WEBVTT - Element Pointe's Dominguez: Market Overvalued (Correct)(Audio) 0:00:01.120 --> 0:00:04.160 You're listening to Taking Stock with Kathleen Hayes and Pim 0:00:04.200 --> 0:00:09.920 Fox on Bloomberg Radio. Quite a week for the markets. 0:00:10.320 --> 0:00:13.400 Stocks unable to hold on the SMP five hundred above 0:00:14.480 --> 0:00:16.959 this week and turning and felt going the other way. 0:00:17.360 --> 0:00:20.600 There's a worry about the growth global economy, the Brexit 0:00:20.680 --> 0:00:24.000 vote coming up on June. Poll that suggests the leave, 0:00:24.360 --> 0:00:28.240 the leave vote, the vote to exit the European Union 0:00:28.400 --> 0:00:30.000 is in the lead. And then you've got the bond 0:00:30.040 --> 0:00:34.240 market rally on fire as these concerns that are hurting 0:00:34.240 --> 0:00:38.080 the stock market make investors all the more eager to 0:00:38.159 --> 0:00:41.879 buy safe US treasury paper. Joining us now is Carlos Dominguez, 0:00:41.960 --> 0:00:46.559 co founder, president and chief investment officer at Element Point Advisors. 0:00:47.159 --> 0:00:51.760 He joins us from Miami UH and he also joins 0:00:51.840 --> 0:00:54.720 his company, element Point from a long long career on 0:00:54.920 --> 0:01:00.200 Wall Street Alpine Capital. JP Morgan, a man who who 0:01:00.200 --> 0:01:02.080 has been there and done that for a long time, 0:01:02.160 --> 0:01:05.480 joining us today on Taking Stock. Carlos, welcome, thanks for 0:01:05.520 --> 0:01:08.160 having me the stock market. What do you think is 0:01:08.160 --> 0:01:10.280 this it for the year? Are we gonna say we 0:01:10.360 --> 0:01:12.880 had this nice runback up from the lows that you know, 0:01:13.000 --> 0:01:15.279 the stock market crater at the beginning of year whereries 0:01:15.319 --> 0:01:17.840 over China. Uh we did, we did. Sit here, We're 0:01:17.880 --> 0:01:21.680 gonna move higher? Are we going to head for another correction? Well, look, 0:01:22.080 --> 0:01:24.160 as you mentioned, I've been around a long time, so 0:01:24.240 --> 0:01:27.080 I respect that in the short term the market could 0:01:27.080 --> 0:01:31.080 really do anything. And prior to today, uh, you know, 0:01:31.160 --> 0:01:34.720 the the rally off of February was quite sharp, the 0:01:35.080 --> 0:01:38.920 breath was was broadening out, and uh, you know, it 0:01:38.959 --> 0:01:42.760 remains a pretty unloved market, so I know that, Uh, 0:01:42.760 --> 0:01:45.759 there's a lot of performance anxiety out there, especially amongst 0:01:45.760 --> 0:01:47.640 hedge funds. So I think in the short term, really 0:01:47.680 --> 0:01:51.640 anything can happen. However, we're not we're not traders here, 0:01:51.840 --> 0:01:55.960 and uh you know, our immediate intermediate term outlook is 0:01:56.080 --> 0:01:58.960 very cautious. We think the market here is probably about 0:01:59.560 --> 0:02:03.560 tend of fifteen percent overvalued, given where we are in 0:02:03.600 --> 0:02:07.920 the economic cycle and uh and where current economic conditions are, 0:02:08.520 --> 0:02:11.080 and specifically, I would say, you know, look at the US, 0:02:11.240 --> 0:02:13.880 the use economy is struggling to even you know, sustain 0:02:13.960 --> 0:02:18.080 anything close to two percent growth. We've got a manufacturing 0:02:18.360 --> 0:02:21.639 sector that is is showing no growth. We're near full employment, 0:02:22.040 --> 0:02:24.840 we're starting to see a little bit of accelerating wage pressure, 0:02:24.880 --> 0:02:29.520 which is uh pressuring corporate margins and uh, and you know, 0:02:29.720 --> 0:02:32.919 productivity has been very meek. Actually in the first quarter, 0:02:33.000 --> 0:02:36.680 productivity was negative. So uh. You know, when when you 0:02:36.720 --> 0:02:41.040 take that altogether, it doesn't paint a picture of of 0:02:41.120 --> 0:02:44.720 being too bullish on stocks in the intermediate term. But 0:02:44.800 --> 0:02:46.480 you know, I think you you made reference to it. 0:02:46.960 --> 0:02:48.760 I think the elephant in the room is really what's 0:02:48.800 --> 0:02:51.120 happening in the in the bond market, especially the global 0:02:51.120 --> 0:02:55.360 bond market, which is which is portending slow global