January 30, 2025 • 44 mins
Watch Carol and Tim LIVE every day on YouTube: http://bit.ly/3vTiACF.
Bloomberg Intelligence Senior Analyst Lee Klaskow reports on UPS adapting to lower-than-expected annual revenue by shipping fewer, higher-margin packages and cutting back on less profitable deliveries, including a 50% reduction in volumes with Amazon by 2026. Bloomberg News Equities Reporter Ryan Vlastelica discusses IBM shares jumping to a record on Wednesday after the company projected strong revenue growth in the new fiscal year and a jump in AI-related bookings. Golden Krust CEO Jacqueline Hawthorne-Robinson talks about taking over as CEO of the Jamaican fast-casual restaurant chain. Mihir Desai, Professor of Finance at Harvard Business School, explains why big tech is eating itself alive by throwing more and more cash at investments in each other. And we Drive to the Close with Sam Stovall, Chief Investment Strategist at CFRA Research.
Hosts: Carol Massar and Tim Stenovec. Producer: Paul Brennan.
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Episode Transcript
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Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio news.
Speaker 2 (00:08):
This is Bloomberg Business Week Insight from the reporters and
editors that bring you America's most trusted business magazine, plus
global business, finance and tech news. The Bloomberg Business Week
Podcast with Carol Masser and Tim Steneveek on Bloomberg Radio.
Speaker 3 (00:26):
We did want to go back to IBM hitting a
record in traday, up the most since April of nineteen
ninety nine, after it reported fourth quarter results that beat
expectations on key metrics thanks to robust growth in IBM
software business. It also gave a strong forecast for free
cash flow. It was the number one gainer in the
S and P five.
Speaker 4 (00:43):
Hundred for most of the day.
Speaker 3 (00:44):
It's now slipped into second place, just behind Vistro, which
we know has been beaten up over questions about the
AI build out and boost Energy.
Speaker 4 (00:53):
But anyway, we wanted to.
Speaker 3 (00:54):
Talk IBM, especially Tim, in a week where we've been
so focused on some of them other megacap tech names.
But it's interest to see the app performance that we're
getting in IBM.
Speaker 5 (01:03):
So watching closely is Ryan Lstelica. He's Bloomberg News Equities reporter.
He joins us from our Chicago bureau. Ryan. It's a
funny week because we're focusing on AI. We're focusing on
the megacap tech names. You've got Apple reporting after the bell,
Microsoft and Meta reported after the bell yesterday. IBM's rallying.
It's not performing the other companies that we talk about
(01:23):
so much. What was so interesting about this quarter for
IBM is this a real turnaround moment for the company?
Speaker 6 (01:30):
Hey, thanks for having me. IBM has actually been doing
pretty well over the past year or so. For a while,
it was kind of viewed as an underappreciated value name
within tech. They do have a lot of AI related businesses,
a lot of AI related patents, and while it was
sort of underappreciated when it comes to you the whole
artificial intelligence space overall, people have been kind of like
warming to the stock. It's really come up quite nicely
(01:52):
over the past twelve months or so, and we did
see in this most recent report very strong cash flow,
very strong cash flow forecast, a lot of positive AI booking.
So the trends there seem pretty strong, and I don't
think people really caught onto it in the same way
that you might. You know, name some of the other
bigger names within the AI space.
Speaker 3 (02:08):
So Ryan though, if you look at the analyst community,
there's been a bunch that actually been raising their price targets,
even if it's just a little bit, but raising their
price targets and IBM today, So maybe a little bit
of a rethink here.
Speaker 7 (02:19):
Yeah, I think so.
Speaker 6 (02:20):
I mean, I think the consensus is slowly growing more positive.
People seem pretty positive with the direction of the company
software business. Like I said, the cash flow, you know,
it kind of remains to be seen how big they
are going to be in the AI landscape. But they've
been in this area for a while. If you remember
IBM's Watson program that I think at won Jeopardy or
something a while. Yeah, so they've been around there for
a while, but it's only kind of recently that people
(02:41):
are sort of contenting them in a more pronounced way.
Speaker 5 (02:43):
Is it about the clients that they're getting. Is it
about spin offs that they've done over the last couple
of years that have changed the business. What specifically is
it about IBM that has people optimistic?
Speaker 6 (02:53):
Yeah, they have gotten rid of a couple of businesses.
They've also done a couple of acquisitions that have been
greeted kind of warmly, know totally red hat so and yeah,
a lot going on there, but that's the name that
it seems like they're finally, after a period of pretty
low growth, starting to pick up a little bit and
that's being reflected in the share price.
Speaker 3 (03:10):
Hey, just quickly, we want to since we've got you,
let's not forget that.
Speaker 4 (03:13):
All right.
Speaker 3 (03:14):
It's been about, you know, a bunch of the Max
seven companies this week for them, we get another one
after the close today. Apple just yesterday it was downgraded
to perform from outperform at Oppenheimer. The latest sign of
kind of some caution ahead of earnings this evening. And
it's not the first downgrade that we've seen as of
late when it comes to Apple.
Speaker 6 (03:33):
Yeah, I think the count was about five or so
so far this month. A lot of concerns about the
iPhone business. How quickly is that growing? What is the
state of play in China right now? There's been a
lot of competition there, a lot of concerns there. You know,
sales there haven't been all that robust. People really were
banking on the iPhone sixteen, the one that has the
AI features. People really hoping that that would lead to
(03:54):
a big upgrade cycle. So far, we haven't really seen that.
Are they going to give you an outlook that kind
of points to adoption is going to pick up a
little bit more. What's the outlook for the seventeen? That's
gonna be the real focus, you know tonight?
Speaker 4 (04:05):
All right, Gonna leave it on that note, Hey, Ryan,
thank you so much.
Speaker 3 (04:08):
Ryan Lestelica News Equities reporter with the second biggest gainer
in the S and P five hundred today IBM up
about twelve percent him.
Speaker 5 (04:16):
All right, how about the biggest decliner? Can we go there?
Speaker 4 (04:18):
Yes, let's do it.
Speaker 5 (04:19):
Okay, that one is none other than Eups down close
to fifteen percent as we speak, shares plunging the most
ever down to its lowest level going back more than
four and a half years. The company did project annual
revenue well below expectations. It told investors that a long
awaited rebound and demand for its parcel services will not
arrive this year, and it also prompted it to slash
(04:39):
its low margin business with Amazon. So let's break this
one down with Bloomberg Intelligence Senior Transport, Logistics and Shipping
analyst Lee Glascow, who joins us from BI headquarters in Princeton,
New Jersey. Explain the Amazon move here because it's certainly
the biggest customer, but it's not the most profitable. Why
make a move such as this.
Speaker 8 (04:58):
Yeah, so Amazon accounts or roughly twelve percent of UPS's
consolidated revenue. It accounts for, call it twenty twenty five
percent of their domestic volumes. And the volume that they're
doing for Amazon is lower margin business A because you know,
delivering to somebody's home has higher costs and therefore usually
(05:18):
has hot lower margins, so that B two C business
tends to be much lower business. Then you have the
fact that you know, Amazon has a lot of purchasing
power because it is so big, so they were able
to negotiate even lower rates. And you know, at the time,
probably you know, a UPS and a FedEx they were
happy to take on Amazon. But as Amazon grew, you know,
(05:40):
it became kind of deluded to margins, and FedEx you know,
said bye bye to Amazon back in twenty nineteen. So
you know, we kind of knew this was going to
happen eventually. I think maybe the pace was surprising and
the timing was surprising, and I also think that you know,
one of the reasons that the market is down so
much is that you know this year is not going
(06:02):
to be as great as what you know a lot
of folks for expecting, and not just in their domestic business,
but they're international and the supply chain businesses as well.
Speaker 3 (06:11):
All Right, So, as we mentioned, lee that UPS is
the biggest decliner in the S and P five hundred,
Carol Tomey, the CEO, saying, Amazon is our largest customer,
but it's not the most profitable customer. You just walked
us through those metrics. But even so, even if it's
not the most profitable, is it a big loss? I
mean so much so that investors are right in sending
the stock.
Speaker 4 (06:31):
I don't know.
Speaker 3 (06:32):
It's biggest one day drop since two thousand and eight,
down about fifteen percent.
Speaker 4 (06:35):
It looks like at its lows.
Speaker 8 (06:37):
Let's just think if you know, if you lost fifty pounds, right,
you'd go out and you'd probably buy yourself a new wardrobe. Well,
while UPS isn't buying a new wardrobe. What they are
doing is they're restructuring their network so they can now
get rid of facilities they can you know, maybe not
have as many planes and operations, maybe they have not
as few trucks or people. So their cost base is
(06:58):
going to go down considerable and the fact that they're
investing in a lot of productivity initiatives that are driven
by technology, they're going to be able to do a
lot more with less. And you know, they're going to
fill some of the capacity that they do have with
much higher yielding business, whether that's for small, medium size
shippers or other types of shippers. You know, even their
(07:22):
their shut post business, their ship post is their kind
of economy ground delivery that the postal service used to
deliver the majority of those packages to people's houses. And
what UPS has been able to do through technology and
AI and machine learning and all that good stuff is
insert that freight back into their network and build density
(07:44):
within their trucks and so lower the average costs of
delivering that. And they decided to take all that in
and they're able to do that through technology, and they
also announced that about a nine point nine percent rate
increase on that business. So you know, I think that
you know, if you're looking past twenty twenty five, I
think in twenty twenty six, UPS is going to be
(08:05):
pretty pretty well positioned for growth and better margins, especially
as it focuses on kind of higher yielding businesses or
higher margin businesses like it has with the growth of
its healthcare business.
Speaker 5 (08:17):
At least certainly, the focus of our conversation is UPS
but doesn't exist in a vacuum here. Amazon is a
big part of this conversation, and I'm wondering where this
leaves Amazon, given that the company has invested so much
over the last decade plus into building out its own
delivery infrastructure network, including planes and including last mile as well.
Where does it leave a company like Amazon. Does it
(08:39):
eventually go entirely all under Amazon's umbrella.
Speaker 8 (08:45):
I think to go entirely under Amazon or umbrella is
possible over time. But you know, when I'm talking about time,
I'm not talking about twenty five, twenty six, I'm talking
about over the long term. You know, what they've been
able to build through their independent contractors is a good
way to take the stuff that people buy and deliver
it to people's homes. What they really haven't been able
to do is pick things up along the way in
(09:08):
mass so like their network is kind of like a
one way network where a FedEx or a UPS are
two way where you know, they do deliver stuff and
they do pick up stuff at the same time, and
so you know, until that that happens, you know, they
are still going to rely on the UPS for returns.
So you know, UPS as a lot of listeners know
(09:28):
they have stores all over the place. You can go
to the store and drop off an Amazon return and
it's pretty easy. So you know, there's that there's that
ability that UPS will probably you know, always have Amazon
as a customer, but but it's just going to be
a much smaller and it might be you know, eventually
the majority of the business might just be returns, but
(09:50):
you know, again that's going to be over time.
Speaker 3 (09:52):
Hey, Lee, FedEx is also down about two point two
percent in today's session. I know we always say they're
not the exact same companies, but but is there some bigger,
broader thing here too about just the business overall or
the you know moving around of goods and stuff that
maybe it's just not as strong.
Speaker 9 (10:09):
Yeah.
