Christopher Zook on Navigating Crude Oil Swings, Private Credit Risks & AI Software

0:00I'd look at the bigger picture and Christopher Zuckas with us, Chairman CIO at CAS Investments. Thank you for being with us. We are getting some headlines. We know there were some talks underway. The president talked about it yesterday and again today, even Iran has a source now establishing that the U.S. and Tehran have had these talks. Maybe they'll even have a whole high-level talks as soon as Thursday. What do you think of that? Well, it's nice to hear confirmation from Iran that they agree the conversations are occurring. This is something that's been fairly predictable at the same time, vastly unpredictable. It's an amazing example of how this president keeps everybody guessing. He certainly did that over the last couple of weeks. So let's get rid of the noise and let's just focus on the big picture and what the forest, if you will, is instead of the trees. Number one, disruption is here to energy supply. We know that's not going to be returned just overnight.

1:00It's going to take time. There's been damage to a number of facilities over there. But at the same time, it will resume in a material way once you have a cessation of hostilities. And that should stabilize oil prices, which would be better for the economy. If we do not see that, we know for sure that it's going to be very disruptive for the economy and oil prices are going to be elevated for very significant periods of time. Saudi Arabia, I believe it was, said that you could see $180 oil. If we did not see cessation of hostilities and the straight of hormones really effectively opened by the end of May, I think personally that all of this is going to come to pass. The way that the president has kind of designed it, which is it's going to go away here in the next couple of weeks. And then, obviously, there'll be a discussion about what post-war looks like, whether it be with the current regime, assuming with the current regime or, obviously, with a new regime in Iran. So when we look through all of that, what it tells us is that risk is still here.

2:01We need to be very focused on where risk is. And we need to be very disciplined about allocating capital right now, just because of the fact that there could be a significant down draft if we get surprised by something that ends up being much worse than what people are expecting. All right. So with that now, we have to wait and see. Obviously, we're watching Brent Crude really closely. Ideally, once the straight of hormones is open and a deal is made, the idea is that oil comes down again. Oil and energy have been dominating the headlines. Do you think energy is a productive play for a portfolio, if yes, how so? So we've been all in on energy for a number of years. We are based in Houston, Texas. We've invested in energy for all of my 35-year career and 25-year history of our firm. We were roaringly bullish on energy long before the hostilities broke out in the Middle East, simply because we have a supply-to-man problem.

3:03Now what we know for sure is that when you have this kind of activity in the Middle East, you're going to have what used to be a pretty significant premium for crude oil against just literally what's possible. It's something to wear for years and years decades, actually. You had a $10 to $20 kind of premium over the supply-to-man economics, simply because of the risk that something could disrupt the flow of oil. Well now we've seen that really what's possible. So while we may go back to $70 oil or $80 oil, we don't see a situation where you'll back to $40 or even $30 or even $50. And if that is true because the supply-to-man economics are such that you just don't have enough supply for all the demand and you have the theoretical disruption premium that's on top of that, it creates an immense opportunity for those that are producing energy. And to be very clear, we're for all energy. All types of energy, we want it to be responsibly sourced, as inexpensive as possible, and

4:04as reliable as it possibly can be. But ultimately for us and our investors, it's about making money. So when we look at the opportunities to do that across everything from traditional oil and gas, to nuclear, to some of the other new advanced technologies that are coming out there, we are very focused on the world of energy. The move in the publicly traded stocks in the last two weeks has been dramatic. And so I do not think that somebody should go out and chase the public names right now, because I think there's a risk that they could come down pretty significantly from where they're trading right now. Of course they could go much higher if hostilities stay in place, but I would not be aggressively investing in oil names, energy companies that are public right now. You can trade them if you want to, but I wouldn't be an investor at these levels. But in the private markets, which is so much of what we do, we literally in the last four weeks have bought multiple assets at two to three and a half times cash flow.

