Yet Another Value Podcast - Chris DeMuth's State of the Markets April 2024

Episode Date: May 5, 2024

It's time to welcome back Chris DeMuth for his monthly state of the markets. For this April 2024 edition, Chris shares his thoughts on: the markets as we head into the Summer months, anti-trust, Capri-Tapestry anti-trust case, mergers blocked in greater frequency - has there been another time like this, and more! For more information about Rangeley Capital, please visit: http://www.rangeleycapital.com/ Chapters: [0:00] Introduction + Episode sponsor: Fundamental Edge [1:57] Thoughts on markets as we finish up April and head into the Summer months [3:47] Growth in the largest businesses in the index [8:27] Anti-trust [12:36] Capri-Tapestry anti-trust case [27:38] Capri-Tapestry cont'd - market definition [38:43] Last 6 months, 3 mergers have been challenged and blocked - ever been another time like this? Today's sponsor: Fundamental Edge You’ve probably heard about the Analyst Academy from Fundamental Edge by now. So instead of repeating the basics, let’s talk a minute about what the Academy is and is not. The Analyst Academy is a practical course on the tools and skillsets required to succeed in the buy-side analyst seat. The instructors have experience from firms such as Maverick Capital, DE Shaw, Citadel, Balyasny and ExodusPoint. But what is the Academy NOT? It’s NOT a course on stock-picking. It IS a rigorous guide to learning a process. It’s NOT a guide to pod shop investing. The Academy attracts a wide range of equity investors, from multi-managers to long only to family offices. Rather than teaching a particular style, Fundamental Edge equips learners with the essential skills required to hit the ground running and support their PM. It’s NOT a financial modeling course. Modeling is, of course, part of the curriculum and plays a central role. But the Academy is more than that. It teaches idea generation, thesis communication and how to add value as an analyst. To learn more and access a 10% discount code, go to fundamentedge.com/YAVP

You've probably heard about the Analyst Academy from Fundamental Edge by now. So instead of repeating the basics, let's talk a minute about what the Academy is and is not. The Analyst Academy is a practical course on the tools and skill sets required to succeed in the by-side analyst seat. The instructors have experienced from firms such as Maverick Capital, D. Shaw, and Citadel. But what is the Academy not? It is not a course on stock picking. It is a rigorous guide to learning and process. It is not a guide to pod shop investing.

The Academy attracts a wide range of equity investor. from multi-managers to long-goly to family offices. Rather than teaching a particular style, Fundamental Edge equips learners with the essential skills required to hit the ground running and support their PM. It is not a financial modeling course. Modeling is, of course, part of the curriculum, and plays a central role.

But the Academy is more than that. It teaches idea generation, thesis communication, and how to add value as an analyst. To learn more and access to 10% discount code, go to Fundamentedge.com slash YavP, or just see the link in the show notes. All right, hello, and welcome to the Yet Other Value Podcast. I'm your host, Andrew Walker.

If you like this podcast, we mean a lot if you could rate, subscribe, review, wherever you're watching or listening to it. I think we're almost at 10,000 subs on YouTube, which most of the people listen to over audio. I don't know why. I've got a very handsome face, I like to think, but, you know, 10,000 is a nice number. So anyway, rate subscribe review with me today. I'm happy to have on Forrest's Monthly State of the Markets, my friend and the founder

of Range of Capital, Chris DeMuth, Chris. how's it going it's going well andrew thank you for having me great uh lots to talk about today before we get there just a quick disclaims around everyone nothing on this podcast investing advice that's always true but chris and i you know it's a state of the markets we're going to talk we could talk about anything uh i think we have an idea what our main thing's going to be but because remember we're talking about anything we could be talking out of our butts or armpits or something so please consult a financial advisor none of this financial advice all that Chris, it has been a, not even quietly, a pretty rocky month in the markets.

You and I are talking, it is April 25th. You know, my preferred index, the Russell 2000 is down 7% this month. The S&P 500 is down 4 or 5%. You know, if you kind of did it on the past 30 days instead of month to date, both them would be down a little further. So it's been a little rough out there, I'd say, you know, S&P. still solidly up on the year. Russell's negative on the year. But I guess just I really want to focus on one particular event, which you know it. But I guess just quickly, how are you thinking

of the markets kind of as we round out February, round out April and head into the summer months? Well, I don't have any big directional bet, but if I see something that looks mispriced bottoms up, I'm also not worried about it kind of running away from me and looking stupid if we have. a CVR we really like, or we have something that's very specific to energy or crypto or something that's kind of a kind of off the run, one off bargain, which is what I'm happy thinking about anyways, is probably going to do well here on absolute and comparative terms. And it drives me crazy if the market's kind of always going straight up, especially growth, especially mega cap so that if my teenagers heard of five stocks in the world, they're all doing better

than I am. And he kind of wonders how this investing thing so hard. So a little bit of humility from that corner of the world is fine with me. It is. So, you know, like the invidians up. But one of the most frustrating things I think for everyone who is an investment growth over the past 10 years is like, hey, everyone had heard of, everyone had heard of Google, Facebook, Apple, Amazon. If you just heard of them and like, great companies, buy over the past 10 years.

