Yet Another Value Podcast - Chris DeMuth's State of the Markets for March 2023

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Starting point is 00:00:34 engage with experts one-on-one and get your calls transcribed free of charge, all for 40% less than you would pay for 20 calls and a traditional expert network model. So if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you. Head over to their website at streamrg.com to learn more. Thanks for listening and we'll catch you next time. All right, hello, and welcome to the yet another value podcast. I'm your host, Andrew Walker, If you like this podcast, it would mean a lot. If you could follow, rate, subscribe, or view it wherever you're watching or listening to it. With me today, I'm happy to have on my friend and the founder of Ranging Capital, Chris DeMuth.

Starting point is 00:01:07 Chris is on for his monthly state of the markets podcast. Chris, how's it going? It's going great. Andrew, thanks for having me on. Thanks for coming on for the March state of the market. You know, it's been a very boring month. So it'll be tough to find tough stuff to talk about. But I'm sure we'll do it.

Starting point is 00:01:22 But let me start this podcast the way I do every podcast. A disclaimer, just remind everyone, nothing on this podcast is investing advice. That's always true, particularly true today. Chris and I have about four or five situations we want to bounce through quickly. So we're going to talk about a lot of different stocks, a lot of different situations. So please do your own work, consult a financial advisor. All that out the way, Chris, end of March 2023. What's on your mind?

Starting point is 00:01:44 Banks, energy, crypto to some extent, thinking about the government's public policy reactions to all of the above, and how that affects the kind of immediate issues and then how that affects the kind of moral hazard and adverse effects kind of going forward and markets going forward a little merger arb, but maybe less merger arb than usual, a lot of litigation, just kind of, I guess the thematic thought for the month for me has been, do I just kind of keep buggering on with specific firm-level ideas and mispricing, some of which have gotten quite a bit bigger? Or do I set that aside? Is this a time to take some big kind of directional swing and say, you know, F it, this whole sector or market is too expensive or too cheap or kind of do something dramatic?

Starting point is 00:02:42 I have not done anything dramatic yet, and I haven't even kind of fully enunciated a dramatic response, but when everything moves a lot, I mean, I always think most strong reactions or overreactions and maybe there's something you can do against that tendency. But I've mostly just been kind of keep working along on individual things we've spoken about in the past. A couple new ones, couple old ones. You know, it's just, I want to start with the banking, but it is crazy. You say most strong reactions are overreactions.

Starting point is 00:03:10 And I remember at some points this month, like first republic stock would trade, like, it opened the day at eight and it closed the day at 60. So it would have closed the prior day at 80. So you're talking about like, if you could time it correctly, you get like 10x moves both ways and stuff like it was the the volatility here was just absolutely wild but i do want to start if you can time it correctly is a big it carries a lot of weight there uh it really is because you know it's just it's been crazy because you know you could wake up like Silicon Valley you wake up one day and you're like oh the stock had a rough day

Starting point is 00:03:45 today but you know book value here is if you just looked at the financial statement you'd think oh book values 200 everybody thought Silicon Valley had a valuable first franchise. And then the next day, the stock just doesn't open. They close the bank. Signature bank over the weekend, kind of over the complaints of management, though. I think there were issues there. They just closed the bank. And First Republic, you know, I think people would have looked as like gold standard banks in terms of brands and operations and stuff. It seems pretty clear that the equity, you know, as you and I are talking, is trading the mid-teens. It seems like the equity's got a real chance of being a zero or they're going to have to take huge, huge

Starting point is 00:04:18 dilution to get bailed out. And it's like, you can just wake up and all of a sudden, your banks a zero. And it's just, it's crazy. It's very difficult to think through that environment. First Republic is the one that I'm far and away most familiar with as on the customer side, not on the equity investor side. My worst five second glance at something that I kind of moved on without delving deeper into was having just an over-the-moon customer experience with First Republic. I mean, things that I've had to kind of by hand experience. land to commercial banks and beg, First Republic just rolls out the red carpet and they get some brilliant Ivy League person who's, you know, I mean, just, just head and shoulders above any

Starting point is 00:05:02 kind of wealth management person I've ever been in contact with. And they can do lending against GPs. They can do all sorts of really clever lines of credit. They can, you know, they can do, I won't even list all of them, but I mean, customer service things that are just beyond what you'd think a bank would do. And I thought, oh, maybe this would be a good equity. And I looked at the equity at one point. This was a little while ago and it was training it like two times buck or something. They were like, oh, I can't own that. That's way too expensive just on value. And I never thought like, oh, this is a good short idea. And it's probably a lot of their very happy customers that just casually and price insensibly bought this stock.