5:06So when you pay those kinds of discounted prices for really attractive assets and you have a good supply demand picture, the opportunity set is as good as I've seen in my 25 years of this firm in 35 year career. And as we talked about credit a moment ago with Kevin Green, we named names like Apollo and KKR, we're watching all of them, you know, Carl Island, back zone, anything sort of involved in the world of private credit and you want to make sure there's enough liquidity and they're sort of curbing the withdrawals that being said, do you think there's a meaningful problem or just it was sort of a one-off that software went down and sort of that's what it is? Is there a problem with private credit or not really? So two things, number one is we actually liquidated our private credit fund that had been very, very successful at the end of 2024, just simply because we couldn't find any really good attractive assets to buy. So we just liquidated the fund, gave everybody their money back, well, we're beginning

6:07to get a lot more interested and here's why. There is a disconnect between what actually is happening at the business level and what is happening in, you know, the publicly traded BDCs or the privately traded BDCs that are having the run on the bank, if you will. The asset quality is going to be affected by economic cycles and make no mistake if we have a recession in this country, which right now we think we're more in the stack flation camp, stagnant economy, rising inflation because of energy prices and other things, that's not good for a lot of assets. There will absolutely be problems in the world of private credit. No question, but the magnitude of which you have a seen this adjustment in the public markets is so dramatic that you really start to have to discount is everybody extrapolating, you know, one sector potentially being, you know, disrupted by AI. The vast majority of sectors are being benefited by AI and not disrupted. Software, it's going to be a challenge.

7:08There's going to be things that are just simply not going to exist, but there's a lot of stickiness to software. There's a lot of businesses that will do just fine and use AI to do things better and more profitably. You know, block is a good example of that. You know, they literally laid out a half of their entire team and they're not expecting to lose any productivity. On the other hand, what you have is regular way businesses that are in the world of private credit, which make up 80% plus of private credit, they're not affected by what's happening in the world of AI except for the benefits that they're getting to their profit margins, their productivity, doing things more effectively and more efficiently. So we think that the opportunity is potentially coming to be able to buy credit at a level we haven't seen since the global financial crisis. If that is true, we're going to definitely be there to take advantage of it. I understand. Let me ask you about this. Barkley's did up the year end target to $76.50. Are you surprised to see year end targets higher than where we are now?

8:12Does that sound doable? Does $7,072.50? I mean, where do you see stocks headed? It's hard because of the fact that 10 stocks make up 46% of the S&P 500. So when you're going to make a projection for the S&P 500, you really just got to be right for the most part on the 10. So, you know, those 10 names are less affected by some of these things that are going on. But if you look at Microsoft being obviously one of those top 10 names, you know, that stock has gotten crushed because of all the concerns about AI and what that might do to its business because clearly they're a software business. At the same time, you have other businesses like Nvidia that are going to benefit from all of this, you know, insatiable demand for chips that we see in the world of AI. So it's tough to be able to say what the index level itself is going to be. But what I can say, 100% definitively, is that the market is very expensive and it's hard to get overly excited about very expensive assets and just blindly believe that they're

9:16all going to continue to go up. When you potentially have a recession coming, you potentially have a slow down economy. If you don't have a recession and you now have a higher level of interest rates that's sticky, it's affecting the consumer and then, of course, you have higher energy prices which affect the consumer. It's hard to see that we don't have a little bit of sideways action at a minimum for the rest of the year. Right. If not a pullback. Yeah, we're out of time, but I know you like space, stock, space, X. Is there a stock that you could recommend in that group or what are you saying when you say you like space, stocks quickly? So we like everything related to space because we learned in World War II that if you did not control the space above your battlefield, you're going to lose. In the world today, you must control the space above the sky above your battlefields. We are very much all in on space. York space systems is a name that just recently went public. We own the name for full disclosure. We love the company. We think it's got tremendous amounts of upside here. That is a good example of what we like in space.

10:19Understood. All right. Thank you so much. I was quickly trying to get that ticker symbol. Thank you. Christopher. Why SS is the ticker symbol for York space? Why SS? All right. Good luck for that. Christopher is your cast investments. Thank you.