I mean, you like created the most legendary returns of all time. You know, I think you'd be plus 25 or 30% annualized if you had just bought those for and held them over the past 10 years. And it's a little frustrating. Like, markets aren't supposed to work where you just say, oh, big good company, buy and like drew out your mouth. And I hate to say, I don't hate to say it. But I know a lot of people have better thesis than that, but it's like, hey, it's not

supposed to be so easy you just find the biggest. And I do wonder if I'm not the first to say this, but, you know, Apple today, largest company in the world. This is different than General Motors 70 years ago, largest company in the world. General Motors, like, if they wanted to build one more car, they needs to get a lot of steel. If they wanted to build 100 more cars, hire a lot of employees, build a whole new plant. Whereas Apple's like, hey, one more. phone. One more, Andrew late at night. Baby won't sleep. Andrew wants to buy something on

app. It costs them nothing. We've never seen businesses before like this. So, you know, the largest companies in the index for a century were self-defeating and kind of rolled over on a fairly regular basis. And now all of the biggest models are also in some ways the best models and are in some ways all platforms with pretty much no marginal cost of an of a incremental customer and it's not just that my teenage son has heard of them it's that they have done so well and investors have done so well on kind of first level thinking kind of on something that seems obvious to me and if I've always been kind of a nerd during my homework looking at the cool kids thinking well it can't possibly be the case that's

something kind of obvious isn't already priced in looking for something that's superficially beautiful that's actually beneath the surface toxic or superficially ugly that's beneath the surface very valuable. It's been a good time to kind of just glance at the surface, come up with the most obvious reaction and say, well, that's good. Kind of above the fold, good news in a good business model that can grow forever has been a really good investment for many years now. Yeah, you know, the one thing is we haven't seen any of these break so far. And maybe we won't, but the interest, like a general motors when they break, they break because Toyota makes better cars, but because it's such an asset heavy company, like, yeah, they can break into bankruptcy.

But I do think it is interesting if an Apple breaks or a Google breaks or something, like a better search engine. When that happens, Google, I mean, the bottom for anything is zero, but I think people will be surprised, like, oh, I'm buying Google at 15 times earnings. I've got this margin of safety because the multiple is kind of low. Like, I think they'll be surprised how fast the E and that earnings evaporates if and when one of these ever loses. Because, again, there's not these hard assets that kind of protect you there, give you that downside margin of safety. When these go away, like, you know, you think about Yahoo losing to Google in the early 2000s to mid-200, like the earnings just vanish. It's done.

You think about Blackberry seeding all their market share to Apple. Like, that's a $60 billion company that goes to zero in two or three years. Like the earnings can go away really fast. But again, I don't know. That's not where I want to take the podcast, but I always think about those things. Let me just one other quickie thought, and then we can move on. Actually, I think I might even be able to slide in a transition here. So one quickie thought is that 2022 really improved a lot of these businesses.

I'd say Facebook in the group, maybe especially. But I think starting to look at Twitter in particular maybe, but the other ones looked around and saw just how much bloat they had and how much distraction they had and having kind of one bad year at the end of the kind of VC super cycle at the beginning of rate increases and so forth, spooking them into becoming really serious as managers for the first. time, then made these companies so much more profitable coming out of it when they may be

oversteered, overreacted, but, you know, hot costs and then coming out of that just were better businesses, less distracted businesses. But to transition to antitrust slightly, I'll see if I could pull this off. If there's any one thing that Lena Khan and I agree on, it's that the law as written and intended doesn't necessarily fit today's topics. My reaction is humility and saying, therefore, let the market decide a lot of things that historically was written statute that might not apply today. Her view is let Lina Kahn decide. This is an excuse to smuggle in command and control on all sorts of things where government picks business models through the FTC via antitrust law.

So we have polar opposite reactions, but I would defer to her on the thoughts that she had that really brought her into office at an extremely young age, which is that what we've had historically doesn't apply cleanly to what is going on in the markets today. Yeah, no, look, I completely agree with you there. Like, historically, this is antitrust has been, is there harm to the consumer?

If yes, stop, if no, go, right? And today, it's really hard to say Facebook, harm to the consumer, when you and I log on to, I mean, actually, neither of us I think go on to Facebook, but people log on to Facebook willingly every day. They've got this huge network effect, but there's a lot of different selling your data like all that. But that is a great. And the biggest one that does affect my life is that I don't write shopping lists. If I get low on toothpaste, I on my phone at the corner of my eye get for $2. it says it's going to come the next day, but often where I live it actually comes the same day.

It comes by the next time I need to brush my teeth for $2 toothpaste. And when she was attacking Amazon, I said, hey, Lena, do you want to, if I pay you $2, will you drop it off at my front door by the next time I need to brush my teeth? Because that's magic. And so as a customer, like, what aspect of this am I being heard on? Not only is the price unbelievably competitive, not only is the service amazing, almost beyond comprehension from, you know, 20 or 30 years ago, but it totally changes my life because I don't even have to think about this anymore. I mean, it's just a momentary thing.

