufacturing and assembly, right? So all of those things. So it's really easy to put real estate in this big bucket and it's not, it's a bunch of little buckets. Actually, it's a bunch of big buckets. Ryan, you had a question? Yeah. I've heard people mention that inventory is really low and homes available for sale or single-family homes is towards a record low. But part of me thinks, okay, maybe there's a shortage. But the other part of me thinks, well, maybe it's the fact that no one wants to sell their home because they were getting quotes at higher prices a year ago, or their neighbor sold

their home a year ago for 20% more than their house would be worth. And they don't want to take the pride knock or maybe they don't want to have to purchase a new home on the current mortgage. So I guess what's like, I don't know, do you think that that invent or that new supply that's coming online is going to be able to kind of buoy prices? Or do you think that prices have to come down if rates are staying this high? We've already seen the bottom, I think, with new construction. It's already started to pretty much stabilize and recover. So one of the reasons that's happened is it's not perfect. And again, we're talking on a national basis. It's different from market to market. And part of that is because when we saw buyers or we

saw builders start to back off a ton when interest rates started to shoot up. They pulled way back because they were expecting an utter collapse. There was a pause and then demand has started to recover. So they're like, okay, well, we got to go back out there because demand is still there. The industry is cyclical. Who knows exactly what's going to happen? And Ryan, I think part of the answer to your question is, sure, there's some of that. There's some of it that are potential sellers that have flexibility that are like, well, let me hold for a better price. But eventually life has to go on, right? So I think we're going to see life go on for a lot of people and the time to sell is going to be when you have to sell. But I think the biggest thing that doesn't get

enough attention is on the residential side, new household formations, right? There was a lot of household formation that there wasn't enough inventory to meet it over the past 12 or 13 years. We just didn't see a lot of single family home construction from 2010 through 2018, right? And 2017, 2018, they started to ramp back up. So there's a massive amount of underbuilding to fill just that cohort of household formation that's happening right now. But again, it's a really local thing. So there's no easy, simple answer. I have an unpopular opinion here, but I think that everything that you guys are saying is right. And the answer is that we're going to have to inflate our way out of this.

And what I mean by that is valuations spiked from, what, 2019 to 2022. Maybe you refinanced like we did in 2020, and now I have a 2.8% interest rate or whatever it is. And so I have no real incentive to sell. so you're, you're holding onto that asset a little bit longer because you, you can't just replace it with, it would literally cost you money to buy a house that costs the same amount. Exactly. Exactly. And so the answer is that yes, my, in my mind, and even in the market's mind, my home is overvalued today. We could sell it for probably an abnormally high amount of money if we were just sort of to reset all the value of housing, but over time that will normalize.

And this happened during the great financial crisis. I mean, the only thing that really, really got hammered was condos because there was a ton of people speculating on a bunch of those things. I know that happened here in the Twin Cities, but housing just kind of, it did this wave thing and then it just started to rise again because interest rates were low, the economy went on, but it just took a long time for valuations to kind of normalize from abnormally high to like, okay, this is fine. And I think that's where we're going to be over the next decade. You know, 3% inflation means that the value of your dollar, your home, if it just

follows inflation is going to go up about 30, 35% over the next decade. Well, if your value is 35% overvalued now, maybe your value of your home is just flat for the next 10 years. That's what I mean by inflating our way out of this. I've got a question. And I think Travis, you bring up an interesting point there. And I think part of it is maybe that Brett and I are just non-homeowner haters. And so we're just waiting and we're like, oh yeah, prices are definitely going to come down. But I guess I have a question on the commercial side of things. I've seen this floated around a lot and it seems like it's mostly speculation that occupancy rates are down, refinances are coming as Matt just mentioned. I guess who's the loser

in this scenario, aside from the people that borrowed a bunch of money for these commercial properties? Are the banks in trouble? Do the banks sell these through to package them in mortgage-backed securities? If there's some big commercial real estate crisis, who are the big losers? You're absolutely right. It's the banks. Specifically, the regional banks that have a lot of commercial real estate debt. The big banks generally don't have a lot of exposure to commercial real estate. And if they do, it's a manageable amount where they're just given their capital requirements and things like that. But, you know, there's that old saying, if you owe the bank a hundred dollars, you have a problem. If you owe your bank a billion dollars, they have a

problem. And that's really what's going on here. One kind of interesting thing on offices, especially, because that's really where the problem is. I interviewed Willie Walker from Walker Dunlop the other day. And it's his opinion that the way out of this is on a massive scale office to residential conversions. It solves the problem of rising home prices to some degree because it adds more supply to the market. It solves the problem that we have millions of square feet of excess office space in our urban areas. Now, it's not practical to convert every single office building to a residential property. That's just not possible in a lot of cases. You need a lot of plumbing infrastructure that isn't there in some of these high-rises,

for example. But it's a really interesting possibility. And the more I think about it, the more I think he's right, that it's going to kind of force the hands of these real estate companies, especially when these properties fall into foreclosure and have to get sold to developers for pennies on the dollar, then it might actually make economic sense to do it. Because right now it doesn't. And that's the big holdup to office to residential conversions is that it's not financially practical in a lot of cases. Will Walker's dog in this fight, by the way, I think is important. They mainly do multifamily housing finance, right? So he has a very vested interest in that. I want to share it just real

quickly. This is really important. It goes back to the past topic. I think it's really important to hammer home the difference in housing and the financial crisis and the housing bubble there and where we are now. So this is just housing completions, okay? This is new construction completions. This is what happened leading up to the housing crisis before the global financial crisis. This was the extreme overbuilding, okay? This is where we are now. We're back to 2002 two levels of construction. This is how much we underbuilt, okay? I really want to stress that because this is a very different environment when it comes to single family residential properties than we've ever been in. And I think it's also important to point out that on the commercial side,