Speaker 8 (10:10):
So, you know, a lot of the impact of the
Amazon business was in UPS's domestic business, and you know,
when they gave their twenty twenty five guidance, their international
business was not nearly as strong, and you know, so
I think the read through for that is maybe demand
is not going to be as great in twenty twenty
five as it was originally thought. I mean, I think
(10:32):
people were expecting low single digit growth in volumes. You know,
maybe that's just more at the low end of that
low single digit growth kind of expectations. So, you know,
I suspect that you'll see analysts be taking down their
numbers not only on ups but maybe on FedEx as well,
you know, just tweaking things here or there. But I
(10:53):
don't think it's like a it's a huge call that, oh,
the consumer is dead, it's time to panic. It's not
time to panic. The consumer in the US has been
extremely resilient and that has been good for these parcel
providers and.
Speaker 3 (11:06):
One of those consumers know it well. Lee, Thank you
so much, really appreciate it.
Speaker 4 (11:10):
Prober Maa sure you welt.
Speaker 3 (11:11):
Bloomberg Intelligence Senior Transport, Logistics and Shipping Alice Lee Clascow.
Speaker 2 (11:16):
You were listening to the Bloomberg Business Week podcast. Catch
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Or watch us live on YouTube.
Speaker 3 (11:30):
Another great need on the economy, and really the consumer
comes from the restaurant space. It was just in December
that Bloomberg reported on how casual restaurant bankruptcies had accelerated
last year, with restaurants filing for bankruptcy at the fastest
pay since twenty twenty as customers retreated. The view for
this year was that advertising value promotions would ultimately helped
(11:50):
restaurants sales. So let's see what is going on in
the environment with us. As the chairman CEO of the
family run fast casual restaurant chain Golden Crust. Jackie Hawthorne
Robinson is with us. She recently took over as cp CEO,
and she joins us here in studio.
Speaker 4 (12:07):
Welcome, Welcome, nice to have you here. How are you?
Speaker 7 (12:09):
Oh, thank you so very much. And I must say
it's great to be here. Ah. Yeah, So I'm doing great.
How about you?
Speaker 4 (12:15):
We're doing okay, trying.
Speaker 3 (12:16):
There's a lot coming at everybody, and I think there's
a lot coming at investors, there's a lot coming at consumers.
Speaker 4 (12:21):
You guys are some thirty years into this.
Speaker 3 (12:24):
If we're got five years thirty five correct, So you know,
how would you describe today's business environment, because what's going
on in restaurants can tell us a lot about the economy,
small business and the consumer.
Speaker 7 (12:34):
Well, basically, for us, from a Golden Cross perspective, we
are doing great in our business. We are functional, we
are operational, we are making profit, and we we are
rolling the dice, so to speak. But I see it,
I see the concept. I see what's happening to other
restaurant business how they are failing. But for us, as
Golden Cross, we are progressing. For sure.
Speaker 5 (12:55):
We saw the last couple of years punctuated by the
highest inflation that we've seen in a generation. That's correct,
Is that gone for you?
Speaker 7 (13:04):
I would say no, it's not going for us. But
what we are doing, we are trying to keep the
market alive. We're trying to bring quality still and even
though inflation is up, we haven't raised prices for a
few years, so we are trying to hold so we
can maintain and stay in business.
Speaker 5 (13:21):
Well, where specifically are you still seeing prices increase.
Speaker 7 (13:24):
I'm seeing prices price increases in big box stores. I'm
seeing price increases in the walmarts and in all those
other locations we are seeing price increases in the products
that we're purchasing coolds overall. Yes, for sure, definitely.
Speaker 3 (13:37):
So if you're not passing along to consumers, that puts
pressure on you guys. Right in terms of the margin
side of this is where we know it can be
already kind of slim and tough in restaurants.
Speaker 7 (13:46):
Yes, I agree with that.
Speaker 4 (13:47):
How difficult?
Speaker 3 (13:48):
And then how do you manage like is there some
can you cut costs elsewhere?
Speaker 7 (13:53):
Cutting costs elsewhere is also very difficult because as we
know just about cost is being increased from every perspective
right now. If it's rental is being increased. If it's good,
so the cost of goods a high, So it's there.
We are trying to shoulder it where inflation is concerned,
just to keep our customers happy and to create the
(14:13):
best product.
Speaker 5 (14:14):
One thing I've noticed at fast casual restaurants is in
recent years is embracing technology and the way that companies
have come out with apps to allow people to order
ahead of time. In some cases, you go to a
restaurant and you're not ordering from a person, you're ordering
using a key exactly. All of that. The idea there
is to help with costs and that's a decrease the
(14:34):
amount of money somebody has to pay for employees, or
decrease the number of employees. How are you guys embracing tech?
Speaker 7 (14:40):
Well, we're embracing tech. Were getting there not quick enough,
but we are definitely entertaining tech and we're moving towards it.
We have apps, we're operating in apps, we're serving from apps.
We've got Uber Eats, and we've got all those different
apps that we are utilizing right now.
Speaker 3 (14:57):
You know, we're talking about, you know, the business side
of of what you guys do, and we are talking
a lot, Jackie, about what might come down from Washington.
We're already, you know, getting glimpses. We're seeing activities already
around immigration. Is that impacting you in terms of a
workforce or.
Speaker 7 (15:15):
It hasn't impacted us yet, so I know going forward
it might be. But right now we are okay and
we are still operational, yes for sure.
Speaker 5 (15:24):
You know, during the pandemic, we saw a lot of
consumers embrace those third party delivery services. One challenge was
for restaurants to have their products actually survive delivery and
taste is good when somebody gets it at their home
or apartment right versus when they get it in a restaurant.
Did you guys have to make changes during that time
how the product was delivered?
Speaker 7 (15:45):
I think for us, I would say absolutely not. Our
products are delivered on time. It's still hot, it's still
holding up in those boxes that we use, So we
do not at present have a problem with.
Speaker 5 (15:56):
Did you see have you seen delivery as a portion
of your overall business fall off significantly since the heights
of the pandemic or of consumers now long of them,
we have increased sales just as far as delivery does.
I'm talking about in restaurant versus delivery. You're you're still
seeing growth in delivery.
Speaker 7 (16:12):
Yeah, we're still seeing growth in delivery, and we're still
see growth in the restaurant. Were Tire's duality and it's
for us, and both of them were still functional.
Speaker 3 (16:20):
I just want to mention some headlines crossing the Bloomberg terminal.
This house to do with open AI, of course, really
at the center of the push that we've seen in
artificial intelligence over the last couple of years, coming from
the Wall Street Journal, Open AIS and talks for investment
around valuing it up to three hundred and forty billion dollars,
and it is in talks to raise up to forty
billion dollars in a new round of financing, and that
(16:41):
would include up to twenty five billion from SoftBank. But
again open AI and talks to raise up to forty
billion dollars that would ultimately give it a three hundred
and forty billion dollar valuation.
Speaker 4 (16:51):
This again tim coming from the Wall Street Journal.
Speaker 5 (16:53):
So I guess not really a lot of concern over
what happened on Monday.
Speaker 4 (16:58):
Or maybe I don't know. It's interesting the timing.
Speaker 3 (17:01):
I feel like this week has been chock full of
news around on artifles intelligence.
Speaker 5 (17:05):
Just to remind the journal reminding us that one hundred
and fifty seven billion dollars is the valuation that open
AI recently had that was only a couple months ago,
back in October. So a three hundred and forty billion
dollar valuation, if this does indeed come true, would be
quite an increase in a short time.
Speaker 4 (17:21):
Yeah, big bump up. Anyway, We're continue to track that.
Speaker 3 (17:24):
I want to get back to Jackie Hawthorn Robinson, CEO
at Golden Crust, you know, for those who are not
familiar and Jackie.
Speaker 4 (17:30):
I'll be quite honest with you.
Speaker 3 (17:31):
When we were reading in and getting ready to do
this interview, I'm like, I don't know that I know
these restaurants. So tell us, because you're around the United
States a lot of them in the textos.
Speaker 7 (17:40):
Are you how to food at all?
Speaker 4 (17:42):
You have not?
Speaker 7 (17:42):
So tell us.
Speaker 4 (17:43):
Tell us about what you guys do. What's to you.
Speaker 7 (17:46):
Golden crusts basically to bring the taste of the Caribbean
to worldwide, to everybody, whichever country, Urian, whatever state, Urian.
So Golden Cross does exist for that. We carry a
niche kind of recipe for all the food items that
we offer with a Caribbean flavor, authentic Caribbean flavor. We
(18:06):
stry for that and that's what we produce every day.
So we're bringing most of our items. Core items do
come out of Jamaica, right, so we import those items
like the Scotch bonded pepper. I'm not sure if you've
ever had that spicy.
Speaker 4 (18:21):
I do like a little bit of spicy. Yes, my
family likes spicy, yep.
Speaker 7 (18:24):
And not only is it spicy, it's flavorful.
Speaker 3 (18:26):
Jackie, Where are you guys, mostly in terms of where
your stores are right now?
Speaker 4 (18:30):
Your restaurants in the know.
Speaker 7 (18:31):
We are located over the metropolitan area. Yeah, that's where
we are right now. And we're also in eight states.
Speaker 5 (18:37):
In eight states, Yes, that is correct, Connecticut, Florida, Georgia, Maryland,
North Carolina, Texas, New York, and New Jersey. Yes, that's
Does that footprint grow, Yes it does where.
Speaker 7 (18:46):
Yes, it grows. I mean we have growth monthly growths
that from coming from all these footprints. We have areas
that are doing better than other areas. But the footprints works.
Speaker 5 (18:58):
Where where will you grow next? Web states? Will you
expand into?
Speaker 7 (19:02):
Well, we're in Texas. We're trying to expand more into Texas.
We currently have three locations there. We're looking to probably
possibly put another two to three locations in the Texas region.
We want to go back and go full blast back
in California. So those are the that's where we are
looking to go to now. California will be the next
(19:23):
state up for us.
Speaker 4 (19:24):
Who is your typical customer?
Speaker 3 (19:25):
And I am curious, Like we talked a little bit
about the business environment earlier, what you have seen in
terms of the spend if that you know, we talked
about inflation and pressures and you haven't been really taught
spending that or passing that along time the customer. But
are you increasingly seeing customers look for kind of like value?
Speaker 7 (19:42):
Hyeah, definitely, they do that every day. Everybody wants a deal.
We understand, yeah, and we do understand that. But our
niche right now is Caribbean people, mostly Jamaicans coming in
and then outside of that, we sure have a broader
customer base, so we serve to every body just about now.
Speaker 5 (20:01):
One thing that I always wonder about when it comes
to restaurants is supply chain and how you keep consistency
across different parts of the country when some restaurants are
thousands of miles from the other restaurant. Correct, how do
you what's your distribution center? How do you make sure
that the experience that somebody has at the location on
Fourteenth Street in Manhattan, for example, is the same as
the location in Texas.
Speaker 7 (20:21):
I think keeping everything the same is how we operate.
We have field officers, we have people that are responsible
for each state. Of course, we do testings all the
time to ensure people are keeping up with what they
need to. We as also a delivery company. We do
deliver all of our items from the main office, whether
it's the beef patties boxed and frozen, and all your
(20:44):
other items like your fresh hard or bread and the
fresh heart of buns and all the other items that
we produce we do deliver daily to these customers and
to these franchises.
Speaker 3 (20:56):
How do you determine you know, you talk about the franchisees,
so in some ways that offload some of the risk
for you guys. That is correct directly, but you want
to make sure those franchises do well because correct, it
impacts the overall brand bottom line brand totally get totally get.