And so, like, I just, the idea that I'm the victim is just preposterous. It's really funny when you read some of these suits, either explicitly or implicitly, they'll call that out and they'll be like, Amazon will send you toothpaste, you know, to your door for $2, and they're going to charge the toothpaste maker. 80 cents for the privilege of being the toothpaste that's elected and gets sent to your door. And no one else can match that. You know, the local mom and pop, you'd have to drive there. So you'd have to spend your time.

And they'd sell to you for $3. And they're so disadvantaged. And you'd be like, I don't see the problem here. Like, I save a dollar and I don't have to drive to the store. That's incredible. Like, what is the issue? Yes, the local mom and pop cannot do that. Like, that unfortunately, I know it sucks for them, but it's a really good thing for me.

I fail to see the antitrust problem here. And it just changes your life. I mean, when I was little, if I was working on a project for my dad, you might spend a significant part of your Saturday because you missed one piece and you'd have to go to Sears to get that one piece. And that's just no part of your life now. You're either doing something that's lucrative or something that's fun 24 hours a day. And you just pick whether you want to do a fun or lucrative activity, but you'd spend no time

on boring logistics. And that's just a sea change. And that's a good thing. That's not a bad thing. Another one that always gets me is, you know, people coming with gig. workers. And I understand there's other things, but I do always get a little bit where they're like, oh, the gig workers pay is too low. And I'm always like, well, yeah, I wish everybody had higher pay, but gig workers, it's not like anybody's like forcing them to take these jobs, right? They're

choosing to because for their skill sets, for the flexibility, whatever it is, like they're choosing to do these jobs. And, you know, a lot of them is it's because they don't have to like minimum wage jobs. When you set the minimum wage at $20 per hour, the demand. man for labor goes down a little bit, right? So people are kind of getting left out. I don't know. It's another thing. Now they're going to there. Wanted to talk about this lawsuit, I mean, it's literally hot off the presses. It got filed about 48 hours ago, so you and I haven't had a ton of time to talk about it. But I think the thing that is kind of making its way the most through antitrust, our world right now, rightly so because, you know, it's a big antitrust case that

came down is the Capri tapestry merger, the FTC, speaking of Khan, filed to block it this, filed to block it this week. Obviously, this had been rumored for a few weeks, but the official block came in this week. Tapestry and Capri quickly responded and said, hey, we'll see you in the court. I think that it's interesting how quickly they responded

and we'll see if that happens. But I wanted to get your, both you and I have read the suit, but haven't really had a chance to catch up on it. So wanted to get your thoughts on the Capri Tapestry antitrust. I want to look at the antitrust issues surrounding whoever controls the ink provider for the FTC, because there's a lot of

black pages in there. There's a lot that we don't know. So on the topic of humility and antitrust, I want to be a little careful that there's so much that the FTC intends here that we don't yet know from having read what's public. That being said, we know that the vote was 5 to 0. We now have a full antitrust agency, and that includes the Republicans. So that is a change from when we had a short-staffed commission. And we know that we have, we've had actually we've already had a judge change, but both of the judges were Democrats. The current ones a progressive. Let me just pause you on the commissioner point, right? Five of them. So when I first heard this suit coming out, and again, I think you and I and

a lot of people share the same thought, right? Capri Tapestry, tape street, this is Michael Korr's, Kate Spade, you know, fashionable handbags, right? We were kind of shocked that somebody would think, oh, you know, somebody's ability to buy a one to $300 handbag. These guys merge and they're going to have market power over, you know, higher end, but not the highest end handbags. I think we were surprised by that. We thought it was kind of a joke. I was a little, you know, when I saw this and saw it was 5-0, I was a little surprised by

that because I kind of thought this would be along party lines, right? Democrats would say, hey, big is bad. Let's stop this. And Republicans would say, hey, let the free market decide. But there are, and correct me if I'm wrong on any of this or if you have a different take, I'll just word it through. I believe there's two Republican commissioners on the board right now. And both of them voted for this deal.

And, you know, it kind of struck me that, hey, the same day that this came out, there was the administration, FTC put out something against non-competes. And that was three to two. So the two Republicans voted against that. And, you know, I was very surprised by that. I, two Republicans voting for this. I was wondering if there's anything to read into a 5-0 decision here. I imagine that the answer is in the black.