Starting point is 00:05:44 But it's just, it's funny. You say all that stuff they did because at the time it sounded great. And I remember when I, in a prior light, if I was at private equity, and I remember they came to me at some point and they're like, hey, here's here's a loan for you, but we're giving you this a loan, not because we're going to make money on this loan, because we want to establish a holistic relationship. And when you do a mortgage, you want to get that and we'll get your bank. And like at the time, it sounded great. And I was like, oh, what great customer service, what a great way. But in hindsight, I'm like, isn't that a short? Like, you've got a company, you've got these companies going like banking is a commodity industry. And yeah, they're trying to do things above and beyond.

Starting point is 00:06:18 but like that's generally how people get in a lot of trouble right like underpricing things with the hope of getting things later like that's how you get in a lot of trouble and first republic there there's other issues there but just in hindsight i'm like oh what was great customer service and going above and beyond is that the sign of a short you know and some of the things some of the things i think i won't mention right now but we're really high touch really high expense uh things um there's a dark side too and maybe related to what you just said working at private equity and there's a dark side that related First Republic to Silicon Valley, which is it's payola. This is the commercial bank equivalent of a soft dollar account.

Starting point is 00:06:55 This is buttering up agents to get them to do things for the money they're responsible for. The top 10 accounts at Silicon Valley Bank was $16 billion of deposits. That wasn't people who neglected to notice that that was somewhat over the $250,000 FDIC cap. Those were people who were getting $2.10 million loans for. their houses personally. And in return, we're putting all of their firms capital in this one account. And that was the deal. That's the deal at First Republic. That was the deal at Silicon Valley Bank. And so that's payola. And so that proved to be very skittish. I mean, I understand banking is a confidence game. And like, look, I get you have to, I get if you start letting

Starting point is 00:07:39 deposits go under or get taking a haircut. You could have real crisis and contagion issues and stuff. But at the same time, I look at the Silicon Valley Bank and, like, I think Circle, the U.S. stable coin, I think they had over $5 billion in cash in Silicon Valley Bank up to like three days before. And they managed to get some out. But when Silicon Valley Bank closed, they had $3 billion worth of cash in it. Or Roku had $500 million of cash and it. And I just look at that. I'm like, I mean, everybody knows what the FDIC limits are. I understand you don't want contagion. But at the same time, if you've got people parking, $3 billion worth of cash and banks and the banks fail, shouldn't be kind of like, hey, you pay a corporate treasurer, like you know the risks. We have to give you a haircut because, you know, all you have to do was move it over to a money market fund. And I understand the company probably had credit line agreements with First Republic. But, you know, at some point, you're taking that risk.

Starting point is 00:08:33 It seems like you have to do it. I don't want to like haircut mom and pops, but $3 billion in a bank just struck me as, what are these guys doing? I've been very interested to watch the public. policy response so far. I always think, you know, arsonists have a field day when there's already a few houses on fire, and the government was able to come in and really settle some old scores. And I think that that was most vivid to me around crypto, maybe somewhat around private equity as well. But if you looked at the kind of crisis mentality rescues and the government emergency response,

Starting point is 00:09:15 it was in many ways opposite of what i would do i would look at and say look we have a 60 day antitrust free zone anybody who wants to run in and rescue somebody gets to rescue them we'll sort out pricing power later you get to do deals we're going to do private market reactions and the government's not going to get in the way because you look at uh you know some of the potential uh saviors and i would look at t d and i'd say okay so one they could rescue FHN. Two, they could rescue Charles Schwab. They already have a big investment note really well. So you have a foreign bank, although Canadians, so barely for them. And you have kind of pedantic government delays that is analogous to say no to something in a crisis. They could have let

Starting point is 00:09:59 a lot more private capital come in if they would simply kind of waive some of the normal kind of government red tape. They didn't do that. Instead, they actually put up a lot of fresh barriers to people who kind of looked around and said, nice rescue you have there, but we're not going to let, for example, signature, which I thought was one of the most interesting, you know, immediate over-the-weekend, throwaway line were taking that bank. And they specifically said, hey, anybody wants to come in and look at signature, you may not turn on any of their old crypto business. When private equity came in and wanted to look at Silicon Valley Bank, they said, no, you're not an acceptable buyer. So the government actually interfered with a lot of the