we don't have that same dynamic, right? It's not that leveraged like we saw with single family housing that it can cause that sort of damage to the economy, right? I think it's going to be far more limited. But let me look for the listeners. Let me describe the chart since a lot of people didn't see that or won't, they won't see that. Oh yeah. You know, the charts worked really well for podcasts. Yeah. So before, before the GFC, there was like 2 million homes or we kind of hit like a 2 million home rate per year. One and a half, right? Or one and a half or no, it was. No. Then after the GFC or when the housing bubble burst, we collapsed down to 500,000 and now we're climbed back up to 1.5 million. So we're not nearly where we were, but we still are recovering

from a long period of probably seven to eight years. Seven years of extreme underbuilding. And the first few years of that, more houses were actually being, if you took in the houses that were actually being leveled, the net inventory in the US went down for two years. Yeah, it was extreme.

And on the office to residential, I mean, that's such a interesting topic because we're from Seattle and it seems like that's the only way the downtown gets saved. Yeah. Okay. So I want to, I want to respond to that because I, somehow I ended up in real estate Twitter. I follow some people who are local here who are developers. And, and so I get a lot of

like smart real estate people see what they're thinking. And this has been a topic and to a person, and this is, by the way, this is in their financial interest to say like, yes, great. I will be that developer. They're all just like, it doesn't work. It doesn't work. Like there may be a project here or a project there but like you talk about like they need to make some plumbing changes you're talking about instead of one big pipe running up running up to you know next to the elevator now we have to have 50 different pipes because every single you know unit has to have water and you know their and their own multiple toilets and the the cost to reconfigure a building from commercial to residential is so astronomical that it doesn't make sense just

generally, especially when interest rates are what they are right now. So I just want to push back on that. It's a great thought. It's a great idea. Reality is different. They can just sleep in the cubicles, Travis. It's fine. My thought is that it might be cheaper than having your office sit empty forever though, because i think there might be no other option than to maybe if like matt mentioned they have to go through bankruptcies basically and then they come out the other side i don't there's just this this space if it's empty isn't that just worse or is it or is it more expensive to to go through the rebuild maybe i don't know if anyone has any thoughts on that this is just from a pure

outsider perspective sounds bullish for the culligan man to me that's that's the colored man always wins there you go okay we have two minutes um before we shut this thing off so i guess earning seasons right around the corner i've got a couple companies that i yeah pepsi kicked it off today what about you guys is there anything that you're watching closely is there any is there anything where you feel like this earning season's a really important one for any companies you own. Regional banks. Yeah. Okay. Go back. Regional banks. I agree. Yeah. No, you had a good one too there, but two in particular, I'm watching are Truist and US Bank

just because they are the ones that shouldn't have been affected by anything, but their stock price makes them look like they were just because of how big they are. So those are two in particular I'm really watching. Yeah. I'll say Lemonade again, just real quick, seeing them continue to, can they continue to bring that loss ratio down and actually prove that they can originate insurance at profitable levels, they do everything else great. If they can do that great, they have like $600 million in forced premiums. They are a tiny, tiny insurer in a trillion dollar industry. So if they can figure that out, this is an important quarter to show that. All right, Travis. I'm interested in looking at the entire auto

industry's dynamics. I think the transition to electric vehicles is happening, is real. but if demand for electric vehicles is growing 50% a year, but production is growing a hundred or 150% a year, that doesn't make for good economics. And that's, I think what we're seeing is that we may actually see really good earnings from the old legacy companies, the GMs, the Fords, and we may see terrible numbers from the Teslas and the Rivians and the, you know, these, the stocks that have actually gone up a lot recently. So I'm really interested to see what that dynamic is because I'm trying to kind of suss out exactly what's going on. Companies aren't reporting their backlog anymore. That just magically disappeared a couple of quarters ago

as Tesla started cutting their prices by $10,000 a vehicle. So what is the actual financial metrics that we're going to have going forward? Because all these companies that thought they were going to be 25% gross margin, it's not going to happen. All right, Ryan, what's yours? I guess bridging the gap between Travis and Matt there, I'm eager to see Ally Financials. I mean, they're one of the biggest auto lenders and it's such kind of a precarious spot where their assets are at now because it seems like it's priced as though people think there's going to be a big kind of implosion in the auto market, especially in the used car market. so if there's if there isn't um or if we see some sort of stabilization the price is there it feels

like allies in a good position but we'll we'll see yep and i'll say i'm looking for forward to match group um so many variables affecting them right now and you know foreign exchange the rebuild of tinder all this stuff's new marketing campaign the the quote-unquote revamp they've given all these great data points uh we'll see you know whether it actually improves their income statement For eight quarters in a row, we've been saying, oh, if we just exclude foreign exchange, this company is doing just fine. Oh, they're going to, yeah, they're going to, I mean, hey, it's actually a benefit now. So we'll see, but that's going to, we're one minute long. Thank you to the three of you for joining us. Remember it's in Alexandria, Virginia,

August 18th, and it's called, oh, what is it? Money Collaborative. Go to moneycollaborative.com. Sign up. Give us your $100. Show up. We'll put the link in the show notes. Let me put the disclosure in. Thank you all for everyone for listening. We are not financial advisors, or Ryan and I are not financial advisors.

And 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. These go live on Thursdays, right around noon or 1230 Eastern time. Thank you.