Speaker 7 (21:12):
Yeah.
Speaker 3 (21:13):
So in terms of expansion, how do you determine where
you are going? Is it just where you're seeing is
a basic demand in terms of customers and you know
that you're going to be able to grow that market,
or how do you determine where to go?
Speaker 7 (21:28):
Just as you mentioned, the demand definitely is a factor.
I mean, we have customers that comes into our stores
every day and whichever state they are from, they are
going to come and say, hey, you guys need to
get into Texas, right, I need your product, you need
to get there. So of course we'll take that, we
will listen to it. We will do demographics and we'll
see if it fits us, and then we'll move into
(21:50):
that state.
Speaker 5 (21:50):
If the gives an understanding of a company run stores
versus franchise stores right.
Speaker 7 (21:56):
Now, right, so give you an understanding, Yeah.
Speaker 5 (21:59):
How many do you have that company run versus.
Speaker 7 (22:01):
Now we're down to like two company stores and the
stores are franchises.
Speaker 5 (22:05):
What is the what is the commitment that a franchise
he has to make in order to open one of
these restaurants.
Speaker 7 (22:10):
Well, they have to commit to the brand, They have
to commit to keep the brand alive, they have to
commit to use our products, and they have to commit
to consistency.
Speaker 5 (22:19):
I was looking for a financial commitment.
Speaker 7 (22:21):
Financial commitment or you need a number, I need a number,
You need a number for that. If I were to
throw a number out, there'd probably say, on this platform
right now, probably about four hundred and fifty thousand.
Speaker 5 (22:34):
Okay, So that's the upfront cost, and then.
Speaker 7 (22:36):
That can be construction costs.
Speaker 5 (22:38):
Upfront costs, and then there are the costs that are
associated with the licensing exactly, and that's a different cost
as well.
Speaker 7 (22:45):
Not really not.
Speaker 5 (22:46):
So the percentages that you take is just a just
a licensing.
Speaker 7 (22:49):
Yes, licensing and at that point you do take your
percentage once they open and become operations.
Speaker 5 (22:55):
Okay, yes, you do well.
Speaker 3 (22:57):
And what's interesting is you, guys, yep, you have the restaurants,
you have the franchisees, but you also have a lot
of products right in grocery stores.
Speaker 7 (23:04):
We sure do.
Speaker 4 (23:05):
What's tell us attle bit about the growth of that
business and what you're seeing there?
Speaker 7 (23:09):
Okay, Well, basically for us, we're in a lot of
big box stores. We're in the Costcos, we're in Dollar Trees,
we are in Walmart, and as a matter of fact,
we are pulling out rolling out a new item for Walmart,
which is scheduled to roll out February twenty sixth a
two pack select patty just for Walmart prices only. Yeah,
(23:32):
so that's what we're doing right now.
Speaker 5 (23:34):
What's the connection between a sales increase at a big
box store when a restaurant opens in that local area.
Do you see a lift?
Speaker 7 (23:44):
Yes, we do, We definitely do.
Speaker 5 (23:46):
Like, if you have a restaurant open up in a
new location and you've already been selling the products in
one of the big box stores, how much does it
increase the sales in the big I would.
Speaker 7 (23:54):
Say because of visibility. So that big new restaurant is
now creating more visibility for us. Most of the time,
it does not affect us at all.
Speaker 3 (24:03):
Yeah, all right, we're gonna leave it on that note.
Really interesting to hear. Let us know as things continue.
Speaker 4 (24:07):
To grow and expand.
Speaker 3 (24:08):
So very much, Jackie, Thank you so much, Jackie Hawthorne Robinson.
She's chairman and chief executive officer of Golden Crust. Joining
us here in studio.
Speaker 1 (24:17):
You're listening to the Bloomberg Business Week podcast. Catch us
live weekday afternoons from two to five e's during Listen
on Applecarplay and Android Atto with the Bloomberg Business.
Speaker 4 (24:27):
App, or watch us live on YouTube.
Speaker 5 (24:30):
Well, it's hard to think back to Monday, Carol, given
what a week it's been so far.
Speaker 4 (24:33):
It's been kind of crazy the ride here.
Speaker 5 (24:35):
Okay, it was a day that the stock market reckoned
with a startup called deep Seek, even though lot of
people knew about what it could do. In our one
last week. On that day, though, you'll recall in VIDAFL
seventeen percent in a single day at e rased five
hundred and eighty nine billion dollars in value, a record
drop for a single day. Meir here, they said, was
watching what happened in the stock market that day closely.
(24:57):
He's the Mizuho Financial Group Professor of Finance at our
Business School. He's also a professor at the law school.
He's also contributed to Bloomberg's weekend edition. He did right
in the New York Times this week that Monday's value
destruction illustrates something concerning happening in financial markets and can
best be explained by an ancient myth. They've a serpent
eating itself, Professer. They said, it's good to have you
(25:18):
with us. Why was Nvidia losing nearly a fifth of
its value in a day? Not that surprising to you?
Speaker 9 (25:25):
Well, so I think what the big surprise is is
why and how seven companies constitute one third of our
market capitalization. That's really the big surprise. And so the
question of the day is really how is that going
to reconcile itself? And so what I tried to put
forward in this piece was just the theory that actually
it's pretty unsustainable and that in effect, big tech is
(25:46):
eating its own tail. This serpent image that you might
have seen of a snake eating itself has been around
for millennia, and I think that's kind of what's going on,
which is just a way of saying this AI frenzy
has in some sense been manifested by these Big seven
companies having a very low cost to capital. They've become
the safe asset in the world. So if you are
around the world you want a dollar denominated asset, but
(26:08):
with better management teams than maybe governments, better balance sheets
than maybe governments, you're gonna flock to them. Well what
does that mean. Well, if that happens and they become
the safe asset, then people don't expect much in terms
of return, because that's what happens with safe assets. Well,
how to managers respond to that? And the answer is
you invest a lot. And that's what they've been doing.
And they've been investing a lot in each other, and
they've been spending like crazy. So, for example, in videos,
(26:32):
more than half their revenues is coming from their siblings
in the Big seven. So the Amazon Microsoft are spending
literally two hundred billion dollars a year in infrastructure spend,
and they're doing buybacks hand over fist, So they are
literally eating themselves and literally eating each other. And the
underlying story I think is going to be that these
(26:52):
is going to end up having low returns. So when
you end up giving them the prize of being a
safe asset, you don't expect much from them, and they
invest like crazy and then they deliver slow returns. That's
what we are going to see. It won't happen today
or tomorrow. It'll happen over the next five or ten years,
like it happened at the beginning of the last century
with railroads and steel. I think that is why it
(27:13):
wasn't that big a surprise.
Speaker 4 (27:14):
I want to dig a little bit into this.
Speaker 9 (27:15):
You know.
Speaker 3 (27:15):
One of the things that we love looking at here
at Bloomberg is that the supply chain functions. You pull
up something like Nvidia, and so Microsoft is responsible for
about nineteen percent of their revenue. Meta is about ten
percent according to our latest data, super Micro about eight percent, Alphabet,
Google about six percent, Amazon about five percent, Dell about
(27:35):
three percent. Like, we love to kind of get an
idea of who's who's buying and so the exposure, especially
if we get bad news from them, what it means
for an Nvidia. So you're saying what to concentrated or
what's your point about you know that they're kind of
it's like there's almost closed circle, right of a closed circle,
and they all are kind of like supporting one another.
Speaker 9 (27:55):
Yeah, so I mean effectively, what's happening is they're investing
in spending money on each other and that closed circle.
Speaker 4 (28:01):
Why are they doing that?
Speaker 3 (28:02):
Because some would say that what we've seen over the
last couple of years is that everybody has all of
a sudden realized, oh my god, look at what generative
AI can do, and so we have to build out
our own.
Speaker 9 (28:11):
Systems exactly right. And the promise is that it is
not a closed circle, that one day it'll all be
manifest to us what those revenues and profits are. And
that is a huge bet. We are all levered to
the MAG seven in a way that I don't think
we understand. When one third of the market cap is
MAG seven, we're levered to it, and the global economy
is levered to it. And all of that is going
to be a function of the productivity of all this
(28:33):
capital they're spending on each other. And what I tried
to raise in that article is it's not clear that
that is going to be manifest and in fact, deep seek.
I think people misunderstood the Deep Seak lesson in part.
The story about Deep Seak is it is very hard
to create a competitive advantage in this industry. You know,
people think there's a lot of money to be made. Well,
(28:53):
to make a lot of money, you need to be
able to capture the rents. And what Deep Seak showed
is that it's not clear that these rents are easily captured.
And so if it's easily accessible to everyone, that doesn't
mean it's not going to be transformational, Carol. What it
means is.
Speaker 3 (29:06):
Because some would say that if it's more accessible, more
people can tap into it, and first people who are
supportive of it, like hence the software guys, right, we
all of a sudden said they were often.
Speaker 9 (29:16):
Running yeah, and it could be transformational, but will a
company be able to capture it?
Speaker 8 (29:20):
All?
Speaker 5 (29:20):
Right?
Speaker 9 (29:20):
So the whole premise of their market capitalizations is there's
going to be seven big winners, and we know who
they are. It's those seven companies, And maybe that's not
right even if it is transformational. If it isn't transformational,
then we're all really in trouble because they're literally deploying
capital at really, really low rates of return, maybe negative
rates of return.
Speaker 5 (29:39):
Your question about a mode or differentiation is an interesting one.
It came up yesterday during our conversation with Caroline Hide
of Bloomberg Technology about what the difference is between Gemini
a GPT, Lama, you know, anthropics, Claude, what is the
difference between these? Apart from the way they look that question,
I think still a lot of investors in the private
markets and the public markets are asking themselves.
Speaker 9 (29:59):
Yeah, and one theory is that it's about scale. You
have to get big, and you have to get big fast,
and the answer is maybe deep seek suggests maybe not.
And also we should just remember that having access to
a lot of capital and spending it is not a
competitive advantage. That is not what a competitive advantage is.
Capital is not like the scarce resource in the world,
and especially.
Speaker 3 (30:19):
For some of these big tech companies, right, Like we
talk about their balance sheets and typically you would say
a higher rate environment would bother them. But they have
so much cash that they don't have to really tap
into the capital markets.
Speaker 9 (30:30):
So but I think they're in a race, right, So
they're spending cash handover fist and the answers will weap
But if you don't have a sustainable advantage, then what
is this race about? And I don't think there is
a real mode there, and then you really have to
question the whole story.
Speaker 5 (30:44):
So I think it raises a lot of questions about
where investors should be putting their money in the public market.
You know, we've been talking. We talk a lot about
single stocks in retirement portfolios. A lot of people are
invested in indexes. If you're not playing the stock market.
All the experts say, hey, just invest in the S
and P five hundred index funds. What happens though, when
the S and P five hundred exactly is dominated by
these companies, where should people put their money?
Speaker 9 (31:05):
Well, that's exactly right, because the unque circumstance is that,
you know, I talk about the unmagnificent four ninety three
because there's a magnificent seven and there's an unmagnificsten four
ninety three. And the answer is that is still the
best advice. However, I think it's a good time to
rethink certain things. So for example, as you know, we
are living in the twentieth year of the value growth split,
(31:27):
where growth has just outperformed value forever, and I think
it's a good occasion to revisit that. And for those
of you who are listening who want to BEBB still,
I just want to index. I just want to do that. Well,
you want to think about broader indsease, You want to
think about value in disease, and you want to think
about whether that whole mantra that has been good for
the last twenty years is good again, especially as rates
(31:49):
stay relatively speaking high in a way they haven't been
for fifteen twenty years.