Starting point is 00:10:37 private, I mean, capitalism is, capitalism is a more vicious regulator, and it provides bailouts. The problem with capitalism is a lot of the times the people who need the bailouts don't like the prices that the market clears at. So they go back begging and say, hey, I've blown everything up, I've caused this contagion, I've created the systemic risk, but I don't like how much these people want to pay me who want to do the private. Like, I need more money because I like money. And the government is incredibly sympathetic to that view. I mean, that was credit Swiss's point at the end. That was a lot of the points of the targets of these bailouts. So the government really interfered with private market reactions and settled old scores with crypto, with private

Starting point is 00:11:20 equity, telling the people who they, and if you look at a lot of the other behavior around crypto, you know, the CFTC complaint, which is definitely worth a read, and I think it's one of the defining documents of this era. Now, the crypto people were doing themselves no service if you look at what they were up to in these things. So the regulators might have had some darn good points here. But they were really kind of doing a lot of score settling while they were bailing out these institutions. Unrelated to any of this, did you read the coins Wells notice, Coinbase's Wells notice? Oh, yes, I did. Yes, it did.

Starting point is 00:11:54 What did you think? I have not read it, but just you said, and I saw the Twitter headlines of it in Meaning, Maria. What did you think of that? Boy, I think that the government for a while has done a pretty good job of calling their shots and preventing market panic around what is and isn't described as a security and therefore a security listing. I think that was pretty devastating. I think the Bionts, I think the CFTC, the more recent complaint against that was pretty devastating. I think these guys knew what they were doing wasn't very compliant. And I think that they're in a lot of trouble. I think there will be crypto.

Starting point is 00:12:37 I think there will be Bitcoin. But I think that the SEC chairman has, in particular, has had concerns and is going to be able to use this current situation to kind of slam the door much quicker and more firmly than he would have otherwise. Yeah. Again, look, this is what people come to the podcast for, right? me talking about things that I haven't read or read. I don't fully understand. But I just, the high level coin base argument I thought did make sense where they're like, hey, like you guys approved us to get listed on the stock exchange. You know, like it's not like our business model has changed. I'm not saying that they prove, but it kind of is like, hey, why now we've been out here

Starting point is 00:13:19 doing this for years. And now you're, now you're choosing the time to do it. It held some sense with me. But at the same time, I also said, hey, you're you're trading worthless at coins. the staking and all this sort of stuff, like it seems pretty clear there's some security offerings there. I was probably less sympathetic on the coin response. I just so vividly remember the Chinese reverse listing frauds from 2010 or so. And the SEC weighed those all in, and they all had American auditors that had now Chinese subs that had audited them. They kind had the basic procedure, and the SEC did eventually, I mean, years late, come in and kind of, you know, slam the door on them. But no, once there have been damages, once there's been a focus,

Starting point is 00:14:08 prosecutorial discretion works in both ways, right? Like, you can come up with something that's nominally illegal, but really is well within the spirit of the law and just isn't a priority, and a prosecutor just says, I saw exactly what you did, and I'm choosing to do nothing about it. And that's a hugely appropriate part of our system. And without it, we would just be spending all of our time on compliance. But it goes in both ways, right? They can have prosecutorial discretion for a while. And then there can be massive damages and new information.

Starting point is 00:14:33 They can say, like, I think consistency is a virtue, but it's a fairly low one in the pantheon of virtues. And you can be inconsistent by aggressively coming after something years later, even if you waived it through, because now it's a priority. Now it's a focus. Now there have been damages. Now it's what we're working on. So if you're outside of the law, you can be grateful for a prosecutorial discretion, but you can't say, now I have a permanent safe harbor because somebody was lenient for me at one time. And now, a quick word from our sponsor.

Starting point is 00:15:05 Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are. And you can access primary research easily and efficiently through their platform. With Stream, you'll have the right insights at your fingertips to make the best investment decisions. They offer a vast library of over 26,000 expert transcripts, powered by AI search technology. Plus, they provide competitive rates on expert call services, and you can even have an experienced by-side analysts conduct the calls for you. But that's not all. Stream also provides the ability to engage with experts one-on-one and get your calls transcribed free of charge, all for 40% less than you would pay for 20 calls in a traditional expert network model.

Starting point is 00:15:42 So if you're looking to optimize your research process and increase ROI on investment research spend, stream has the solution for you. Head over to their website at streamrrg.com to learn more. Thanks for listening and we'll catch you next time. Let me turn back to the banks. Sure. I did post on the banks and one of the, the issue I have with the banks, right, is, okay,

Starting point is 00:16:03 we've now seen three to five bank failures depending on how you count all these banks, right? And they go up and they go up quick. And I can look at a variety of regional banks and I can find you, depending on what you want, I can find you once trading an interchangeable book. I can find you ones that they're trading under tangible book. They're trading for five times 2022 price to earnings.