growth 0:02:55.520 --> 0:02:58.959 and and an environment where equities will not do very well. 0:02:59.400 --> 0:03:02.520 So let's let's break this down a bit, because the 0:03:02.560 --> 0:03:05.000 reality is there, and you say, as you say, your 0:03:05.120 --> 0:03:07.160 your medium, you're a longer term investor, You're not going 0:03:07.200 --> 0:03:08.679 to worry about the wiggles, but you do want to 0:03:08.720 --> 0:03:12.240 make money for your clients. So at a time like this, 0:03:12.960 --> 0:03:15.399 you know, where do you put your money? What kind 0:03:15.400 --> 0:03:19.960 of stocks do you buy? What do you avoid? Right? So, 0:03:20.000 --> 0:03:23.280 I mean, look, we're multi acid class class investors, but 0:03:23.400 --> 0:03:27.960 when you look at our specific equity allocation, uh, we 0:03:28.080 --> 0:03:30.400 kind of we kind of break the world down into 0:03:30.440 --> 0:03:34.200 what we would consider core holdings. Which are you know, 0:03:34.320 --> 0:03:37.680 names that have sustainable competitive advantage that generally kind of 0:03:37.720 --> 0:03:40.840 grow in a v over time. They're there the names 0:03:40.840 --> 0:03:45.840 that are widely known such as J and J, General Mills, Pepsi, Fiser, 0:03:46.840 --> 0:03:50.200 Honeywells of the world. So though, you know, we have 0:03:50.360 --> 0:03:53.680 an overweight to those names that we call core allocations. 0:03:54.240 --> 0:03:58.320 And then um, we also break up you know, by style. 0:03:58.400 --> 0:04:02.320 We look at value and contrarian names, and then on 0:04:02.360 --> 0:04:04.840 the other side, on the more aggressive side, we look 0:04:04.880 --> 0:04:07.920 at what we call growth and momentum names. And in 0:04:07.960 --> 0:04:11.520 the market like this, we tilt heavily towards value and 0:04:11.600 --> 0:04:15.520 contrarian names. Uh. We also, I should say, have a 0:04:16.240 --> 0:04:18.640 large overweight to cash. And I know, you know, a 0:04:18.720 --> 0:04:22.359 lot of people won't tell their clients to to you know, 0:04:22.400 --> 0:04:25.320 to hold a large cash allocation. But to us, it's 0:04:25.360 --> 0:04:29.320 it's not only uh the ultimate volatility damperer, but it 0:04:29.320 --> 0:04:32.160 it really serves as UH as an you know, has 0:04:32.200 --> 0:04:35.200 given us the opportunity to take advantage of volatility in 0:04:35.240 --> 0:04:40.280 the market, should we see it. Bonds, they've got all 0:04:40.400 --> 0:04:43.240 kinds and a lot of them have slipped into negative territory. 0:04:43.600 --> 0:04:47.760 What about ten jillion dollars worth of bonds around the 0:04:47.760 --> 0:04:50.320 world with negative yields, and of course you've got sovereign 0:04:50.320 --> 0:04:53.560 you've got the governments, you've got corporates. Uh, in the 0:04:53.680 --> 0:04:56.159 US you have nuties which are very popular. What is 0:04:56.160 --> 0:05:00.240 your position on fixed income? So we we we have 0:05:00.400 --> 0:05:04.279 a i'd say a normal allocation of core fixed income. 0:05:04.600 --> 0:05:08.080 Um muni's have have been a large part of our 0:05:08.080 --> 0:05:10.880 client's portfolio. I think on a relative basis, corporates are 0:05:10.880 --> 0:05:13.560 starting to look to look a little more interesting. UM 0:05:13.600 --> 0:05:15.120 I would say where we're a little bit out of 0:05:15.160 --> 0:05:19.080 consensus is that we're we're a longer duration than you know, 0:05:19.120 --> 0:05:22.000 the average advisor would would recommend. And that's just because 0:05:22.440 --> 0:05:25.719 with US rates tenure at one point six five and 0:05:25.720 --> 0:05:28.840 as you mentioned, ten trillion dollars of sovereign bonds globally 0:05:28.880 --> 0:05:32.320 trading at negative rates, we think there's there's downward pressure 0:05:32.320 --> 0:05:35.479 on rates. So uh, you know, we're not afraid to 0:05:35.560 --> 0:05:38.240 hold to hold bonds here, but obviously you know we 0:05:38.320 --> 0:05:42.000 balance that with a larger than normal allocation to cash. 0:05:42.200 --> 0:05:45.359 So what about some of the alternatives do you play 0:05:45.400 --> 0:05:48.120 in that space? The liquid alts is they're called real 0:05:48.279 --> 0:05:51.960 estate reads. Any of that I