Speaker 5 (31:53):
Although one challenge, though, someone might push back and say,
well VTI, which is the Vanguard Total stock Market Index,
is pretty heavily correlated to the S and P five hundred.
That is true, and that's a challenge. If you want
to buy the entire market, you're still just buying that's
biggest company.
Speaker 2 (32:08):
That is true.
Speaker 9 (32:08):
I mean in a way that is a little bit
of the point of the piece, which is we are
all levered to the max seven in a way that
we can't get away. I think the answer is though,
there are narrower, you know, value indices that can help you,
and there are international ways to go. So I am
not a huge believer in stock pickers, So I think
indices are fantastic, But there are other kinds of indices.
(32:29):
There's non US indices, there's yield, there's fixing. There's lots
of things that we, for the last fifteen years have
forgotten about. My previous piece was about magical thinking and
how kind of long periods of low rates have infected
people to think like this goes on forever, and growth
the stuff happens forever, and technology solves everything. And so
look when rates get back up where they are, you
got to think hard in your portfolio about fixed income
(32:50):
in a way and cash in a way that you
haven't thought about it in a long time.
Speaker 3 (32:54):
All right, So, Professor Veisi, so how does this potentially end?
People have made the comparisons to the tech bubble of
nineteen ninety nine two thousand. I don't know that it's
the exact same thing, but you tell me that in
terms of then how does this ultimately work its way out?
Or do these companies possibly ultimately deliver if AI is
(33:15):
as transformative as we think it might be.
Speaker 9 (33:17):
Yeah, So I think the analogy to the dot com
bubble isn't that great in some ways because those a
lot of those companies were not real companies and it
was all a little sketchy. Exactly, these are real companies,
like this is, these are really the best companies in
the world, Okay, And so what's more likely to be
true is something like the nifty to fifty Yeah, going
to the early seventies or the early part of last century,
(33:40):
which is railroads and steel. And what does that tell you?
It's a grind. It's not a pop of a bubble.
It's like five years of like zero of like zero returns, right,
So it's grind.
Speaker 4 (33:51):
So five years of this stuff just kind of going sideways.
Speaker 9 (33:54):
Yeah, perhaps like sideways, right, because it's not is it?
Speaker 4 (33:57):
Because the bill takes so long a lot.
Speaker 9 (34:00):
And then we realize that the returns aren't there, right,
And for us to realize that and understand that, I mean,
these folks are spending hundreds and hundreds of billions of dollars.
We won't really know the productivity of that capital spend
for a long time and that's why it takes longer.
And they're not like fly by night folks, right, take
serious people, and so it's going to take years and
that I don't know if that's good news or bad news, Carol,
(34:21):
but I think that is the right way to understand.
It's it's three to five years of a grind, which
also helps you understand why valuation levels are high right
now and how they come back down, just very slowly
and in a very boring, unexciting way.
Speaker 5 (34:35):
It's interesting because we saw in the president's first week
of his term an announcement where he was flanked by
Larry Ellison of Oracle, Pascio Shei's son of soft Bank,
Sam Alltman of Open Ai, and he was tatting a
one hundred billion dollar up to five hundred billion dollar investment. Yeah,
is that something that concerns you when we're talking about
(34:56):
figures of that size, Well, what.
Speaker 9 (34:58):
Would concern me is if capital you know, this is
all by capital allocation, like everything is in the economy,
and so if capital allocation is going to be guided
by political litmus tests, which is, you got to spend
one hundred billion, and if you're not good for the
hundred billion, you know, we're not sure if you're a
real deal. If it becomes a political litmus test and
it's not being guided by the tenets of capital allocation,
(35:20):
we're all going to suffer on that over the long run.
So that's what concerns me. It's about whether this is
becoming a political litmus test, like are you with us
on AI or not? And then of course, as you know,
CEOs have to respond, which you know, I'm good for
thee hundred billion, Yeah, which now starts to feel like
a poker match as opposed to foughtful capital allocation and
(35:40):
feels a little bit like a political litmus test.
Speaker 3 (35:43):
Well, it's certainly something we've talked about that even with
some of the announcements that came out of the administration. Right,
but of course no government money, but nonetheless commitments by
companies and some say, you know, it's a commitment, doesn't
mean ultimately the spend gets carried out. So it's something
to keep an eye on, right, to see ultimately how
it plays at I think we're in this interesting place
where we've talked a lot too about we're waiting for
(36:04):
the payoff and understanding whether this all makes sense.
Speaker 4 (36:07):
Great stuff, Thank you so much, oh my pleasure, really
appreciate it.
Speaker 3 (36:10):
Professor me here today say he is, of course with
Harvard Business School. He's the Mizuho Financial Group Professor of
Finance at Harvard Business School. And a professor of law
at Harvard as well. Interesting column here in the New
York Times. Thank you so much, really appreciate it.
Speaker 4 (36:25):
Rob Mac, I'll bet you let me drive.
Speaker 9 (36:28):
Oh no, no, no, no, this is not a toy jug.
Speaker 7 (36:32):
Honey, please, I'll do the riding gravels.
Speaker 9 (36:35):
Excuse mate, I want to try it.
Speaker 7 (36:39):
It's a good question time.
Speaker 5 (36:44):
This is the drive to the clothes dot plum for me.
Speaker 2 (36:47):
Thing well don on Bloomberg Radio.
Speaker 3 (36:50):
All right, everybody, just about eighteen minutes left to go
in the trading session. Carol Master along with Tim Stanovic
live here in our Bloomberg Interactive Broker's studio. And as
Tim and both mentioned, we did see stocks roll over here.
We've now got the Dow in negative territory. But you
are definitely off the best levels of the session, but
a leg down. And we did have some comments from
(37:11):
President Trump from the Oval Office talking to reporters, and
the President saying that there are plans to announce Canada
Mexico TIFFs because of fentanyl shipments we would assume coming
into the United States, and particularly and specifically I should
say that the President saying twenty five percent tariffs when
it comes to Canada and Mexico. So we're going to
look for some more clarifications on that, more detail, if
(37:33):
you will. But investors noticing and sending stocks in a
straight leg down over the last few minutes, not.
Speaker 5 (37:38):
Just stocks, keeping on currencies as well. The Mexican peso
has sunk to a session low on those comments from
Trump about tariffs. Let's see what Sam Stoveall has to
say about this. He's chief investment strategist at CFRA Research.
He's back with us from Allentown, Pennsylvania. Sam, was an
interesting trade today even before just a few minutes ago,
and we got those comments from reporters saying that Trump
(37:59):
would impost twenty five percent tariffs on Canada and Mexico.
Do defense and all. How are you looking at tariffs
over at CFRA.
Speaker 10 (38:07):
Hey, Tim, Well, certainly we are paying attention to whatever
the President says one day to the next. We still think, however,
that a majority of this tariff talk is more to
do with negotiating and trying to get to squeeze out
whether it's from Columbia, Venezuela as well as Mexico and Canada,
(38:28):
to try to get whatever it can to improve the
trade situation.
Speaker 3 (38:33):
The sensitivity though sam of the markets to headline on
possible tariffs, the sensitivity even on Monday to the news
out of deep Seak in terms of AI, many were
saying that, you know what, investors are just looking for
a reason to sell after two years of just moving higher.
Do you agree that there's a sensitivity in the market
or do you think the fundamentals are there that investors
(38:55):
don't need to be so nervous about the outlook, especially
when it comes to further gains.
Speaker 10 (39:00):
Well, I think certainly that we could easily go through
a pullback or even a mild correction, because those things
do happen every so often. But I still call myself
a bull. I think that we are likely to see
prices higher at the end of the year, but volatility,
I think certainly is going to be on the upswing.
But I would tend to say also that because the
(39:22):
market has been very willing to rotate from the high
growth areas, showing some interest in healthcare, in materials, in
industrials areas that had been under performers in twenty twenty four,
that says a lot to me that investors are not
willing to give up the shift just yet.
Speaker 5 (39:40):
Did you change your view given the stock market action
that we saw on Monday with some big name tech
names sell off as a result of the deep Seek news.
Speaker 10 (39:50):
Well, Tim, we didn't change our view because we're taking
sort of a wait and see attitude like the FED.
We did acknowledge absolutely that it is news that should
probably be taken quite seriously. We still think that these
companies are likely to stress the need for greater compute
as we shift toward ngetic AI and physical AI. But
(40:14):
at the same time, these semiconductor companies could probably end
up experiencing a bit of pressure in the near term,
but our feeling is that it could end up then
experiencing a buy on the dip a little later on. So,
right now, technology is the worst performing sector in the
month of January, and historically the four worst performers in
(40:38):
the month of January tend to underperform the SMP in
the full calendar year.
Speaker 3 (40:45):
Hey, Sam, I do wonder too that within the AI community,
the big megacap tech names that are all spending big.
Speaker 4 (40:51):
Time on AI at this point.
Speaker 3 (40:55):
Don't think at some point kind of have to support
the AI story in the AI narrative, even if they
think that there might be a competitor. I mean they
all were, so I feel like, you know, congratulatory backslapping,
if you will, on Monday over Deep Seek in terms
of their findings, And you do wonder do they kind
of have to all be like AI be supportive of
(41:16):
it because there's so much money at stake, so much
that's already been invested.
Speaker 10 (41:21):
Sure, and also Carol that we're starting to see AI
profits exceed AI expenditures, and so that is something where
companies are expecting it to get a reward in this
year and also in future years, where it's not just
investments in the product that will then bear fruit years
(41:43):
from now. They're actually expecting to see nice returns beginning
this year.
Speaker 5 (41:48):
When do we start to see AI affecting the companies
that are not hyperscalers, When do we start to see
them affecting consumer packaged goods companies, automakers and the like.
Speaker 10 (42:00):
Well, I would tend to say that that is something
that is certainly down the road. I don't have a
specific timeframe for you, but when you think about a
lot of the minor AI that we experience on a
daily basis, whether we're just communicating with others, or whether
we are doing calculations. Certainly that's already being beneficial to
(42:22):
consumers and investors today.
Speaker 3 (42:24):
Sam love talking with you for so many different reasons.
I feel like we've talked so much over the years,
whether it's earnings, whether it's fundamentals. But I appreciate someone
who has seen a lot of cycles, a lot of
strains and stresses in the financial system, and seeing innovation disruption,
things that people thought would be something big that ultimately
do not memestock so much. I'm just thinking about just
(42:48):
got about a minute and a half left here. How
you think about the market environment. Is there a lot
of clarity and transparency about kind of where we go
from here?
Speaker 4 (42:55):
Or are there more questions?
Speaker 10 (42:58):
I think that there are questions. I guess it depends
on what we mean by where we go from here.
Is it in the next couple of months, is it
this calendar year, or is it five or ten years
down the road. I am a bit concerned about valuations
and how people tend to just dismiss them and say, well,
it's because now is different. I mean, the S and
(43:20):
P is trading at a twenty one percent premium to
its forward pe average over the last ten years and
close to a forty percent premium over the last twenty years.