Starting point is 00:16:25 If you and I had been talking a month ago, we would have been like, this is a great bank. This is a compounder bank. It's trading at 1.8 times tangible book. And maybe that's a little expensive, but it's within the realm of reasonableness, right? Now it's under tangible book, five times reading, blah, blah, blah, blah, blah. I guess the two things that hold me back in my mind are number one, like, you know, If you go fair value, if you go look through the financial statements, it's not just the fair value of the health to maturity loans that, you know, blew up Silicon Valley Bank or the health to maturity securities.

Starting point is 00:16:54 Like you start looking at the loan portfolios. You know, if you fair value these loan portfolios, there's a lot of, there's a lot of hair there. And banks are very levered companies. You know, once you start haircuting these things, it gets pretty bad. I look at the Silicon Valley deal that they just sold. The loans got valued at what, like 75% of book. Once you start doing that to some other banks, 95% of books is enough to wipe out a lot of these banks. I look at that on one side.

Starting point is 00:17:17 I'm like, I don't know how much I can trust the asset balance here, even for the good banks. Like small haircuts really move the needle there. And then B, you know, it seems like the contagion's controlled. But I just keep thinking March 2008, you and I probably said, oh, it looks like the contagion's controlled. And then a couple months later, you know, all of a sudden just everything was falling. And, you know, you do wonder, hey, is this the first domino or is this the last domino or the first domino? And then I guess the third thing I worry about is, you know, even if you're buying a bank at tangible book and, a month ago, two-time tangible book was the right price.

Starting point is 00:17:48 I do worry that you're going to have a lot of regulation coming in on the back end of this, and banks are going to be looking at in the future, less leverage, requiring more liquidity, basically regulations, all that sort of stuff is going to drive return on equities down. So earnings go down, return on equities go down. So they're worth less in the future. Now look at those three combinations, say, look, I'd love to run in, like I think I called it in my blog post. I'd love to run in like an action hero running into a burning building and just start buying banks left and right and be the hero in this panic. But, you know, I do worry, like regulation, all

Starting point is 00:18:19 these concerns hold me back. So I ramble a little bit. I'll flip it over to you. Well, I am not the action hero rushing into the Bernie building, but that's a lot of what I thought about this past month is, you know, saying what the hell and going for it. And I've not done that and not that tempted. I kind of have two levels of concerns. One is the kind of immediate signature, the government shuts them down and there is zero over the week on concern and then these broader ones. In terms of the immediate concern, I look at how idiosyncratic the behavior was and the financials were in the failure so far. And I will count First Republic on that list. So the ones that either have gone under or the debt market is saying they are

Starting point is 00:19:08 highly likely to. So the ones that have been seized and FRC, I think those are highly idiosyncratic. I think they're not very much like the next dozen on the list. Is there one or two that I'm forgetting that should be added to that list? I don't even think so. So that makes me fairly comfortable with the kind of dramatic early part of this crisis. But then you're still left with, we haven't even gotten into kind of systemic, you know, overall, just kind of overall credit risk and overexposure where you have these very, very low interest rates for a very, very long period of time and just the amount of malinvestment, whether that's at the banks themselves or all the places they've loaned to in their, in their lending portfolio.

Starting point is 00:20:02 So I think there's a lot of problems there. All the remaining problems I can solve with price though. You can't solve signature with price. It didn't really matter. If you were long signature, it didn't really matter what multiple you paid for you. That was wrong. I think for the remaining regionals and community banks, underpaying solves for the reasonably likely bad credit that they have for the increased regulation, for the increase in FDIC insurance, which is going to go up a lot for what they're going to have to pay. I do think this mid-lawful, institution that is sub too big to fail, regional, not national, but low touch and low kind of customer loyalty, somewhat expensive deposits. I think they're the ones that are going to be

Starting point is 00:20:51 most permanently impaired. And the beneficiaries will be the kind of money center, kind of national banks and the community banks that can really afford the relationships and the, you know, in some ways better due diligence on who they're lending to and so forth. So I have a number of community banks that I think are actually actually increased had deposits go up this past month that I think are terrific. They're generally pretty tiny. And for those, I would say I feel very comfortable if I kind of thought I was underpaying, you know, some things that I'd had small positions in the past, but you know, kind of situations where it's like, well, I don't really like paying more than tangible book value for anything, but I was like, I was at, you know, they're down double digits