covered up font. I've been a little careful. I kind of know indirectly the new commissioners, and I mean, they're not judges. This isn't a legal process. I have a First Amendment right. I can be as mouthy as I feel like, but it's an official process. I've been semi-deferential on my views publicly and privately, in part because I just don't want to say something stupid. And there might be very hot, hot docks. Now, the thing that I can't avoid feeling is that there could be some prosecutorial discretion. I think a normal person would look at this and say, who cares? Right. It's a crime to go steal silverware, and you expect the police to throw somebody in jail. And it's a crime to steal plastic wear. But if something, it's a crime to steal plastic wear. But if

somebody took a plastic fork from work and then got kind of tackled by a police officer and thrown in shackles on the street, that'd be a little odd. If you took a police of plastic wear from a very wealthy person, that would be odd. And here we're talking about expensive purses bought by people who like not just the expensive purses, but they like the expensiveness of the purses, possibly getting slightly more expensive. Now I categorically do not think this would happen, but if I did think it would happen, I don't think it's one of the top 100,000 priorities. It's like you think we could solve all the other problems first. The concerns I had with being able to sleep at night

worrying about expensive locks is hails in comparison to how silly this seems. But I'm being a little, so that is certainly my reaction. I'll go slightly more into that in a sec, but it just referring to those two commissioners, boy, they must see something that has not been publicly put out in either the press release or the non-redacted parts because I know enough of their seriousness that that would not be compelling to them. When you read, a lot of the redaction when you read this is, you know, the tapestry, SVP, head of handbag said, blank, blank, blank, blank, blank, blank, right? So they, there definitely are quotes. So I, you know, You have to imagine they're hot talks.

You have to imagine, I think they have hot talks. I guess my question to you on hot docs would be, how much do hot talks matter here, right? If you and I, if we bought, if we ran a handbag company, we bought another handbag company, and we're like, we're going to be the best handbag company in the world. We're going to slaughter our competitors. Our profit margins are going to be huge. Like, that sounds great, but, you know, that's also like a little bit in the scheme of it. Handback seems like a pretty easy area to enter, you know,

consumer discretionary? I can go on Instagram and buy 100 different handbags. I guess how much will it come down to you? You go to the judges and you say, hey, yeah, the SVV said that, but A, that's not the stance of the company, right? It's not the CEO who said that. And B, that doesn't preclude like this is a very competitive area. How much can hot dogs get rebutted? So this is a market. You know, if you think about the most traditional model, the very idea for what antitrust was built over, you know, the two railroads going to the same spot that would take five years for a customer to replicate. It's going to be one of the two, combining them and raising prices would hurt the consumer.

This is almost the opposite fact pattern. So you can go online and find literally hundreds of different suppliers at this price point. Secondly, it is frivolous enough topic. You'd also just keep the purse or use one of the dozens of purses you already have. Fashion right now, there's a much more of like a high. low emphasis where you could see somebody like Princess Catherine in England who will combine a $10,000 air maze item with a $20 H&M item. So no one customer is ghettoized in any one part of the market.

People go way up and way down and use all sorts of different things. So if you and I were, forget about the antitrust case for a second, if we were going to invest in something and we're saying, where is current market share least, relevant to where we would think it fundamentally is as a business three or five years from now. And I said, ha ha, I have a 12% market share. That doesn't mean anything. In fact, it could be self-defeating because the ubiquity of some item becomes a boring to the fashion kind of conscious buyer that tends to want boutiques that I've never heard of anyways. And so these companies are petrified by competition.

They're not lacking in competition. And who knows, I simply know that I don't know where the competition is going to come two years from now. It's just the FTC staffers think that they know everything. And that this market share is like a, like, it's like talking about gravity or some force of nature that once you have it, you won't let go. And so, in fact, I don't own. a position, you know, I'm looking at the stock price right now. It's basically at the $35 that

it came from right before the deal. But one of the reasons I'm not that excited about this is in whatever case, whatever situation if they don't win, like this is not a company with pricing power. You know, this is, they're going to be in that worst quadrant of accused of antitrust violations and pricing power, but not actually having it. You want to have it and not be accused of it. But this is just an industry that, just three things really quick that they focused on that were, that caught my attention. One, they clearly focused on physical locations, which is a head scratcher to me on how that harms customers and how online isn't to focus, how I had something I saw in a storefront that was specific to a storefront in Seoul.

And I sent a quick email to the store in Beverly Hills and they were willing to send it to Connecticut. So this whole like, I need a physical presence locally. It has nothing to do with, for a present for my wife. I can't think of how as an actual real-life customer, the physical location. I didn't check to see if there was a nearby store before I made that purchase. But the physical location, they seem to think is important. That's a curiosity. Secondly, they're clearly trying to conform to the new guidelines.

It's possible there was some horse trading between the Democrat majority and the Republican minority saying, hey, we need you on this to basically redefine where antitrust is in the new guidelines, which are much, much broader for the government to enforce. And then the thing that I'm really going to look to see why it was so convincing is smuggling in work and employment, not just price slash salary, but minutia of the terms, the workplace of compensation and so forth, they want to be able to control that from the FTC. I could not believe. So, So in Albertson's Kroger, that had a highly unionized grocery labor force, right? And so they mentioned one of the things in that case they mentioned was, hey, these two merge.

They're often the only unionized grocery labor force in these towns. So they merge and all of a sudden you have monopoly power on the labor side. I think that's a real stretch. You know, we've never, to my knowledge, we've never seen antitrust for labor tested in a case. But here saying, hey, you have these two people merge. They're going to have 33,000 combined employees, and it's going to be a disaster. They're going to have monopoly power over retail employees. I mean, it struck me as bizarre.