Tech is at thirty five percent premium over the ten
year period and more than sixty sixty five percent over
the twenty year period. So I would tend to say
(43:41):
that we're going to have to see a very large
pickup in earnings because I don't expect PE multiples to expand,
and if the economy is likely to be contracting as
we move into this year and next, it's going to
be a tough hurdle I think to see expanding profits
rather than simply focusing on maintaining profit margins.
Speaker 4 (44:04):
Yeah, super solid point for us to wrap up on.
Speaker 3 (44:06):
Sam, Thank you, as oways Sam Stovell, chief investment strategist
at CFA Research, joining us from Allentown, Pennsylvania.
Speaker 2 (44:14):
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Speaker 2 (00:08):
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Speaker 3 (00:26):
We did want to go back to IBM hitting a
record in traday, up the most since April of nineteen
ninety nine, after it reported fourth quarter results that beat
expectations on key metrics thanks to robust growth in IBM
software business. It also gave a strong forecast for free
cash flow. It was the number one gainer in the
S and P five.
Speaker 4 (00:43):
Hundred for most of the day.
Speaker 3 (00:44):
It's now slipped into second place, just behind Vistro, which
we know has been beaten up over questions about the
AI build out and boost Energy.
Speaker 4 (00:53):
But anyway, we wanted to.
Speaker 3 (00:54):
Talk IBM, especially Tim, in a week where we've been
so focused on some of them other megacap tech names.
But it's interest to see the app performance that we're
getting in IBM.
Speaker 5 (01:03):
So watching closely is Ryan Lstelica. He's Bloomberg News Equities reporter.
He joins us from our Chicago bureau. Ryan. It's a
funny week because we're focusing on AI. We're focusing on
the megacap tech names. You've got Apple reporting after the bell,
Microsoft and Meta reported after the bell yesterday. IBM's rallying.
It's not performing the other companies that we talk about
(01:23):
so much. What was so interesting about this quarter for
IBM is this a real turnaround moment for the company?
Speaker 6 (01:30):
Hey, thanks for having me. IBM has actually been doing
pretty well over the past year or so. For a while,
it was kind of viewed as an underappreciated value name
within tech. They do have a lot of AI related businesses,
a lot of AI related patents, and while it was
sort of underappreciated when it comes to you the whole
artificial intelligence space overall, people have been kind of like
warming to the stock. It's really come up quite nicely
(01:52):
over the past twelve months or so, and we did
see in this most recent report very strong cash flow,
very strong cash flow forecast, a lot of positive AI booking.
So the trends there seem pretty strong, and I don't
think people really caught onto it in the same way
that you might. You know, name some of the other
bigger names within the AI space.
Speaker 3 (02:08):
So Ryan though, if you look at the analyst community,
there's been a bunch that actually been raising their price targets,
even if it's just a little bit, but raising their
price targets and IBM today, So maybe a little bit
of a rethink here.
Speaker 7 (02:19):
Yeah, I think so.
Speaker 6 (02:20):
I mean, I think the consensus is slowly growing more positive.
People seem pretty positive with the direction of the company
software business. Like I said, the cash flow, you know,
it kind of remains to be seen how big they
are going to be in the AI landscape. But they've
been in this area for a while. If you remember
IBM's Watson program that I think at won Jeopardy or
something a while. Yeah, so they've been around there for
a while, but it's only kind of recently that people
(02:41):
are sort of contenting them in a more pronounced way.
Speaker 5 (02:43):
Is it about the clients that they're getting. Is it
about spin offs that they've done over the last couple
of years that have changed the business. What specifically is
it about IBM that has people optimistic?
Speaker 6 (02:53):
Yeah, they have gotten rid of a couple of businesses.
They've also done a couple of acquisitions that have been
greeted kind of warmly, know totally red hat so and yeah,
a lot going on there, but that's the name that
it seems like they're finally, after a period of pretty
low growth, starting to pick up a little bit and
that's being reflected in the share price.
Speaker 3 (03:10):
Hey, just quickly, we want to since we've got you,
let's not forget that.
Speaker 4 (03:13):
All right.
Speaker 3 (03:14):
It's been about, you know, a bunch of the Max
seven companies this week for them, we get another one
after the close today. Apple just yesterday it was downgraded
to perform from outperform at Oppenheimer. The latest sign of
kind of some caution ahead of earnings this evening. And
it's not the first downgrade that we've seen as of
late when it comes to Apple.
Speaker 6 (03:33):
Yeah, I think the count was about five or so
so far this month. A lot of concerns about the
iPhone business. How quickly is that growing? What is the
state of play in China right now? There's been a
lot of competition there, a lot of concerns there. You know,
sales there haven't been all that robust. People really were
banking on the iPhone sixteen, the one that has the
AI features. People really hoping that that would lead to
(03:54):
a big upgrade cycle. So far, we haven't really seen that.
Are they going to give you an outlook that kind
of points to adoption is going to pick up a
little bit more. What's the outlook for the seventeen? That's
gonna be the real focus, you know tonight?
Speaker 4 (04:05):
All right, Gonna leave it on that note, Hey, Ryan,
thank you so much.
Speaker 3 (04:08):
Ryan Lestelica News Equities reporter with the second biggest gainer
in the S and P five hundred today IBM up
about twelve percent him.
Speaker 5 (04:16):
All right, how about the biggest decliner? Can we go there?
Speaker 4 (04:18):
Yes, let's do it.
Speaker 5 (04:19):
Okay, that one is none other than Eups down close
to fifteen percent as we speak, shares plunging the most
ever down to its lowest level going back more than
four and a half years. The company did project annual
revenue well below expectations. It told investors that a long
awaited rebound and demand for its parcel services will not
arrive this year, and it also prompted it to slash
(04:39):
its low margin business with Amazon. So let's break this
one down with Bloomberg Intelligence Senior Transport, Logistics and Shipping
analyst Lee Glascow, who joins us from BI headquarters in Princeton,
New Jersey. Explain the Amazon move here because it's certainly
the biggest customer, but it's not the most profitable. Why
make a move such as this.
Speaker 8 (04:58):
Yeah, so Amazon accounts or roughly twelve percent of UPS's
consolidated revenue. It accounts for, call it twenty twenty five
percent of their domestic volumes. And the volume that they're
doing for Amazon is lower margin business A because you know,
delivering to somebody's home has higher costs and therefore usually
(05:18):
has hot lower margins, so that B two C business
tends to be much lower business. Then you have the
fact that you know, Amazon has a lot of purchasing
power because it is so big, so they were able
to negotiate even lower rates. And you know, at the time,
probably you know, a UPS and a FedEx they were
happy to take on Amazon. But as Amazon grew, you know,
(05:40):
it became kind of deluded to margins, and FedEx you know,
said bye bye to Amazon back in twenty nineteen. So
you know, we kind of knew this was going to
happen eventually. I think maybe the pace was surprising and
the timing was surprising, and I also think that you know,
one of the reasons that the market is down so
much is that you know this year is not going
(06:02):
to be as great as what you know a lot
of folks for expecting, and not just in their domestic business,
but they're international and the supply chain businesses as well.
Speaker 3 (06:11):
All Right, So, as we mentioned, lee that UPS is
the biggest decliner in the S and P five hundred,
Carol Tomey, the CEO, saying, Amazon is our largest customer,
but it's not the most profitable customer. You just walked
us through those metrics. But even so, even if it's
not the most profitable, is it a big loss? I
mean so much so that investors are right in sending
the stock.
Speaker 4 (06:31):
I don't know.
Speaker 3 (06:32):
It's biggest one day drop since two thousand and eight,
down about fifteen percent.
Speaker 4 (06:35):
It looks like at its lows.
Speaker 8 (06:37):
Let's just think if you know, if you lost fifty pounds, right,
you'd go out and you'd probably buy yourself a new wardrobe. Well,
while UPS isn't buying a new wardrobe. What they are
doing is they're restructuring their network so they can now
get rid of facilities they can you know, maybe not
have as many planes and operations, maybe they have not
as few trucks or people. So their cost base is
(06:58):
going to go down considerable and the fact that they're
investing in a lot of productivity initiatives that are driven
by technology, they're going to be able to do a
lot more with less. And you know, they're going to
fill some of the capacity that they do have with
much higher yielding business, whether that's for small, medium size
shippers or other types of shippers. You know, even their
(07:22):
their shut post business, their ship post is their kind
of economy ground delivery that the postal service used to
deliver the majority of those packages to people's houses. And
what UPS has been able to do through technology and
AI and machine learning and all that good stuff is
insert that freight back into their network and build density
(07:44):
within their trucks and so lower the average costs of
delivering that. And they decided to take all that in
and they're able to do that through technology, and they
also announced that about a nine point nine percent rate
increase on that business. So you know, I think that
you know, if you're looking past twenty twenty five, I
think in twenty twenty six, UPS is going to be
(08:05):
pretty pretty well positioned for growth and better margins, especially
as it focuses on kind of higher yielding businesses or
higher margin businesses like it has with the growth of
its healthcare business.
Speaker 5 (08:17):
At least certainly, the focus of our conversation is UPS
but doesn't exist in a vacuum here. Amazon is a
big part of this conversation, and I'm wondering where this
leaves Amazon, given that the company has invested so much
over the last decade plus into building out its own
delivery infrastructure network, including planes and including last mile as well.
Where does it leave a company like Amazon. Does it
(08:39):
eventually go entirely all under Amazon's umbrella.
Speaker 8 (08:45):
I think to go entirely under Amazon or umbrella is
possible over time. But you know, when I'm talking about time,
I'm not talking about twenty five, twenty six, I'm talking
about over the long term. You know, what they've been
able to build through their independent contractors is a good
way to take the stuff that people buy and deliver
it to people's homes. What they really haven't been able
to do is pick things up along the way in
(09:08):
mass so like their network is kind of like a
one way network where a FedEx or a UPS are
two way where you know, they do deliver stuff and
they do pick up stuff at the same time, and
so you know, until that that happens, you know, they
are still going to rely on the UPS for returns.
So you know, UPS as a lot of listeners know
(09:28):
they have stores all over the place. You can go
to the store and drop off an Amazon return and
it's pretty easy. So you know, there's that there's that
ability that UPS will probably you know, always have Amazon
as a customer, but but it's just going to be
a much smaller and it might be you know, eventually
the majority of the business might just be returns, but
(09:50):
you know, again that's going to be over time.
Speaker 3 (09:52):
Hey, Lee, FedEx is also down about two point two
percent in today's session. I know we always say they're
not the exact same companies, but but is there some bigger,
broader thing here too about just the business overall or
the you know moving around of goods and stuff that
maybe it's just not as strong.
Speaker 9 (10:09):
Yeah.
Speaker 8 (10:10):
So, you know, a lot of the impact of the
Amazon business was in UPS's domestic business, and you know,
when they gave their twenty twenty five guidance, their international
business was not nearly as strong, and you know, so
I think the read through for that is maybe demand
is not going to be as great in twenty twenty
five as it was originally thought. I mean, I think
(10:32):
people were expecting low single digit growth in volumes. You know,
maybe that's just more at the low end of that
low single digit growth kind of expectations. So, you know,
I suspect that you'll see analysts be taking down their
numbers not only on ups but maybe on FedEx as well,
you know, just tweaking things here or there. But I
(10:53):
don't think it's like a it's a huge call that, oh,
the consumer is dead, it's time to panic. It's not
time to panic. The consumer in the US has been
extremely resilient and that has been good for these parcel
providers and.