Starting point is 00:21:39 for where I was already paying down double digits from tangible book values. Now they're getting really cheap. I think cheapness, I think underpaying solves for everything there. Now, some of the characteristics are super illiquid, family dominated, and often somewhere in the demutualization process where that's where, you know, we were talking earlier about, earlier about kind of where can you be comfortable with price as an indicator, I think underpaying solves for everything there. And I guess on the mutualization process, the nice thing there is you're going through to do mutualization process, which means you've got a lot of cash coming into the door. So you're going into a banking crisis.

Starting point is 00:22:16 And like, if you've already done the first step, you're going into banking crisis with the best equity ratios you'll ever have, tons of cash. Like maybe you're picking off competitors. Maybe you're just picking up lots of market share, but that's great. Yeah. I mean, just one specific one that I just think really highlights that specific. I have a very small, long position in it, but for Seacoast FSCA, they just raised money at $10 per share from people, including me. It's trading at $8.59. That $10 per share is still there. It's not like

Starting point is 00:22:48 they've instantly put it all to work. But I thought $10 a share was a bargain. I think $8.59's a bargain. I think it's a boring little investment that will have no entertainment value whatsoever. But, I mean, they're just at the beginning of a process that that's an example of something where it's a prudently run little community bank and it'll be fine and the investment will take several years to play out. But I think the margin of safety there is real. And there's nothing, I mean, there's there's nothing this institution has anything to do with Silicon Valley Bank. Perfect. All right. Let's turn over to, I wanted to walk through a couple regulatory things.

Starting point is 00:23:29 And I just realized I grabbed the wrong hat off my desk. So I'm going to flip to the proper hat. But I want to talk. So we'll talk for the 10th podcast in a row. We'll talk Activision Blizzard in a second. Let me just start the JetBlue Spirit deal. During this month, the DOJ came out and they did what a lot of people thought they were going to do and say, hey, this is an antitrust violation. We're suing to block.

Starting point is 00:23:51 But on top of that, the Department of Transportation got involved. And I just want to talk. We can talk about the Spirit deal. But, you know, the Department of Transportation getting involved and they're kind of doing the regulatory thing that the FTC sometimes has where they can hit pocket something in a way that, or sorry, the FCC has, they can hit pocket something in a way that just kills the deal without any judicial review or any appeals process or anything. So I just want to talk about, you know, the spirit deal in particular, but also in general, the trend towards government agencies taking a more aggressive stance on blocking mergers in ways that don't allow for judicial reviews, appeals and stuff. because, you know, everybody knew the FCC could do this with media deals. But if the Department of Transportation can do this and you start thinking like every company has some regulator, do you merger ARBs?

Starting point is 00:24:37 Do we need to start thinking, hey, the government, it's not just their judicial review where we'll get a court case eventually if the companies want to take it to court. It's actually the government will bring everything that they can to stop deals that they think are an issue. So, you know, merger ARB spreads have to be wide or bigger deals. like there just might not be room for bigger deals. I'm rammed a little bit. I'll turn it over to you.

Starting point is 00:24:57 I think it might be the case that this is my lightest merger arb exposure ever or in 15 years, something like that. And one of the issues is that I'm indifferent between the probability deal gets done, what I'm mostly concerned about how variant my view is. But it has to be analyzable. I mean, everything we look at has to be legal and analyzing. And on the analyzable side, the administration is willing, and they very clearly enunciated their kind of whole government theory of this thing, which is if anybody has any power to do

Starting point is 00:25:35 anything, we're supposed to be all pulling for our team and our ideological preference and the statutory jurisdiction doesn't really matter to them. We saw this in Tegna with how the FCC kind of manipulated the process. We're seeing it now in front. with the Department of Transportation. And it really cuts deeply into the rule of law and due process and the ability to have your day in court in front of a judge to win or lose. And it makes the American system much more like Europe. And we're seeing it in this administration in a progressive direction. You know, boy, I thought the suit, I thought the antitrust suit was actually fairly convincing and likely a winner and had everything they wanted.