Our friend Lionel Hutz had a piece yesterday where he said, hey, a lot of what the FTC is capturing with their responding to price wage increases is not them competing with each other. It's actually local minimum wages going up. But even if it was, it strikes me as bizarre, like to think that. Again, everyone has skills, but they're talking about hourly employees in the handbag market, like to think that they couldn't walk across the mall, literally the mall and go find 20 other jobs if the, you know, Kate Spade and Michael Corsor emerged or something. Like, it's insane to me to think that that's going to have a Monopter.

I couldn't even believe they tried to bring it in. And I feel like that part, it's going to get laughed out of court. I don't know. What did you think there? A couple thoughts. One is, I remember thinking it was very funny when you're a. applying to college that the kind of most elite schools claim that they're the best. And as you kind of go down and down market, they still claim that they're the best,

but they just have increasingly specific geographical. You know, it's kind of, you'd have some things like, oh, this is the Harvard of the South, or this is the, you know, kind of increasingly specific geographical terms of where they're dominant. Similarly, in antitrust, you can always have a monopoly if you have a specific enough market, but it shows how far away they're getting from caring about the consumer, where the consumer probably doesn't even know if you pull people, are you going to a union or non-union grocery store? Nobody knows. Nobody cares. It has nothing to do with the consumer. It's just trying to bully companies and having the government pick their kind of favored way of compensating employees. Now, it's even more egregious in this case where they've kind of dropped the union aspect where you're trying to define this incredibly specific. a market. From a employment perspective, though,

there's absolutely nothing that ties an employee to only being able to market at that level and not being able to market at the high level, you know, the high level, you know, $10,000 air maze bag or the lower level, $100 kind of mall, strip mall bag or discount your bag. So these people can go do other things. It's not like, oh, I only am able to

sell $200 to $250 kind of purses. So there's nothing that holds them. It's just, it's just really arbitrary. Brett Coffron, founder and lead trainer of Fundamental Edge, barely remembers his first year as a hedge fund analyst. Most of that year was spending a blind panic. Was his research any good? Was he learning fast enough? What did his PM really want from him? Training on the by side was non-existent 15 years ago when Brett was a new analyst at Maverick. Then he actually got to promoted. Then he worked harder, found mentors, and asked for uncomfortable feedback. Eventually, he turned it around, learning by osmosis from the talented people around him, and rose to managing director. But is this the best way to develop talent? Brett doesn't think so, and that's why he

founded Fundamental Edge. The Fundamental Edge Analyst Academy provides students with the tools, frameworks, and confidence to excel in any fundamental equity analyst seat in the industry. Lose the panic and fast track your career on the by side. Find out more info about their next cohort at Fundamentedge.com slash yafp or just see a link in the show notes. Chris, the last thing I wanted to talk about here on Capri, actually there were there were three more things. Number one, let's start with the silliest.

A real housewife, so twice in the FTC complaint, they mentioned this entrepreneur who had a field handbag, uh, field handbag startup. And it struck me as funny because they just come out and they, they mention her. And I was like, should I know who this is? Like what's going on? So I googled it. And it turns out this. failed handbag entrepreneur they mentioned is now a real housewife, which I thought was hilarious.

And her failed handbag startup, they mentioned she sells it after, no, it's after a long time, but they sell it for $13 to $19 million. So let's just call it $15 million ballpark. And yeah, you know, $15 million exit isn't the wildest success story of all time. But, you know, I take a $15 million exit. That's not exactly the sobist of stories to go start something up and sell it for $15 million. Now, I'm sure a lot of capital went into it. you know, I don't know what other things, but it just, A, it struck me as a little crazy, like,

to cite failed entrepreneurship as the reason, like one case of failed entrepreneurship as the reason this is going to be antitrust. And B, I thought it was kind of funny. You know, Lena Con is roughly 35. She's right in that demographic. And I thought it was kind of funny that she comes out and she's like, failed housewife entrepreneurship. Like, this is the issue with this merger. It was just very humorous to me. I understand this doesn't make her break the case. But, you know, you read Albertson's Grogers. There's cases of. Chris DeMuth, you know, he worries that if Albertsons buys Kroger, his local grocery store, which is the only pharmacy within 15 minutes is going to get closed and he'll have to drive

45 minutes to get his life-saving medicine or, you know, they've got a mom who says, hey, I go and get my kid's peanut butter. And if this closes, I'll have to, the only place to buy groceries will be a dollar store, which dollar stores are not great for buying all of your house. And, you know, that's Albertson's Kroger. Here it's a real housewife's tried to do a startup and she exited for eight figures after a few years. It's just crazy to me. That's the antitrust. I'll pause there and let you say anything you want to. And we also have to prove that the customers liked her bags. Maybe that she had got

eight figures instead of nine or ten because they didn't like her bags as much as they're like seven pluses. I mean, you need a scratch. Andrew Walker said, Andrew Walker, host of the nichiest of niche finance podcast in a handback startup and it failed and he couldn't sell it for a dollar. Block this merge. You know, I don't think Capri Tapestry is the reason that my hand bag startup failed. I think there's a hundred reasons on lifts before that. I mean, in 24 hours, you can get financing online, you can get marketing online, you can help with SEO and social, and you need a scrap of material and something that customers want. But a lot of this is coping with the fact that the customers wanted something else.