don't I'm not a 0:05:51.960 --> 0:05:55.400 big fan of liquid alts uh, and uh, you know, 0:05:55.440 --> 0:05:58.120 I'm not a big fan of hedge funds at this time. 0:05:59.240 --> 0:06:02.640 We do like private equity and UM and we're finding 0:06:02.920 --> 0:06:08.120 in private equity there's also some interesting uncorrelated strategies. There's 0:06:08.160 --> 0:06:10.440 one in particular that we've been looking at recently. It's 0:06:10.440 --> 0:06:12.880 a fund that Apollo is going to come out with 0:06:13.000 --> 0:06:16.000 later this year. Uh. This is their third fund. It's 0:06:16.000 --> 0:06:19.200 a life settlements fund, so really just has no correlation 0:06:19.320 --> 0:06:22.080 to the equity market. And that's fund in the prior 0:06:22.160 --> 0:06:26.520 to funds has averaged low double digit net returns to 0:06:26.560 --> 0:06:28.960 the investor. So that that's the kind of stuff that 0:06:29.320 --> 0:06:33.520 seems really interesting to us in this environment. Uh, Commodities anything, 0:06:33.520 --> 0:06:40.120 there very very small allocation to gold. Okay, what about 0:06:40.600 --> 0:06:45.920 overseas markets, what about overseas developed markets? What about emerging markets? 0:06:45.960 --> 0:06:49.280 So uh, we have a very very small allocation of 0:06:49.320 --> 0:06:52.960 emerging markets. Actually, the one I like the most which 0:06:53.040 --> 0:06:56.760 we invest through any t F is Russia. Uh, probably 0:06:56.760 --> 0:06:59.479 because it's the cheapest and most one of the most 0:06:59.560 --> 0:07:03.920 unloved than cheapest emerging markets out there. And really, given 0:07:04.040 --> 0:07:08.200 how crude has bounced back pretty sharply rather than you know, 0:07:08.480 --> 0:07:12.920 chase any US sort of exposure to energy, we'd rather 0:07:13.200 --> 0:07:16.480 we'd rather do that through Russia. So that's where that's 0:07:16.480 --> 0:07:20.240 on the emerging mark side. On the international developed side, uh, 0:07:20.360 --> 0:07:22.920 we do have some you know, some Europe and Japan. 0:07:23.120 --> 0:07:25.960 I prefer to look for managers that focus more on 0:07:26.000 --> 0:07:29.080 the small and mid cap growth when it comes to 0:07:29.120 --> 0:07:31.920 Europe and Japan because I find that, you know, our 0:07:32.000 --> 0:07:34.560 our U S holdings, which tend to be you know, 0:07:34.760 --> 0:07:37.520 very large tap they have, they have a lot of 0:07:37.560 --> 0:07:40.360 exposure to to those economies anyway, So I don't want 0:07:40.360 --> 0:07:42.960 to I don't want that redundant exposure in our portfolios. 0:07:43.360 --> 0:07:45.040 And we do a look through of the names we 0:07:45.160 --> 0:07:49.160 hold and about six of our revenues come from the 0:07:49.240 --> 0:07:52.119 US and thirty five from abroad. Just a quick comment 0:07:52.160 --> 0:07:54.520 on Apple. It's on my mind because the Developers conference 0:07:54.560 --> 0:07:57.280 next week and I talk about individual companies, But what 0:07:57.440 --> 0:08:00.680 is your sense of Apple and that kind of stock 0:08:00.760 --> 0:08:02.960 that was in such great favor for a while and 0:08:03.040 --> 0:08:06.960 now it seems to be flanguished a bit. Well, this 0:08:07.040 --> 0:08:09.080 is the kind of environment where I actually want to 0:08:09.080 --> 0:08:12.560 own a name like Apple. It's generally unloved the you 0:08:12.600 --> 0:08:17.400 know the slow the slow growth environment where where you know, 0:08:17.440 --> 0:08:21.520 the smartphone heavy growth phases over. But it's well known, Uh, 0:08:21.600 --> 0:08:24.320 they've got a lot of cash, they're they're returning their 0:08:24.320 --> 0:08:27.640 cash to shareholders and and the company has shown a 0:08:27.760 --> 0:08:30.320 history of innovation, so you know, to write them off 0:08:30.360 --> 0:08:33.800 at this stage is I think full of gold. Carl's Dominguez, 0:08:33.840 --> 0:08:36.280 thank you so very much. He's co founder, president, chief 0:08:36.280 --> 0:08:42.160 investment officer at Element Point Advisors in Miami. I'm Kathleen Hayes, 0:08:42.360 --> 0:08:45.240 my co host Pim Fox is on assignment this afternoon. 0:08:45.280 --> 0:08:48.760 Movers and Shakers, the market Clothes coming up on Bloomberg Radio.