Starting point is 00:26:24 So it was customer facing. It was low-end customer-facing. It was ethnic low-end customer-facing. It was just everything from that kind of progressive political perspective that they would like to be able to say, I thought the likelihood that they were going to file it was very, very high, and the likelihood they're going to want to settle it right away is very, very low. And in the antitrust, this is an industry where they have more than no points, and this is an

Starting point is 00:26:47 industry with... prior price fixing. And there's lots of hot docks. There's hot, hot docs here. So this is what they love. And the DOT coming in is kind of gilding the lily. It was kind of, we have such a winning political case. The ambitious DOT secretary kind of said, I want to come in on this one too. But they could probably kill this one without that. But yeah, it makes it very hard to have it back and forth to have a settlement and to get in front of a judge and win cases that deserve to win. So I think this deal is probably doomed. And my ability to analyze it with any kind of confidence is almost as doomed. You know, just one thing that surprised me here,

Starting point is 00:27:35 I think we talked about the spirit deal back when it was the spirit frontier deal and then JetBlue came over the top. And what that surprised me is, Spirit literally published presentations that said, hey, if JetBlue buys us, this is going to be a regulatory problem. And then, you know, like JetBlue already was fighting the DOJ on their Northeastern Alliance deal. And JetBlue just, you know, despite the target publishing things that said this is an antitrust problem, despite the DOJ clearly saying it's an antitrust problem, if you kind of buy anything, JetBlue just ramrodded through here. You know, they just kept coming, kept coming until Spirit eventually kind of had to say yes or also would have been a

Starting point is 00:28:13 fiduciary problem. And I think their shareholders were saying, hey, they're offering to pay huge rate fees, all this sort of stuff. I just sort of like, these are big companies. They're supposedly have the best advisors. Like, how do they get in a situation where it seems so clear to you and me that this was going to be a regulatory problem? How do they get in a situation where they were in this regulatory issue? And the complaint just wrote itself. I mean, I think it's really hard to fight a battle beyond the battle you're in when it's competitive and emotional and all of the people involved are kind of trying to win and they're pot committed on decisions that they made and they think they're right. So you kind of throw all the ammo you have at that current

Starting point is 00:28:55 fight, including ammo that's wildly counterproductive for the next battle you're going to be and you kind of figure out, I'll fight that battle when I get to it. But in this case, it was glaring and the government used it to good effect. I really thought about both in the save complaint and in the CFTC's complaint to replicate the one thing the government's really, really damn good at is getting their hands on every document that they want. And just they're probably U.S. especially because of all of our national security apparatus, we're just really good at signal intercepts and tracking down the information they want from internal docs, including when people don't want to be repeated.

Starting point is 00:29:44 It's almost funny when you read these complaints and kind of somebody's whispering, like, I hope they don't notice this. You're kind of reading it on page 20 of the complaint. It's like on a TV show when the guys are, the criminals are talking and like the cops are in the other room listening. They're like, this is gold. Like that's literally what's happening with these guys. Yeah.

Starting point is 00:30:02 You know, you can correct me if you feel differently here. I get lots of inbounds on spirit and they're like, hey, you know, if JetBlue can pull this off, you know, I can't remember what the exact share, what the exact consideration would be, but it's a lot higher, spirits trading for about 1670 right now. Like, if JetBlue can pull this off, stocks going a lot higher, like you get a huge arm. And then if they can't, like spirits trading for their tangible book value is about $14 per share. They're going to get a little bit of breakup fee. Like maybe they could revisit the frontier merger or, you know, just as a standalone, it looks cheap. And I, you know, I just, it's a brainer to me, right? Like, I just, I don't see a way

Starting point is 00:30:39 this deal is going through at this point. And I get the kind of objective cheapness, but I look at and I'm like, this is the airline industry, man. I'm not sure I want to get into the business in the airline industry. And it's just a brainer to me. I'm just not sure I've got like any real analyzable edge there. But I know. Yeah. No position, not a lot of interest in it. I understand the point. But ARBs tend to be such sloppy sellers. I mean, there's just, I think usually there's a later, lower opportunity. So we'll see. I mean, one of the things that struck me reading the complaint and thinking about Frontier

Starting point is 00:31:17 in particular, and it's really a creature of the fact that most customers just shop for plane tickets on price only, and that's how they shop. It's not what they're grateful for once they're halfway across an ocean on one of these planes. But Frontiers are fairly a miserable experience to fly on. And the complaint kind of goes into all of the details that if JetBlue buys them, they're going to rip some seat outs. They're going to format it just like JetBlue and that that's going to be this terrible thing. And there's just something philosophically funny about antitrust, at least how in this case it's being used, not just for price, but for qualitative concerns about a market, which is neither you nor I

Starting point is 00:32:12 offer to fly people extremely inexpensively to Puerto Rico or somewhere. Why is it that this guy who temporarily was willing to do so, but wanted to stop doing so at some point in the future? He has this, he's like this kind of second class citizen that, unlike you or me, is required to keep doing the thing that he's already doing. It seems like it's very strange duty that you could say, yeah, I did this for a while. I don't want to anymore. They're willing to buy it. They're going to make it more like their planes than I'm done. It's a strange, it's a strange phenomenon for me that they have to keep going the way.