But yeah, I know, I think that that's, it's probably the least good sob story. I mean, you could put a sob story together and demagogue spirit, which they did, you could, demagogue a Kroger, but you really want some kind of downmarket angle. And this, you know, if you're down market, you can also just put your stuff in your grocery bag. I mean, this isn't a necessity, which again, that is not carved out of the antitrust law, but that could come into play in terms of just reasonable prosecutorial discretion, life short, what are we going to focus on?

Is this honestly, I mean, I only wish this. was our biggest problem. We had to deal with. It's another, as you said, like, antitrust is real and you could imagine a lot of things that are silly but could result in real consumer harm. But one of the reasons I think all of us, and you know, finance is a male dominated world and you have to take that into perspective. But I think one of the reasons everyone thought this was silly was, you know, you and I are both into CrossFit. If you came to me and were like, no bulls getting bought out by Reebok and the FTC tried to, you know, file a soup and they said, hey, all Crossfitters are going to have to pay

$5 more per lifting shoe. You know, I'd be like, yeah, I don't want to pay $5 more, but I'd be like, you know, you're paying $120 for lifting shoes, you know, $5. Here it's, hey, you know, suburban housewives are going to have to pay instead of $250 for the handbag, it's going to be $275. Be like, okay, that is harm, but their handbags are not a God-given right. I think where this merger is going to turn is the market definition. And I do think the FTC was very clever here, right?

They came out and they said, hey, this is a merger of two accessible luxury. It's accessible luxury is the definition, I believe. This is a merger too. And look, Judge, I understand that's a small carve out of the market, but we're not making this market definition up. This is how the companies themselves, this is how Wall Street, this is how they've defined their market. And these are the two largest players.

We don't know their market share yet. It's redacted, but I'm sure we'll find out. These are the two largest players merging. We're using their own definition of the market. market against them to show this is an antitrust issue. Again, I think you and I think that it's kind of silly, but I did think it was clever, and I think the whole case is going to turn on, does a judge believe accessible luxury is, it's going to come, I mean, there's going to be competitive entry arguments and everything, but I do think it's going to turn on, does a judge

want to look at all handbags or does he want to look at affordable luxury? Does you want to look at just luxury? If the FTC is successful and kind of hanging the companies on their own words, I think there's a shot, a good shot, they win this. So what did you think about the market definition? I think it is one that this FTC could convince this judge of. And it's one of the reasons why I'm happy to think, okay, so really, as of today, all the, in a sense, all of the deal premiums gone, although it's probably worth less than it looked like it was worth last August. So I think you could still lose, you know, $10 a share from here. It's not, you're not done losing money if you own Capri, if the deal breaks, but share prices

where it came from. My thought that we can find a later, lower entry if we even want to enter later and lower, is that this FTC could convince this judge. I think it's going to hang on documents. And one of the reasons why I'm generally and he are skeptical of hot documents is that the market definition is an econometric reality that has a lot in it that Randow kind of mid-management salespeople at a company might not be thinking about so that there's a certain amount of kind of jocular competitive banter, mostly in the marketing type people that

the antitrust authorities love to cite. You know, ha, ha, we got you. You wake up trying to get a tapestry or get, you know, this one competitor that you're thinking of because you're this one kind of middle manager putting together a PowerPoint presentation. And that's on your mind. Well, my point about what this competition is like and what this very competitive market is like, he has no idea what's going to blindside him from some boutique that's going to be the hot thing a year from now. That is absolutely part of the market.

And that is no part of the PowerPoint. point, that's competition. The competition you get blindsided by. The market's not defined by who he's thinking about any more than a battle is defined by the enemy whose position you're aware of. You know, you could say, oh, this is fine. I'm happily walking through the jungle and I see no enemies, therefore there are no enemies. That doesn't define your enemies. That doesn't define the competition. It doesn't define the battle. And so the FD think they're super clever when they find this lack of awareness of other competitors from mid-management marketers. I bet they found that here. And that is absurdly narrow. It is to win in court. I think they might hear. But it's not

what the law intended, and it's not economics. You know, I think about something, Coke and Pepsi might be too far. But if we were talking, 20 years ago in energy drinks, right? You'd probably be talking Monster versus Red Bull. And, you know, I know Coke and Pepsi used to be like all the executives hated each other. And I'm sure Monster versus Red Bull, all the executives, it's not quite, there wasn't as many years, but I'm sure they all hated each other. And if you had Monster, they'd be like, oh, yeah, we're going to stick it to Red Bull and

we're going to knife them and everything. And they weren't even imagining, you know, Noco, the most popular drink among CrossFit people for the most part, right? no code popping up a few years later bang energy celsius which is like all the rage like there's all these competitors that were on the come that they couldn't even think about when it was kind of just the two of them knifing it out for shelf space and the energy drink and in a similar way you know uh Nike versus Reebok they probably weren't thinking about Lulu lemon they probably weren't 20 years ago they certainly weren't thinking about Under Armour like the these consumer

brands yeah for a while it can be one or two but as you're saying if you're the salesperson middle management you're only focused on beating that competitor across the street The real competitor you actually have to worry about is kind of still in his mom's garage, if that makes sense. Let me make one other point about the market definition and how it might not fit the real economics, even if it does fit what the company's thinking about. You said accessible luxury. What the FTC is going forward, to be clear, is accessible luxury handbag market.