Speaker 3 (11:06):
One of those consumers know it well. Lee, Thank you
so much, really appreciate it.
Speaker 4 (11:10):
Prober Maa sure you welt.
Speaker 3 (11:11):
Bloomberg Intelligence Senior Transport, Logistics and Shipping Alice Lee Clascow.
Speaker 2 (11:16):
You were listening to the Bloomberg Business Week podcast. Catch
us live weekday afternoons from two to five pm Eastern
Listen on Applecarplay and Android Auto with the Bloomberg Business app.
Or watch us live on YouTube.
Speaker 3 (11:30):
Another great need on the economy, and really the consumer
comes from the restaurant space. It was just in December
that Bloomberg reported on how casual restaurant bankruptcies had accelerated
last year, with restaurants filing for bankruptcy at the fastest
pay since twenty twenty as customers retreated. The view for
this year was that advertising value promotions would ultimately helped
(11:50):
restaurants sales. So let's see what is going on in
the environment with us. As the chairman CEO of the
family run fast casual restaurant chain Golden Crust. Jackie Hawthorne
Robinson is with us. She recently took over as cp CEO,
and she joins us here in studio.
Speaker 4 (12:07):
Welcome, Welcome, nice to have you here. How are you?
Speaker 7 (12:09):
Oh, thank you so very much. And I must say
it's great to be here. Ah. Yeah, So I'm doing great.
How about you?
Speaker 4 (12:15):
We're doing okay, trying.
Speaker 3 (12:16):
There's a lot coming at everybody, and I think there's
a lot coming at investors, there's a lot coming at consumers.
Speaker 4 (12:21):
You guys are some thirty years into this.
Speaker 3 (12:24):
If we're got five years thirty five correct, So you know,
how would you describe today's business environment, because what's going
on in restaurants can tell us a lot about the economy,
small business and the consumer.
Speaker 7 (12:34):
Well, basically, for us, from a Golden Cross perspective, we
are doing great in our business. We are functional, we
are operational, we are making profit, and we we are
rolling the dice, so to speak. But I see it,
I see the concept. I see what's happening to other
restaurant business how they are failing. But for us, as
Golden Cross, we are progressing. For sure.
Speaker 5 (12:55):
We saw the last couple of years punctuated by the
highest inflation that we've seen in a generation. That's correct,
Is that gone for you?
Speaker 7 (13:04):
I would say no, it's not going for us. But
what we are doing, we are trying to keep the
market alive. We're trying to bring quality still and even
though inflation is up, we haven't raised prices for a
few years, so we are trying to hold so we
can maintain and stay in business.
Speaker 5 (13:21):
Well, where specifically are you still seeing prices increase.
Speaker 7 (13:24):
I'm seeing prices price increases in big box stores. I'm
seeing price increases in the walmarts and in all those
other locations we are seeing price increases in the products
that we're purchasing coolds overall. Yes, for sure, definitely.
Speaker 3 (13:37):
So if you're not passing along to consumers, that puts
pressure on you guys. Right in terms of the margin
side of this is where we know it can be
already kind of slim and tough in restaurants.
Speaker 7 (13:46):
Yes, I agree with that.
Speaker 4 (13:47):
How difficult?
Speaker 3 (13:48):
And then how do you manage like is there some
can you cut costs elsewhere?
Speaker 7 (13:53):
Cutting costs elsewhere is also very difficult because as we
know just about cost is being increased from every perspective
right now. If it's rental is being increased. If it's good,
so the cost of goods a high, So it's there.
We are trying to shoulder it where inflation is concerned,
just to keep our customers happy and to create the
(14:13):
best product.
Speaker 5 (14:14):
One thing I've noticed at fast casual restaurants is in
recent years is embracing technology and the way that companies
have come out with apps to allow people to order
ahead of time. In some cases, you go to a
restaurant and you're not ordering from a person, you're ordering
using a key exactly. All of that. The idea there
is to help with costs and that's a decrease the
(14:34):
amount of money somebody has to pay for employees, or
decrease the number of employees. How are you guys embracing tech?
Speaker 7 (14:40):
Well, we're embracing tech. Were getting there not quick enough,
but we are definitely entertaining tech and we're moving towards it.
We have apps, we're operating in apps, we're serving from apps.
We've got Uber Eats, and we've got all those different
apps that we are utilizing right now.
Speaker 3 (14:57):
You know, we're talking about, you know, the business side
of of what you guys do, and we are talking
a lot, Jackie, about what might come down from Washington.
We're already, you know, getting glimpses. We're seeing activities already
around immigration. Is that impacting you in terms of a
workforce or.
Speaker 7 (15:15):
It hasn't impacted us yet, so I know going forward
it might be. But right now we are okay and
we are still operational, yes for sure.
Speaker 5 (15:24):
You know, during the pandemic, we saw a lot of
consumers embrace those third party delivery services. One challenge was
for restaurants to have their products actually survive delivery and
taste is good when somebody gets it at their home
or apartment right versus when they get it in a restaurant.
Did you guys have to make changes during that time
how the product was delivered?
Speaker 7 (15:45):
I think for us, I would say absolutely not. Our
products are delivered on time. It's still hot, it's still
holding up in those boxes that we use, So we
do not at present have a problem with.
Speaker 5 (15:56):
Did you see have you seen delivery as a portion
of your overall business fall off significantly since the heights
of the pandemic or of consumers now long of them,
we have increased sales just as far as delivery does.
I'm talking about in restaurant versus delivery. You're you're still
seeing growth in delivery.
Speaker 7 (16:12):
Yeah, we're still seeing growth in delivery, and we're still
see growth in the restaurant. Were Tire's duality and it's
for us, and both of them were still functional.
Speaker 3 (16:20):
I just want to mention some headlines crossing the Bloomberg terminal.
This house to do with open AI, of course, really
at the center of the push that we've seen in
artificial intelligence over the last couple of years, coming from
the Wall Street Journal, Open AIS and talks for investment
around valuing it up to three hundred and forty billion dollars,
and it is in talks to raise up to forty
billion dollars in a new round of financing, and that
(16:41):
would include up to twenty five billion from SoftBank. But
again open AI and talks to raise up to forty
billion dollars that would ultimately give it a three hundred
and forty billion dollar valuation.
Speaker 4 (16:51):
This again tim coming from the Wall Street Journal.
Speaker 5 (16:53):
So I guess not really a lot of concern over
what happened on Monday.
Speaker 4 (16:58):
Or maybe I don't know. It's interesting the timing.
Speaker 3 (17:01):
I feel like this week has been chock full of
news around on artifles intelligence.
Speaker 5 (17:05):
Just to remind the journal reminding us that one hundred
and fifty seven billion dollars is the valuation that open
AI recently had that was only a couple months ago,
back in October. So a three hundred and forty billion
dollar valuation, if this does indeed come true, would be
quite an increase in a short time.
Speaker 4 (17:21):
Yeah, big bump up. Anyway, We're continue to track that.
Speaker 3 (17:24):
I want to get back to Jackie Hawthorn Robinson, CEO
at Golden Crust, you know, for those who are not
familiar and Jackie.
Speaker 4 (17:30):
I'll be quite honest with you.
Speaker 3 (17:31):
When we were reading in and getting ready to do
this interview, I'm like, I don't know that I know
these restaurants. So tell us, because you're around the United
States a lot of them in the textos.
Speaker 7 (17:40):
Are you how to food at all?
Speaker 4 (17:42):
You have not?
Speaker 7 (17:42):
So tell us.
Speaker 4 (17:43):
Tell us about what you guys do. What's to you.
Speaker 7 (17:46):
Golden crusts basically to bring the taste of the Caribbean
to worldwide, to everybody, whichever country, Urian, whatever state, Urian.
So Golden Cross does exist for that. We carry a
niche kind of recipe for all the food items that
we offer with a Caribbean flavor, authentic Caribbean flavor. We
(18:06):
stry for that and that's what we produce every day.
So we're bringing most of our items. Core items do
come out of Jamaica, right, so we import those items
like the Scotch bonded pepper. I'm not sure if you've
ever had that spicy.
Speaker 4 (18:21):
I do like a little bit of spicy. Yes, my
family likes spicy, yep.
Speaker 7 (18:24):
And not only is it spicy, it's flavorful.
Speaker 3 (18:26):
Jackie, Where are you guys, mostly in terms of where
your stores are right now?
Speaker 4 (18:30):
Your restaurants in the know.
Speaker 7 (18:31):
We are located over the metropolitan area. Yeah, that's where
we are right now. And we're also in eight states.
Speaker 5 (18:37):
In eight states, Yes, that is correct, Connecticut, Florida, Georgia, Maryland,
North Carolina, Texas, New York, and New Jersey. Yes, that's
Does that footprint grow, Yes it does where.
Speaker 7 (18:46):
Yes, it grows. I mean we have growth monthly growths
that from coming from all these footprints. We have areas
that are doing better than other areas. But the footprints works.
Speaker 5 (18:58):
Where where will you grow next? Web states? Will you
expand into?
Speaker 7 (19:02):
Well, we're in Texas. We're trying to expand more into Texas.
We currently have three locations there. We're looking to probably
possibly put another two to three locations in the Texas region.
We want to go back and go full blast back
in California. So those are the that's where we are
looking to go to now. California will be the next
(19:23):
state up for us.
Speaker 4 (19:24):
Who is your typical customer?
Speaker 3 (19:25):
And I am curious, Like we talked a little bit
about the business environment earlier, what you have seen in
terms of the spend if that you know, we talked
about inflation and pressures and you haven't been really taught
spending that or passing that along time the customer. But
are you increasingly seeing customers look for kind of like value?
Speaker 7 (19:42):
Hyeah, definitely, they do that every day. Everybody wants a deal.
We understand, yeah, and we do understand that. But our
niche right now is Caribbean people, mostly Jamaicans coming in
and then outside of that, we sure have a broader
customer base, so we serve to every body just about now.
Speaker 5 (20:01):
One thing that I always wonder about when it comes
to restaurants is supply chain and how you keep consistency
across different parts of the country when some restaurants are
thousands of miles from the other restaurant. Correct, how do
you what's your distribution center? How do you make sure
that the experience that somebody has at the location on
Fourteenth Street in Manhattan, for example, is the same as
the location in Texas.
Speaker 7 (20:21):
I think keeping everything the same is how we operate.
We have field officers, we have people that are responsible
for each state. Of course, we do testings all the
time to ensure people are keeping up with what they
need to. We as also a delivery company. We do
deliver all of our items from the main office, whether
it's the beef patties boxed and frozen, and all your
(20:44):
other items like your fresh hard or bread and the
fresh heart of buns and all the other items that
we produce we do deliver daily to these customers and
to these franchises.
Speaker 3 (20:56):
How do you determine you know, you talk about the franchisees,
so in some ways that offload some of the risk
for you guys. That is correct directly, but you want
to make sure those franchises do well because correct, it
impacts the overall brand bottom line brand totally get totally get.
Speaker 7 (21:12):
Yeah.
Speaker 3 (21:13):
So in terms of expansion, how do you determine where
you are going? Is it just where you're seeing is
a basic demand in terms of customers and you know
that you're going to be able to grow that market,
or how do you determine where to go?
Speaker 7 (21:28):
Just as you mentioned, the demand definitely is a factor.
I mean, we have customers that comes into our stores
every day and whichever state they are from, they are
going to come and say, hey, you guys need to
get into Texas, right, I need your product, you need
to get there. So of course we'll take that, we
will listen to it. We will do demographics and we'll
see if it fits us, and then we'll move into
(21:50):
that state.
Speaker 5 (21:50):
If the gives an understanding of a company run stores
versus franchise stores right.
Speaker 7 (21:56):
Now, right, so give you an understanding, Yeah.
Speaker 5 (21:59):
How many do you have that company run versus.
Speaker 7 (22:01):
Now we're down to like two company stores and the
stores are franchises.
Speaker 5 (22:05):
What is the what is the commitment that a franchise
he has to make in order to open one of
these restaurants.
Speaker 7 (22:10):
Well, they have to commit to the brand, They have
to commit to keep the brand alive, they have to
commit to use our products, and they have to commit
to consistency.
Speaker 5 (22:19):
I was looking for a financial commitment.
Speaker 7 (22:21):
Financial commitment or you need a number, I need a number,
You need a number for that. If I were to
throw a number out, there'd probably say, on this platform
right now, probably about four hundred and fifty thousand.
Speaker 5 (22:34):
Okay, So that's the upfront cost, and then.
Speaker 7 (22:36):
That can be construction costs.
Speaker 5 (22:38):
Upfront costs, and then there are the costs that are
associated with the licensing exactly, and that's a different cost
as well.
Speaker 7 (22:45):
Not really not.
Speaker 5 (22:46):
So the percentages that you take is just a just
a licensing.
Speaker 7 (22:49):
Yes, licensing and at that point you do take your
percentage once they open and become operations.
Speaker 5 (22:55):
Okay, yes, you do well.
Speaker 3 (22:57):
And what's interesting is you, guys, yep, you have the restaurants,
you have the franchisees, but you also have a lot
of products right in grocery stores.
Speaker 7 (23:04):
We sure do.
Speaker 4 (23:05):
What's tell us attle bit about the growth of that
business and what you're seeing there?
Speaker 7 (23:09):
Okay, Well, basically for us, we're in a lot of
big box stores. We're in the Costcos, we're in Dollar Trees,
we are in Walmart, and as a matter of fact,
we are pulling out rolling out a new item for Walmart,
which is scheduled to roll out February twenty sixth a
two pack select patty just for Walmart prices only. Yeah,
(23:32):
so that's what we're doing right now.
Speaker 5 (23:34):
What's the connection between a sales increase at a big
box store when a restaurant opens in that local area.
Do you see a lift?
Speaker 7 (23:44):
Yes, we do, We definitely do.
Speaker 5 (23:46):
Like, if you have a restaurant open up in a
new location and you've already been selling the products in
one of the big box stores, how much does it
increase the sales in the big I would.
Speaker 7 (23:54):
Say because of visibility. So that big new restaurant is
now creating more visibility for us. Most of the time,
it does not affect us at all.
Speaker 3 (24:03):
Yeah, all right, we're gonna leave it on that note.
Really interesting to hear. Let us know as things continue.
Speaker 4 (24:07):
To grow and expand.
Speaker 3 (24:08):
So very much, Jackie, Thank you so much, Jackie Hawthorne Robinson.
She's chairman and chief executive officer of Golden Crust. Joining
us here in studio.
Speaker 1 (24:17):
You're listening to the Bloomberg Business Week podcast. Catch us
live weekday afternoons from two to five e's during Listen
on Applecarplay and Android Atto with the Bloomberg Business.
Speaker 4 (24:27):
App, or watch us live on YouTube.
Speaker 5 (24:30):
Well, it's hard to think back to Monday, Carol, given
what a week it's been so far.
Speaker 4 (24:33):
It's been kind of crazy the ride here.
Speaker 5 (24:35):
Okay, it was a day that the stock market reckoned
with a startup called deep Seek, even though lot of
people knew about what it could do. In our one
last week. On that day, though, you'll recall in VIDAFL
seventeen percent in a single day at e rased five
hundred and eighty nine billion dollars in value, a record
drop for a single day. Meir here, they said, was
watching what happened in the stock market that day closely.
(24:57):
He's the Mizuho Financial Group Professor of Finance at our
Business School. He's also a professor at the law school.
He's also contributed to Bloomberg's weekend edition. He did right
in the New York Times this week that Monday's value
destruction illustrates something concerning happening in financial markets and can
best be explained by an ancient myth. They've a serpent
eating itself, Professer. They said, it's good to have you
(25:18):
with us. Why was Nvidia losing nearly a fifth of
its value in a day? Not that surprising to you?
Speaker 9 (25:25):
Well, so I think what the big surprise is is
why and how seven companies constitute one third of our
market capitalization. That's really the big surprise. And so the
question of the day is really how is that going
to reconcile itself? And so what I tried to put
forward in this piece was just the theory that actually
it's pretty unsustainable and that in effect, big tech is
(25:46):
eating its own tail. This serpent image that you might
have seen of a snake eating itself has been around
for millennia, and I think that's kind of what's going on,
which is just a way of saying this AI frenzy
has in some sense been manifested by these Big seven
companies having a very low cost to capital. They've become
the safe asset in the world. So if you are
around the world you want a dollar denominated asset, but
(26:08):
with better management teams than maybe governments, better balance sheets
than maybe governments, you're gonna flock to them. Well what
does that mean. Well, if that happens and they become
the safe asset, then people don't expect much in terms
of return, because that's what happens with safe assets. Well,
how to managers respond to that? And the answer is
you invest a lot. And that's what they've been doing.
And they've been investing a lot in each other, and
they've been spending like crazy. So, for example, in videos,
(26:32):
more than half their revenues is coming from their siblings
in the Big seven. So the Amazon Microsoft are spending
literally two hundred billion dollars a year in infrastructure spend,
and they're doing buybacks hand over fist, So they are
literally eating themselves and literally eating each other. And the
underlying story I think is going to be that these
(26:52):
is going to end up having low returns. So when
you end up giving them the prize of being a
safe asset, you don't expect much from them, and they
invest like crazy and then they deliver slow returns. That's
what we are going to see. It won't happen today
or tomorrow. It'll happen over the next five or ten years,
like it happened at the beginning of the last century
with railroads and steel. I think that is why it
(27:13):
wasn't that big a surprise.
Speaker 4 (27:14):
I want to dig a little bit into this.
Speaker 9 (27:15):
You know.
Speaker 3 (27:15):
One of the things that we love looking at here
at Bloomberg is that the supply chain functions. You pull
up something like Nvidia, and so Microsoft is responsible for
about nineteen percent of their revenue. Meta is about ten
percent according to our latest data, super Micro about eight percent, Alphabet,
Google about six percent, Amazon about five percent, Dell about
(27:35):
three percent. Like, we love to kind of get an
idea of who's who's buying and so the exposure, especially
if we get bad news from them, what it means
for an Nvidia. So you're saying what to concentrated or
what's your point about you know that they're kind of
it's like there's almost closed circle, right of a closed circle,
and they all are kind of like supporting one another.
Speaker 9 (27:55):
Yeah, so I mean effectively, what's happening is they're investing
in spending money on each other and that closed circle.
Speaker 4 (28:01):
Why are they doing that?
Speaker 3 (28:02):
Because some would say that what we've seen over the
last couple of years is that everybody has all of
a sudden realized, oh my god, look at what generative
AI can do, and so we have to build out
our own.
Speaker 9 (28:11):
Systems exactly right. And the promise is that it is
not a closed circle, that one day it'll all be
manifest to us what those revenues and profits are. And
that is a huge bet. We are all levered to
the MAG seven in a way that I don't think
we understand. When one third of the market cap is
MAG seven, we're levered to it, and the global economy
is levered to it. And all of that is going
to be a function of the productivity of all this
(28:33):
capital they're spending on each other. And what I tried
to raise in that article is it's not clear that
that is going to be manifest and in fact, deep seek.
I think people misunderstood the Deep Seak lesson in part.
The story about Deep Seak is it is very hard
to create a competitive advantage in this industry. You know,
people think there's a lot of money to be made. Well,
(28:53):
to make a lot of money, you need to be
able to capture the rents. And what Deep Seak showed
is that it's not clear that these rents are easily captured.
And so if it's easily accessible to everyone, that doesn't
mean it's not going to be transformational, Carol. What it
means is.
Speaker 3 (29:06):
Because some would say that if it's more accessible, more
people can tap into it, and first people who are
supportive of it, like hence the software guys, right, we
all of a sudden said they were often.
Speaker 9 (29:16):
Running yeah, and it could be transformational, but will a
company be able to capture it?
Speaker 8 (29:20):
All?
Speaker 5 (29:20):
Right?
Speaker 9 (29:20):
So the whole premise of their market capitalizations is there's
going to be seven big winners, and we know who
they are. It's those seven companies, And maybe that's not
right even if it is transformational. If it isn't transformational,
then we're all really in trouble because they're literally deploying
capital at really, really low rates of return, maybe negative
rates of return.
Speaker 5 (29:39):
Your question about a mode or differentiation is an interesting one.
It came up yesterday during our conversation with Caroline Hide
of Bloomberg Technology about what the difference is between Gemini
a GPT, Lama, you know, anthropics, Claude, what is the
difference between these? Apart from the way they look that question,
I think still a lot of investors in the private
markets and the public markets are asking themselves.
Speaker 9 (29:59):
Yeah, and one theory is that it's about scale. You
have to get big, and you have to get big fast,
and the answer is maybe deep seek suggests maybe not.
And also we should just remember that having access to
a lot of capital and spending it is not a
competitive advantage. That is not what a competitive advantage is.
Capital is not like the scarce resource in the world,
and especially.
Speaker 3 (30:19):
For some of these big tech companies, right, Like we
talk about their balance sheets and typically you would say
a higher rate environment would bother them. But they have
so much cash that they don't have to really tap
into the capital markets.
Speaker 9 (30:30):
So but I think they're in a race, right, So
they're spending cash handover fist and the answers will weap
But if you don't have a sustainable advantage, then what
is this race about? And I don't think there is
a real mode there, and then you really have to
question the whole story.
Speaker 5 (30:44):
So I think it raises a lot of questions about
where investors should be putting their money in the public market.
You know, we've been talking. We talk a lot about
single stocks in retirement portfolios. A lot of people are
invested in indexes. If you're not playing the stock market.
All the experts say, hey, just invest in the S
and P five hundred index funds. What happens though, when
the S and P five hundred exactly is dominated by
these companies, where should people put their money?
Speaker 9 (31:05):
Well, that's exactly right, because the unque circumstance is that,
you know, I talk about the unmagnificent four ninety three
because there's a magnificent seven and there's an unmagnificsten four
ninety three. And the answer is that is still the
best advice. However, I think it's a good time to
rethink certain things. So for example, as you know, we
are living in the twentieth year of the value growth split,
(31:27):
where growth has just outperformed value forever, and I think
it's a good occasion to revisit that. And for those
of you who are listening who want to BEBB still,
I just want to index. I just want to do that. Well,
you want to think about broader indsease, You want to
think about value in disease, and you want to think
about whether that whole mantra that has been good for
the last twenty years is good again, especially as rates
(31:49):
stay relatively speaking high in a way they haven't been
for fifteen twenty years.
Speaker 5 (31:53):
Although one challenge, though, someone might push back and say,
well VTI, which is the Vanguard Total stock Market Index,
is pretty heavily correlated to the S and P five hundred.
That is true, and that's a challenge. If you want
to buy the entire market, you're still just buying that's
biggest company.
Speaker 2 (32:08):
That is true.
Speaker 9 (32:08):
I mean in a way that is a little bit
of the point of the piece, which is we are
all levered to the max seven in a way that
we can't get away. I think the answer is though,
there are narrower, you know, value indices that can help you,
and there are international ways to go. So I am
not a huge believer in stock pickers, So I think
indices are fantastic, But there are other kinds of indices.
(32:29):
There's non US indices, there's yield, there's fixing. There's lots
of things that we, for the last fifteen years have
forgotten about. My previous piece was about magical thinking and
how kind of long periods of low rates have infected
people to think like this goes on forever, and growth
the stuff happens forever, and technology solves everything. And so
look when rates get back up where they are, you
got to think hard in your portfolio about fixed income
(32:50):
in a way and cash in a way that you
haven't thought about it in a long time.
Speaker 3 (32:54):
All right, So, Professor Veisi, so how does this potentially end?
People have made the comparisons to the tech bubble of
nineteen ninety nine two thousand. I don't know that it's
the exact same thing, but you tell me that in
terms of then how does this ultimately work its way out?
Or do these companies possibly ultimately deliver if AI is
(33:15):
as transformative as we think it might be.
Speaker 9 (33:17):
Yeah, So I think the analogy to the dot com
bubble isn't that great in some ways because those a
lot of those companies were not real companies and it
was all a little sketchy. Exactly, these are real companies,
like this is, these are really the best companies in
the world, Okay, And so what's more likely to be
true is something like the nifty to fifty Yeah, going
to the early seventies or the early part of last century,
(33:40):
which is railroads and steel. And what does that tell you?
It's a grind. It's not a pop of a bubble.
It's like five years of like zero of like zero returns, right,
So it's grind.
Speaker 4 (33:51):
So five years of this stuff just kind of going sideways.
Speaker 9 (33:54):
Yeah, perhaps like sideways, right, because it's not is it?
Speaker 4 (33:57):
Because the bill takes so long a lot.
Speaker 9 (34:00):
And then we realize that the returns aren't there, right,
And for us to realize that and understand that, I mean,
these folks are spending hundreds and hundreds of billions of dollars.
We won't really know the productivity of that capital spend
for a long time and that's why it takes longer.
And they're not like fly by night folks, right, take
serious people, and so it's going to take years and
that I don't know if that's good news or bad news, Carol,
(34:21):
but I think that is the right way to understand.
It's it's three to five years of a grind, which
also helps you understand why valuation levels are high right
now and how they come back down, just very slowly
and in a very boring, unexciting way.
Speaker 5 (34:35):
It's interesting because we saw in the president's first week
of his term an announcement where he was flanked by
Larry Ellison of Oracle, Pascio Shei's son of soft Bank,
Sam Alltman of Open Ai, and he was tatting a
one hundred billion dollar up to five hundred billion dollar investment. Yeah,
is that something that concerns you when we're talking about
(34:56):
figures of that size, Well, what.
Speaker 9 (34:58):
Would concern me is if capital you know, this is
all by capital allocation, like everything is in the economy,
and so if capital allocation is going to be guided
by political litmus tests, which is, you got to spend
one hundred billion, and if you're not good for the
hundred billion, you know, we're not sure if you're a
real deal. If it becomes a political litmus test and
it's not being guided by the tenets of capital allocation,
(35:20):
we're all going to suffer on that over the long run.
So that's what concerns me. It's about whether this is
becoming a political litmus test, like are you with us
on AI or not? And then of course, as you know,
CEOs have to respond, which you know, I'm good for
thee hundred billion, Yeah, which now starts to feel like
a poker match as opposed to foughtful capital allocation and
(35:40):
feels a little bit like a political litmus test.
Speaker 3 (35:43):
Well, it's certainly something we've talked about that even with
some of the announcements that came out of the administration. Right,
but of course no government money, but nonetheless commitments by
companies and some say, you know, it's a commitment, doesn't
mean ultimately the spend gets carried out. So it's something
to keep an eye on, right, to see ultimately how
it plays at I think we're in this interesting place
where we've talked a lot too about we're waiting for
(36:04):
the payoff and understanding whether this all makes sense.
Speaker 4 (36:07):
Great stuff, Thank you so much, oh my pleasure, really
appreciate it.
Speaker 3 (36:10):
Professor me here today say he is, of course with
Harvard Business School. He's the Mizuho Financial Group Professor of
Finance at Harvard Business School. And a professor of law
at Harvard as well. Interesting column here in the New
York Times. Thank you so much, really appreciate it.
Speaker 4 (36:25):
Rob Mac, I'll bet you let me drive.
Speaker 9 (36:28):
Oh no, no, no, no, this is not a toy jug.
Speaker 7 (36:32):
Honey, please, I'll do the riding gravels.
Speaker 9 (36:35):
Excuse mate, I want to try it.
Speaker 7 (36:39):
It's a good question time.
Speaker 5 (36:44):
This is the drive to the clothes dot plum for me.
Speaker 2 (36:47):
Thing well don on Bloomberg Radio.
Speaker 3 (36:50):
All right, everybody, just about eighteen minutes left to go
in the trading session. Carol Master along with Tim Stanovic
live here in our Bloomberg Interactive Broker's studio. And as
Tim and both mentioned, we did see stocks roll over here.
We've now got the Dow in negative territory. But you
are definitely off the best levels of the session, but
a leg down. And we did have some comments from
(37:11):
President Trump from the Oval Office talking to reporters, and
the President saying that there are plans to announce Canada
Mexico TIFFs because of fentanyl shipments we would assume coming
into the United States, and particularly and specifically I should
say that the President saying twenty five percent tariffs when
it comes to Canada and Mexico. So we're going to
look for some more clarifications on that, more detail, if
(37:33):
you will. But investors noticing and sending stocks in a
straight leg down over the last few minutes, not.
Speaker 5 (37:38):
Just stocks, keeping on currencies as well. The Mexican peso
has sunk to a session low on those comments from
Trump about tariffs. Let's see what Sam Stoveall has to
say about this. He's chief investment strategist at CFRA Research.
He's back with us from Allentown, Pennsylvania. Sam, was an
interesting trade today even before just a few minutes ago,
and we got those comments from reporters saying that Trump
(37:59):
would impost twenty five percent tariffs on Canada and Mexico.
Do defense and all. How are you looking at tariffs
over at CFRA.
Speaker 10 (38:07):
Hey, Tim, Well, certainly we are paying attention to whatever
the President says one day to the next. We still think, however,
that a majority of this tariff talk is more to
do with negotiating and trying to get to squeeze out
whether it's from Columbia, Venezuela as well as Mexico and Canada,
(38:28):
to try to get whatever it can to improve the
trade situation.
Speaker 3 (38:33):
The sensitivity though sam of the markets to headline on
possible tariffs, the sensitivity even on Monday to the news
out of deep Seak in terms of AI, many were
saying that, you know what, investors are just looking for
a reason to sell after two years of just moving higher.
Do you agree that there's a sensitivity in the market
or do you think the fundamentals are there that investors
(38:55):
don't need to be so nervous about the outlook, especially
when it comes to further gains.
Speaker 10 (39:00):
Well, I think certainly that we could easily go through
a pullback or even a mild correction, because those things
do happen every so often. But I still call myself
a bull. I think that we are likely to see
prices higher at the end of the year, but volatility,
I think certainly is going to be on the upswing.
But I would tend to say also that because the
(39:22):
market has been very willing to rotate from the high
growth areas, showing some interest in healthcare, in materials, in
industrials areas that had been under performers in twenty twenty four,
that says a lot to me that investors are not
willing to give up the shift just yet.
Speaker 5 (39:40):
Did you change your view given the stock market action
that we saw on Monday with some big name tech
names sell off as a result of the deep Seek news.
Speaker 10 (39:50):
Well, Tim, we didn't change our view because we're taking
sort of a wait and see attitude like the FED.
We did acknowledge absolutely that it is news that should
probably be taken quite seriously. We still think that these
companies are likely to stress the need for greater compute
as we shift toward ngetic AI and physical AI. But
(40:14):
at the same time, these semiconductor companies could probably end
up experiencing a bit of pressure in the near term,
but our feeling is that it could end up then
experiencing a buy on the dip a little later on. So,
right now, technology is the worst performing sector in the
month of January, and historically the four worst performers in
(40:38):
the month of January tend to underperform the SMP in
the full calendar year.
Speaker 3 (40:45):
Hey, Sam, I do wonder too that within the AI community,
the big megacap tech names that are all spending big.
Speaker 4 (40:51):
Time on AI at this point.
Speaker 3 (40:55):
Don't think at some point kind of have to support
the AI story in the AI narrative, even if they
think that there might be a competitor. I mean they
all were, so I feel like, you know, congratulatory backslapping,
if you will, on Monday over Deep Seek in terms
of their findings, And you do wonder do they kind
of have to all be like AI be supportive of
(41:16):
it because there's so much money at stake, so much
that's already been invested.
Speaker 10 (41:21):
Sure, and also Carol that we're starting to see AI
profits exceed AI expenditures, and so that is something where
companies are expecting it to get a reward in this
year and also in future years, where it's not just
investments in the product that will then bear fruit years
(41:43):
from now. They're actually expecting to see nice returns beginning
this year.
Speaker 5 (41:48):
When do we start to see AI affecting the companies
that are not hyperscalers, When do we start to see
them affecting consumer packaged goods companies, automakers and the like.
Speaker 10 (42:00):
Well, I would tend to say that that is something
that is certainly down the road. I don't have a
specific timeframe for you, but when you think about a
lot of the minor AI that we experience on a
daily basis, whether we're just communicating with others, or whether
we are doing calculations. Certainly that's already being beneficial to
(42:22):
consumers and investors today.
Speaker 3 (42:24):
Sam love talking with you for so many different reasons.
I feel like we've talked so much over the years,
whether it's earnings, whether it's fundamentals. But I appreciate someone
who has seen a lot of cycles, a lot of
strains and stresses in the financial system, and seeing innovation disruption,
things that people thought would be something big that ultimately
do not memestock so much. I'm just thinking about just
(42:48):
got about a minute and a half left here. How
you think about the market environment. Is there a lot
of clarity and transparency about kind of where we go
from here?
Speaker 4 (42:55):
Or are there more questions?
Speaker 10 (42:58):
I think that there are questions. I guess it depends
on what we mean by where we go from here.
Is it in the next couple of months, is it
this calendar year, or is it five or ten years
down the road. I am a bit concerned about valuations
and how people tend to just dismiss them and say, well,
it's because now is different. I mean, the S and
(43:20):
P is trading at a twenty one percent premium to
its forward pe average over the last ten years and
close to a forty percent premium over the last twenty years.
Tech is at thirty five percent premium over the ten
year period and more than sixty sixty five percent over
the twenty year period. So I would tend to say
(43:41):
that we're going to have to see a very large
pickup in earnings because I don't expect PE multiples to expand,
and if the economy is likely to be contracting as
we move into this year and next, it's going to
be a tough hurdle I think to see expanding profits
rather than simply focusing on maintaining profit margins.
Speaker 4 (44:04):
Yeah, super solid point for us to wrap up on.
Speaker 3 (44:06):
Sam, Thank you, as oways Sam Stovell, chief investment strategist
at CFA Research, joining us from Allentown, Pennsylvania.
Speaker 2 (44:14):
This is the Bloomberg Business Week podcast, available on Apple, Spotify,
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