Starting point is 00:32:48 And antitrust has this impact on how. an industry is organized that is always very lowercasey conservative in the sense of I'm looking at how things are right now I'm going to step in and say now is the perfect time now is what needs to be defended not yesterday not tomorrow and not allow for the natural evolution of an industry I'm going to simply put my foot down and say yes this is good when I look at a spirit of flight it doesn't look that good to me and it's interesting that the government wants to very specifically defend that including the qualitative aspects of this one airline you know the reverse would just be very funny right like if you and i launched an airline that was hey if you're going to

Starting point is 00:33:28 porto we're going to charge 30 000 per passenger but it's going to be it's going to be laddish man right like we're throwing in king size beds instead of seats and like you can get anything you want in three years to now we're like we got to sell jet blue's figured out they will make a lot more money if they take our planes and they just convert them to normal planes and then the department uh the dj came after us was like absolutely not if you sell to if you sell to if you sell to jet blue and you let them fly normal middle class Americans over there at reasonable rates, it's going to be impinging on the, you know, the 30,000 per flight travels. Last one, I quickly wanted to tip, Activision Blizzard.

Starting point is 00:34:03 We talk about it basically every time. It's because it's the biggest merger arb out there. Look, it's been a rough market month for the stock market. It's been a good month for Activision Blizzard. I'm kind of kicking myself because I think we started getting like a little more bullish in the last one, but this month, the CMA came out. There's been rumors EU. Basically, it seems like the CMA and the EU are.

Starting point is 00:34:22 about to kind of, you know, Microsoft's going to give them a little bit, maybe not a pound of flesh. Maybe they're just going to give them a cup of sugar, but it seems like they're going to drop. And then Activision Blizzard is, seems like they're going to have the U.S. antitrust case, but it seems like a lot of those concerns where you and I, for months, we've been saying, I just don't know how you get around the UKCMA. If the UKCMA wants to block it, it seems like UKCMA is going to drop. And then we've just got a normal antitrust case. I just want to turn it over to you. How are you thinking about Activision Blizzard these days? It's a huge step forward to make progress with the CMA.

Starting point is 00:34:59 It looks as if they are, I mean, they said something explicitly, and then there's an implicit aspect to this. Explicitly, they are narrowing their review and they are not going to go after them on consoles, but implicitly, they're not carrying water for the U.S. And if that's the case and if these can be handled independently, it would be a big win to get CMA and EU, again, in front of a judge in the U.S. They just, by the way, got Japan. Wasn't a big focus, but like they're kind of rolling up the other external reviews. Microsoft has dealt with this extremely well. They have some really great executives, and they have some really great lawyers on this.

Starting point is 00:35:41 And so this has been a big step forward. By the way, people who are interested in this deal should follow, if it's, if it's a good, anybody doesn't follow Lulu Misservi, Lulu Chang Miservi is just a sensationally good PR kind of corporate comms person at Activision. And unlike any comms person I've ever seen in terms of how mouthy she is on antitrust in particular, but she has a substack really, really, really good at Activision. But I think we're going to, if this is dealt with on the mayor, with a kind of due process in the U.S. I think the companies will wipe the floor with the government.

Starting point is 00:36:24 The risk has always been that they're clever and they get coordinated action with the EU or with the CMA. And we're not out of the woods yet, but that's looking a lot better. So I think, you know, we probably have passed over from under 50-50 to over 50-50 that they can get this done. When is the, let's say EU, UK, everything, what's the timing of the trial. It's early August is when the trial would happen. And then I guess we'd get a ruling in what, call it November. Am I kind of thinking about that correctly? Yeah, I think kind of April, May, we would know, oh, we're heading to the U.S. court, and that's really where this is going to be determined. Yeah, summer, trial, fall, winter, wrapping up. And then with some prospect of

Starting point is 00:37:10 settlement or, you know, acceleration before then. Yep, yep. Okay. That makes sense. But so I guess the two things if people are thinking. So I'm pretty sure the trial starts early August. So, you know, if people are wondering when we won't be talking about the largest merger are about there, by the end of the year, it seems like it will be done for sure. But yeah, it's just interesting to me. Because the other thing, and I've made this point in the podcast before, but you know, right now with all the positive UK and EU stuff, I've even started seeing people be like, hey, Activision would love to get out of this deal. Maybe it's time for Microsoft to bump on this deal as the timing goes because Activision appears to be performing really well all

Starting point is 00:37:48 a sudden, right? Activision owns, I think people think of their big games, but they also own King, which has Candy Crush. Candy Crush somehow is still wildly popular. It's growing revenue really well. Activision's new game, Diablo 4. Diablo is one of my favorite games when I was a very little kid. But Diablo 4 is getting great reviews. It's tracking to be like one of the biggest games of the year, of the past multiple years. It's getting unbelievable reviews. So all of a sudden Activision is like performing really well and people are saying bump fundamental downside keeps coming higher and higher and I get all of that. But I also would just point to you if we were talking about this a year ago, we would instead Activision is a broken company. Engineers are fleeing

Starting point is 00:38:25 left and right. The performance is dismal. To me, it's just the fundamental value of a video game company is very hard to do. If you're talking about buying it 20 times price earnings, that means you need 20 years of earnings to make up your fair value. These things can swing really wildly. don't know what platforms we're going to be playing. I don't know what people are going to be into. Like, I just think it's very hard, a little bit similar to movie studios, right? Like, yeah, movie studios have value. A lot of the values in the library and the relationships and stuff. But when they go to strategic buyers, they tend to go for a lot. But in the public markets, it tends to be really hard to capitalize them. And I do think there's something to that

Starting point is 00:38:59 with Activision. But anyway, anything else you want to talk about Activision? Yeah. One last thought I have is, like, I keep trying to think about this deal from a Sony perspective. And if it looks like Microsoft is making good progress right now towards resolution of CMA and EU, does Sony have the point of maximum leverage now? Because for all the reasons that I think this deal would be hugely benefited by getting in front of a real judge in the US and hashing it out with econometrics and with data where I think they have hugely, I mean, I think other than politics and shenanigans, I think the, um, Microsoft, has hugely the upper hand here. If that's approximately right, and Sony has some very good

Starting point is 00:39:45 lawyers, do they try to cut a better deal now? Because if the government loses Sony as a complainer, then that just obliterates their case. That takes the deal from, you know, because say the deal just went from 45 to 55 percent chance. It could leap from 55 to 75 percent chance just with Sony saying, we love it. We're set. And now, a quick word from our sponsor. Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are, and you can access primary research easily and efficiently through their platform. With Stream, you'll have the right insights at your fingertips to make the best investment

Starting point is 00:40:18 decisions. They offer a vast library of over 26,000 expert transcripts powered by AI search technology. Plus, they provide competitive rates on expert call services, and you can even have an experienced by-side analysts conduct the calls for you. But that's not all. Stream also provides the ability to engage with experts one-on-one and get your calls transcribed free of charge, all for 40% less than you would pay for 20 calls and a traditional expert network model. So if you're looking to optimize your research process and increase

Starting point is 00:40:46 ROI on investment research spend, Stream has the solution for you. Head over to their website at streamrg.com to learn more. Thanks for listening and we'll catch you next time. Did you see yesterday, I think like 17 senators, congressmen sent a letter to send a letter that said, hey, we're worried that Sony is unfairly hurting the Xbox in Japan in violation of the U.S.-Japan free trade agreements? Yeah. I was wondering if that was, because I think a bunch of the senators are from, you know, areas where Microsoft has a lot of pool. And I was wondering if this is Microsoft, you know, obviously there's a difference between saying, hey, maybe there's unfair practice in Japan versus. holding up a almost $100 billion merger, but I was wondering if this was Microsoft, like, trying to exert a little pressure somewhere else to get Sony to come to the table on this particular

Starting point is 00:41:36 deal. But yeah, anything else you want to talk about with Microsoft at Activision? No, I think that's, I think that's pretty good. Well, Chris, I mean, I said I was joking up front when I said, I don't know what to talk about, but this was a wild month. I'm, you know, who knows where it goes. I'm hoping April is much smoother sailing. We'll have a shorter podcast with much less potential banking crisis to talk about. But this was great. We'll talk before them, but we'll do a podcast in April and looking forward to that one. I'm looking forward to it too. 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

Starting point is 00:42:13 financial advisor. Thanks.

Yet Another Value Podcast - Chris DeMuth's State of the Markets for March 2023

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