So they're saying the market is accessible luxury handbags very, very narrow. but I'm speaking to the monopolist of yet another value blog with 100% market share of your own empire and so maybe the FTC should look at that but this is

very specific I don't have this data but I think something that one could look at is whether a price increase in accessible luxury because another way you could think about

accessible luxury is some lady feels like blowing a couple hundred bucks her shoes are perfectly fine her bag's perfectly fine her hair is perfectly fine it's a fun activity to spend the money if any one of those things had price at whack she could also just go to the salon and spend the money on her hair she could just get shoes everything's probably fine there's no need this is discretionary so without being too dismissive of its frivolity the fat that it's not deep, deep discounted market control or actual kind of European luxury market control, but accessible luxury, I bet the econometrics would show very, very little, if

any, pricing power, even if you had this incredibly high market share in any one of these categories, because it's just the amount of money somebody wants to blow, maybe on an outfit, maybe to look better, maybe to feel better, but it doesn't necessarily have to be a bag. there's one other thing I want to talk about, and this kind of relates to the price of our thing, but in the past six months, we've seen three mergers challenger blocked that I-Robot, Spirit, and now coach, right? And I look at that, and all of them, you know, I-Robot and Spirit probably might, who knows, go bankrupt. You know, the FTC and the DOJ came out and said, hey, this is a huge antitrust problem. We've got to stop this.

they might go bankrupt without their mergers. Coach, they're not going bankrupt. Sorry, Capri, they're not going bankrupt. But before the merger was announced in August-ish, the stock was 35. The stock is 35 now. Most ARBs are kind of setting the downside between 20 and 25. I'm sorry. And I just think it's interesting that, you know, you're having these mergers blocked or contested.

And for all of them, like if you went to the buyer, today and said, hey, what do you think the fair value for the company is? It'd be a lot lower than the deal price. All of them are losing these deals and, you know, facing some form of financial distress or a lot less rosy future than they look at. And, you know, there's no way antitrust can obviously block something and then the company can get into stress. But I just think it's interesting. I can't remember seeing this many, maybe it's because it's a more aggressive administration and they're trying to challenge more deals. But I just can't remember so many deals where the downside, the block, the merger break price is so far below this,

you know, Spirit was 20 standalone before everything happened. And now that took about two years to play out. But today, the stock's trading under four, right? Like, I can't remember so many deals where the downside is so far below the unaffected price in merger arb terms. And I don't, I don't know if I'm talking about, you know, it makes merger arb hard because when the downside keeps decreasing, like the odds keep changing, it makes everything hard. It's just, it's strange to me. I don't remember a time like this. Yeah, I think that it'll be interesting to see.

I kind of think about it in terms of peaking, and certainly there's a lot of peeking at the FTC. Maybe there's some amongst the judges that made me very wary of antitrust for a little while here because the fact pattern on divestitures was so bad for the companies. You know, you were walking into an industry pitching something to the FTC, and one of the things that people more pro-enforcement than I am really had going for them is that the nice compromises with companies, especially complex divesture packages, were disasters in a really good number of cases, rental cars, grocery stores, where the divesting company got rid of the garbage that they didn't want anyways, kept the good stuff, formulated, complicated, structures, the assets being sold, you know, got in distress, they bought them back, and that robustly increased enforcement. Now we have this other peaking issue, which is you look at where they blocked and they're blocking a lot of deals that the target just got obliterated. It's like, oh, this wasn't a two to one. This is going to zero in terms of the number of competitors

that the customer has from that deal, a right aid, spirit, iRobot. And then if they don't care about the companies, they serve, SAC, don't care about the investors, but this is the same administration and the same kind of progressive side of the, within the Democrats, that Lena Con certainly represents,

kind of the Liz Warren wing of the party, that is also at the same. same time attacking buybacks. So dividends taxes go up. They don't want you to sell in a strategic deal for nominally antitrust reasons. But now they don't want you to buy back shares either. So it's unclear to me what this is other than just an attack on the idea of private property. What is your private property if you can't get any of it back? What does it mean to own something that you can't eventually sell? I mean, I robot, I think, would be. the classic case of why would you have started that? I mean, selling to Amazon, that was the

plan, that was the exit. You take years of your life and complexity and risk, and it might not have worked, but it did to the extent that you can hand it off to somebody someday. But if you're not allowed to hand it off and you're not supposed to buy back shares, you're not supposed to give it in it to what does it mean to own anything? And so that's clearly not keeping them up at night, but it is a question that I think about when I look at what the FTC is doing. Yeah. You know, the one other, we don't have to talk about it now. The one other thing that jumped out to me here is just along the lines of coach was, again, this was 35 or 40 before the deal comes out. The deal's at 57. Most people think the downside's kind of in the 20 to 25 range. You know, I, I, people had kicked around, hey, does tapestry really want to own coach now? The downside's worse. If they could walk, they'd be better off, right? If you and I, were in a deal if I was going to buy your house for a million dollars and then the guest house went away but for some reason I still had to buy it and the guest house was 500,000 like it'd be

better for me to if I could walk or recut. In this case, you know, it'd be better for Tapestry if they could walk or recut. And Teapstree came out really fast and said, we're going to fight the FTC in court and we'll see in court we think this merger is fine. I was a little surprised by that just because, you know, if I was usually, maybe I say, hey, this is a gift tourist, right? If we just go along, wait out, go do fulfill all of our obligations, but then, you know, in August or so rolls around, merger times out and we can just walk. We can, we can use this to either recot or walk away from a bad deal, but it seems like they're going, it seems like they're ready to go to court.

So I was a little surprised by that, not to say that they couldn't, right? Maybe August comes around and they do decide to walk or they do decide to try. to recut. But I was just a little surprised by that. I don't know if you had any thoughts there. The FTC is more porous than the DOJ. I think that was really just an indication that the companies have seen this coming for probably months, thematically, and probably weeks in terms of the plot. You have five people, two Republicans, they all have staff. At least some of the staff might have been more sympathetic to the companies. So the companies knew what this, what and when this vote would have been so they were ready. And there's also the contra indicator that if you were the buyer

expecting to be in litigation with the deal target over your merger duties, you're particularly meticulous going through the duties process. You know, similarly, JetBlue that was able to settle with Spirit on terms that were probably okay for JetBlue was meticulous about their appeal. I thought their appeal was actually kind of good, right? I thought it was hopeless or nearly hopeless, but I thought it was, you know, not that this matters. I thought it was correct. And they, you know, somebody managed to type that all up, despite the fact that they were actively working to get out of their deal when they could. So I think that's all it is. I think they would leave the instant that they could. I think they should leave the

instant that they could. And they're just living up to their merger duties. No, I certainly hear that. I guess, you know, I'm just looking at the tapestry response. There is no question. This is a pro-competitive pro-consumer deal. You know, it slams to FTC. We're planning to go to court. You know, if they wanted to walk, they could just

have put out a press release that said, we have read the FTC's lawsuit, we disagree with the conclusions, and we look forward to fulfilling our merger duties and pursuing a legal case, right? They came out very wholehearted, and to me, that seems like something you put out when you want to go to court and win versus if you're trying to time it out.

But I do know a few people who are saying, hey, you know, maybe from a purely economic view today, it seems like they'd be better if they timed it out. It just doesn't seem that's the route they're going. I think so, yeah. Also, you really don't want to be left in an industry with these kind of precedents because one of the reasons why some of these companies have gotten so screwed over after the deals have been blocked. think they make our country less competitive, and they've been really harmed is you're left unable to do that.

I mean, one of the ones we did that worked out well is the Horizon deal, and if they've lost that, what are they going to do? Like, what, if that's elite, if it's a crime to sell your company where the whole structure of the industry is built on a research and then you kind of sell to a commercial buyer at some point, and that that's far and away the most rational, efficient way to run an industry, if that's a crime now, then what are you supposed to do? And they, you know, would be left, you know, competing with 10X, the scale European competitors. It would be a crime to sell yourself to LVMH. Well, your company is worth a lot less if you're not allowed to sell to

LVMH because somebody at the FTC doesn't want you to do that. No, and not to believe it, but as you mentioned with the rise and like it sounds it sounds great and a press release like hey we're stopping big pharma from buying these innovative drug companies but what you're really doing is you're saying hey vc's never fund drug development again right because the exit for you fund one very novel drug you have to you have to sell to big farm at some point right it does not make sense if you're a standalone drug company to go build your own sales force and do all this sort of stuff so if you fine if you want the rule to be big pharma can't buy anything okay, but now big farmers going to have to develop every drug and you're just going to have

a lot less innovation. So here, I mean, I guess, yeah, if the answer is if you compete in the accessible luxury market, you can't sell to anyone. Okay, cool, but, you know, there'll probably still be entrance in the accessible luxury market just because people do it, but there'll be less investment in it because if you can't exit, it does make sense eventually if you have a good brand to sell someone who can really get scale, right? Really skilled SG&A. Put it into their stores. Realize some synergies with the logistics and everything. Anyway, started to ramble a little bit and get both of us getting more into the libertarian bank. Chris, it's been about an hour. Why don't we wrap it up there? End of April. Looking forward to chatting in May. There's probably going to be a lot of

events. We don't know. There's some events we do know. And looking forward. We'll go from there. Thanks, Andrew. A quick disclaimer, nothing on this podcast should be considered an investment advice. Guests or the host may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks.