Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2: Hello and welcome to another episode of the Odd Lots Podcast.
Speaker 2: I'm Tracy Alloway.
Speaker 3: And I'm Joe.
Speaker 4: Why isnt thal Joe?
Speaker 2: Every once in a while, I think it's a good
Speaker 2: idea to pause and consider everything that's happened in the
Speaker 2: market and how it actually matched up to initial expectations,
Speaker 2: because I think, you know, we're recording this on let's
Speaker 2: see June eighteenth, s and P five hundred is at
Speaker 2: another record. Meanwhile, ten year treasury yields are at what
Speaker 2: like four point three percent now, and I think certainly
Speaker 2: two years ago, maybe even a year ago, I don't
Speaker 2: think anyone would have thought that stocks would rally this
Speaker 2: much in a rising rate environm.
Speaker 4: No, I mean, I think this has been you know,
Speaker 4: the beginning the middle of twenty twenty. I'm starting to
Speaker 4: lose track of the years. Parts of twenty twenty two,
Speaker 4: obviously the stock market was total dead money, and going
Speaker 4: into twenty twenty three, I think there was a lot
Speaker 4: of pessimism recession, and that would have been like, well, yes,
Speaker 4: this is what we expect when we get a rising
Speaker 4: rate environment. Stocks go down, the economy slows maybe a
Speaker 4: recession happens and then the market turned around, the economy
Speaker 4: continued to boom. But it's not like they cut rates
Speaker 4: or anything. And in fact, the main story has been
Speaker 4: that rate cuts keep getting pushed further into the future
Speaker 4: rate cut expectations.
Speaker 3: Yeah.
Speaker 2: Absolutely, But despite the record in the s and P
Speaker 2: five hundred and all these you know, we keep talking
Speaker 2: on the podcast about all the lines going up into
Speaker 2: the right, and there are a lot of them at
Speaker 2: the moment, there's some nervousness in the market right now.
Speaker 2: I think that's fair to say. So you see a
Speaker 2: lot of people, for instance, talking about the lack of
Speaker 2: breadth in stocks.
Speaker 3: Yeah.
Speaker 4: Look, if you're in sa P five hundred index fund holder,
Speaker 4: then there's a lot of conversations you just turn out
Speaker 4: someone's like, oh, there's lack of breadth. It's like, yeah, whatever, man,
Speaker 4: my ETF is up fifteen percent through the year.
Speaker 3: I'm happy with that.
Speaker 4: You know, like that's pretty great no matter what. But
Speaker 4: if you're an active manager, you want to beat the index.
Speaker 4: If you're worried about like durability, you might notice the
Speaker 4: fact that, like you know, if you strip out a
Speaker 4: few really big tech stocks like Nvidia and a few
Speaker 4: others returns are much worse, and so that raises all
Speaker 4: kinds of anxiety. Is this entire thing just sort of
Speaker 4: hanging on analysts demand for chips to run AI models?
Speaker 5: Absolutely?
Speaker 2: So today I am pleased to say we do indeed
Speaker 2: have the perfect guest. You know, I said in the
Speaker 2: intro that almost no one would have expected stocks to
Speaker 2: be where they are. This person did expect stocks to
Speaker 2: be where they are currently. This person is one of
Speaker 2: the few that I can think of that has basically
Speaker 2: called a lot of the market right over the past
Speaker 2: year or two.
Speaker 3: Probably someone we should talk to.
Speaker 2: Yes, absolutely so we are going to be speaking with
Speaker 2: Tom Lee. He is, of course, the co founder and
Speaker 2: head of research at Funstrat Global Advisors and FS Insight. Tom,
Speaker 2: welcome to the show.
Speaker 5: Thank you very much.
Speaker 1: So.
Speaker 2: I know you're sometimes described as an uber bowl. Is
Speaker 2: that a fair a fair characterization of how you feel
Speaker 2: about markets?
Speaker 5: I think that label is not reflective of how I
Speaker 5: feel about markets. I think that label is generally used
Speaker 5: by perma bears who've been perma wrong, and it's a
Speaker 5: cheap shot.
Speaker 4: Taken, Okay, but I get that it sounds like a
Speaker 4: cheap shot. But on the other hand, uber bowls or
Speaker 4: permables historically have like one hundred years of lines going
Speaker 4: open to the right on their side.
Speaker 3: So my view when I hear someone being.
Speaker 4: Described as a permeable is, oh, this is someone who,
Speaker 4: except for like five minutes here and there in twenty twenty,
Speaker 4: in two thousand and nine, is permacorrect.
Speaker 3: Yeah, i'd say so.
Speaker 5: I think people don't live in those longer time frames,
Speaker 5: you know. In the day to day. People live as
Speaker 5: if this is a street battle, and the label uber
Speaker 5: BWL is like someone well, you know what, he might
Speaker 5: lead us out, but I don't trust him because we're
Speaker 5: in a street fight. And so it's generally I find
Speaker 5: people saying it more as a cheap show.
Speaker 4: No, the people who say it are all really obnoxious.
Speaker 4: That I agree.
Speaker 2: I didn't mean to be obnoxious. Wait did you just
Speaker 2: call me obnoxious?
Speaker 4: No, you described when you said it, you were characterizing
Speaker 4: other people.
Speaker 5: Yes, well, I feel like we should give people the offense.
Speaker 2: Okay, excellent. I feel like we should give people the
Speaker 2: opportunity to describe their own work. But why don't we
Speaker 2: talk about something concrete, which is at the beginning of
Speaker 2: this month, Tom, you at Funstrat put on an S
Speaker 2: and P five hundred target of five thousand, five hundred,
Speaker 2: we're at about five thousand, four hundred seventy five or
Speaker 2: something like that right now. So just in that short
Speaker 2: time frame, you know, called it correctly.
Speaker 5: What did you did?
Speaker 4: You see?
Speaker 5: This is actually a textbook rally. At the start of
Speaker 5: this month, we alerted our clients that since nineteen twenty seven,
Speaker 5: when you look at the start of June, but markets
Speaker 5: were up in the first quarter, but then had a
Speaker 5: draw down in April, which is what we had. Yeah,
Speaker 5: that happened eleven times. Eleven of eleven times, June was
Speaker 5: a positive month. So May is essentially a recovery month,
Speaker 5: and then June is the month where markets go back
Speaker 5: to risk on. The median gain since nineteen twenty seven
Speaker 5: is three point nine percent, which calculated a fifty five hundred.
Speaker 4: There you go, simple math investing made easy, but zooming out.
Speaker 4: You're a fun strat for years prior to that, you're
Speaker 4: a JP Morgan I was a big fan of your
Speaker 4: org then correctly calling for much higher stock prices through
Speaker 4: much of the twenty tens, when you know there were
Speaker 4: still a lot of people calling for double dips in
Speaker 4: the sort of raw of a pretty large, bearish contingent.
Speaker 3: How do you work? What do you do?
Speaker 4: Because there are all different approaches that people have towards,
Speaker 4: you know, making educated guests as to where the stock
Speaker 4: market could go. How would you describe your approach?
Speaker 5: Well, fundamental to our process is evidence based research, so
Speaker 5: you know, at the core we really try to frame
Speaker 5: where history could explain where we are today. Okay, we
Speaker 5: rely on a lot of cross market signal, so to us,
Speaker 5: the bond market is always smarter than the stock market.
Speaker 5: That's why they say equities are the land to sea students.
Speaker 5: And the third is, of course monetary policy is really
Speaker 5: the driver, so you can't fight the FED. And then
Speaker 5: I think the fourth is that thematic approaches surpass cyclical
Speaker 5: What does that mean? Well, part of our work relies
Speaker 5: on what we call like thematic drivers. One is millennials.
Speaker 5: Ok so that since twenty eighteen we've talked about how millennials,
Speaker 5: which is the largest generation, are reshaping the economy, which
Speaker 5: they are mainly through fintech and changes in preference. But
Speaker 5: of course now coming is a big generational wealth transfer
Speaker 5: of you know, as much as eighty trillion dollars. The second,
Speaker 5: of course, is that there is a huge global labor
Speaker 5: shortage which has started in twenty fifteen and won't be
Speaker 5: resolved till twenty thirty five. And the two previous instances
Speaker 5: of global labor shortage resulted in a parabolic movement technology stocks,
Speaker 5: which has been part of our themetic approach, and now
Speaker 5: we see two other things like energy security and cybersecurity
Speaker 5: are huge thematic drivers, especially because of AI, and so
Speaker 5: this grounds our work. We not only use it to
Speaker 5: judge markets, but we use it to build our Granny
Speaker 5: Shots Core Stock portfolio, which is a thematic portfolio fixed
Speaker 5: the strongest stocks within each theme, and that has outperformed
Speaker 5: every year twenty nineteen.
Speaker 2: I'm trying to think how to phrase this question, but
Speaker 2: what do the strong themes mean for the overall market?
Speaker 2: Because I think everyone would agree that stuff like AI
Speaker 2: is interesting and promising, maybe a little overhyped at this point,
Speaker 2: but you could make the argument that there is potential there.
Speaker 2: And yet you know, we've seen the S and P
Speaker 2: five hundred as a whole go up, and there is
Speaker 2: that argument over breadth, like how much of this is
Speaker 2: purely AI? And the stuff that people are getting excited
Speaker 2: about versus general optimism about the market.
Speaker 5: Well, I mean, if I look at the stock market,
Speaker 5: I think it is playing out with all the things
Speaker 5: you just mentioned, because the groups that are affected by
Speaker 5: high and tight monetary policy have really lagged, whether it's
Speaker 5: the regional banks or industrial multiples are being suppressed. And
Speaker 5: we know that the spend and actually now some of
Speaker 5: the synergy coming from AI is driving not only the
Speaker 5: producers of AI like and some of the software companies,
Speaker 5: but in many of the companies that are levering leveraging
Speaker 5: this for revenue growth. So I think it is playing out.
Speaker 5: But overall, I think it's on balance a healthy economy
Speaker 5: because companies are generating good earnings growth, and the labor
Speaker 5: market has come back into balance, and consumers aren't highly levered,
Speaker 5: which is really the big deal because to me, when
Speaker 5: consumers can't borrow more money because they borrow too much,
Speaker 5: that's really when the economy hits the tipping point.
Speaker 4: When it comes to consumer balance sheets. Just on this,
Speaker 4: what do you look at when you say, Okay, the
Speaker 4: consumer is not high levered. I alouls say discussions like oh,
Speaker 4: excess savings gone.
Speaker 2: People look at total credit card debt.
Speaker 3: Yeah, what do you look at?
Speaker 5: Well, I think the gold standard is still the debt
Speaker 5: service ratio, which the Federal Reserve puts a lot of
Speaker 5: time into and employs a lot of economists to build
Speaker 5: a fair view. And the debt service ratio today is
Speaker 5: still under ten percent, which you know, for instance, before
Speaker 5: this decade, you'd be in a sort of peak consumer
Speaker 5: borrowing at a fourteen to sixteen percent level, so consumers
Speaker 5: can if interest rates don't move, they can borrow forty
Speaker 5: percent more money. I think the cash say excess savings
Speaker 5: is a spurious argument because I don't remember it in
Speaker 5: my thirty years people saying consumer cycles turn when their
Speaker 5: excess savings is gone. I mean, that's not really been
Speaker 5: how the business cycle works.
Speaker 2: You mentioned thirty year career just then, and I realized
Speaker 2: I'm kind of unfamiliar with you other than at funstrat.
Speaker 2: Can you maybe give us a recap of what you've
Speaker 2: been doing for three decades?
Speaker 5: Yes, I've essentially had the same job for my entire
Speaker 5: post college career. I started off at Kidder Peabody in
Speaker 5: the early nineties as.
Speaker 3: One of my old bosses.
Speaker 4: Was it Kidder Peabody, David wire No, No, someone else said, okay, sorry,
Speaker 4: keep going.
Speaker 3: Yeah.
Speaker 5: I got into stock research at that time, and I
Speaker 5: was working at the sector I was assigned was wireless.
Speaker 5: So the first fourteen years of my career ARC was
Speaker 5: as a technology analyst covering the wireless industry, which again
Speaker 5: for my clients, many of which I still have from
Speaker 5: those days. No, I'm not an uber buwl because there
Speaker 5: were many times I had cell ratings on stocks. But
Speaker 5: it's not fun to be telling people the shortest stock
Speaker 5: that they own. That's when they're very angry. And then
Speaker 5: in the two thousands, wireless was consolidating and I wanted
Speaker 5: to find some other things to do, so I started
Speaker 5: to do some work on bankruptcy bankrupt stocks because many
Speaker 5: wireless stocks from bankrupt I did a whole piece called
Speaker 5: the Chapter after Chapter eleven where I looked at over
Speaker 5: two thousand publicly listed bankruptcies. I used our Mumbai team
Speaker 5: at the time, we called it Momba team at JP Morgan,
Speaker 5: and we went through all these filings and we found
Speaker 5: that stocks that emerged from bankruptcy do well. So we
Speaker 5: had a whole strategy around buying bankruptcy stocks and then
Speaker 5: JP Morgan asked me at the time if I wanted
Speaker 5: to become the small cap strategist on top of wireless,
Speaker 5: so I had two jobs. I ranked in both categories,
Speaker 5: and then in seven they asked me if I wanted
Speaker 5: to become the chief equity strategists, which I've been doing
Speaker 5: ever since and started fundstret twenty fourteen. So this is
Speaker 5: our tenth year.
Speaker 3: O congraguate.
Speaker 2: Congratulations. Okay, So, given your history with the wireless companies
Speaker 2: and technology overall, I feel like I have to ask
Speaker 2: you about AI and Nvidia and all of that. Is
Speaker 2: there any common thread or any valid comparison between the
Speaker 2: AI boom that's happening right now and say, the Internet
Speaker 2: bubble of the late nineteen nineties and early two thousands.
Speaker 5: There are a lot of parallels. When I started doing wireless,
Speaker 5: there were thirty four million cell phones. Today there's seven billion.
Speaker 5: So it's a hypergrowth industry that grew almost in parallel
Speaker 5: with Internet because without mobile you wouldn't really have the
Speaker 5: Internet that we have today in the early stages of
Speaker 5: that growth. So when you look at penetration, Wall Street
Speaker 5: always underestimates the importance of the technology, and part of
Speaker 5: it has to do with it's a generational lens. Every
Speaker 5: new technology is adopted by a young cohort, people in
Speaker 5: their twenties, teens, or even thirties, but most people on
Speaker 5: Wall Street are in their forties or fifties, so they're
Speaker 5: one generation removed. I remembered when our PC Analystic Kidder said,
Speaker 5: why would you have one computer per household or even
Speaker 5: more than that, because they're twenty five hundred dollars. And
Speaker 5: I know when cell phones first emerge, people thought it
Speaker 5: was a yuppie toy and it was going to be
Speaker 5: only for people make seventy five thousand a year. But
Speaker 5: what I learned as a Wilds analyst was teenagers and
Speaker 5: young kids, especially in Europe, were using cell phones. So
Speaker 5: I used a vintage model saying that if one hundred
Speaker 5: percent of like teenagers have a cell phone by the
Speaker 5: time they're sixty, the penetration rate should be whatever it is,
Speaker 5: that's AI. The adoption rate for AI is staggering, but
Speaker 5: the use case is important because there's a labor shortage.
Speaker 5: So to me, I think it's very likely we're underestimating
Speaker 5: how much revenue all these companies will make. I can
Speaker 5: give you some simple math. Yeah, please, the global labor
Speaker 5: shortage by the end of this just by the end
Speaker 5: of this decade is close to forty million worker equivalents,
Speaker 5: and that's three trillion of wages. Okay, we're turning labor
Speaker 5: cost into silicon a center or into tech automation, of
Speaker 5: which we know today eighty percent is hardware silicon. So
Speaker 5: does that mean whoever supplying the chips might have a
Speaker 5: two trillion revenue probably, and right now the largest share
Speaker 5: of that would go to a company like in Vidia.
Speaker 5: So if in Video is one hundred billion in revenues,
Speaker 5: now you know what does by the end of this decade,
Speaker 5: is it it's eight hundred billion of trillion dollar revenue company?
Speaker 5: And then what should we discount that rate at I'd
Speaker 5: say there's probably a lot of upside.
Speaker 4: So that's sort of the argument from the fundamentals perspective.
Speaker 4: The other thing people like to do is they like
Speaker 4: to draw these dual axis lines where they're like, here's
Speaker 4: the chart of Nvidia starting at some arbitrary date, here's
Speaker 4: the start of Cisco starting at some arbitrary date, and
Speaker 4: then they line up the peak so that the peak
Speaker 4: always happens to be right now. But regardless of the
Speaker 4: fact that that's, you know, largely what naves and scammers do,
Speaker 4: it is true that just from an overall index perspective,
Speaker 4: there is an incredible lot riding on a handful of
Speaker 4: companies right now, whether it's in Vidia specifically, the mag
Speaker 4: seven more broadly, and that you know, in nineteen ninety
Speaker 4: nine there was just an incredible weight on Cisco and
Speaker 4: Sun Microsystems and Microsoft and a couple of others. Do
Speaker 4: you see any parallels in the market environment.
Speaker 5: Yes, there's a lot of parallels, but there are some differences.
Speaker 5: You know, keep mind Cisco sold a one hundred dollars
Speaker 5: box in video selling at fifty thousand dollars chips, so
Speaker 5: the moat around that is much much greater. I also
Speaker 5: think to contextualize this, we need to look at the
Speaker 5: global economy. If we're turning labor cost into silicon, then
Speaker 5: which countries are really the primary suppliers of technology? The US,
Speaker 5: by a country mile is the only supplier. So the
Speaker 5: US is essentially exporting technology now. And that's different because
Speaker 5: Internet was more democratized, people just put up towers and
Speaker 5: laid fiber. You can't, you know, create your own version
Speaker 5: of an Invidia chip you have to buy from video.
Speaker 3: So I think that.
Speaker 5: Tech will probably be, you know, forty fifty percent of
Speaker 5: the global stock market weight where we know that's probably twenty.
Speaker 5: Oh wow, it's probably like eighteen. I mean, you know
Speaker 5: in the US it's only forty.
Speaker 4: And what in the US it's forty. Globally it's eighteen.
Speaker 4: And you say it's going to go to forty to
Speaker 4: fifty percent globally.
Speaker 5: Yes, because you're replacing recurring labor costs with the capital investment.
Speaker 2: Interesting, so you mentioned the net present value of tech
Speaker 2: stocks just then, and I'm curious talk to us about rates,
Speaker 2: the higher interest rate environment and what it means for
Speaker 2: stock valuation, because I think this is where people are
Speaker 2: either a little bit surprised or perhaps a little bit
Speaker 2: nervous the idea that even in the higher rate environment,
Speaker 2: stocks can move upwards.
Speaker 3: Yeah.
Speaker 5: Well, again, I can cite some history and then maybe
Speaker 5: provide some context. Please, Since nineteen thirty five, when you
Speaker 5: look at the relationationship between the tenure yield and ford PE,
Speaker 5: it is not linear. It is a dynamic relationship, and
Speaker 5: between four and seven percent it is positively correlated. So
Speaker 5: when interest rates go up, pe rises. Logically, it sort
Speaker 5: of makes sense because you're seeing it now. When you
Speaker 5: have higher rates, it's barriers to entry. So the existing
Speaker 5: companies make more money, and companies earn money on their cash,
Speaker 5: so the unlevered companies are actually you know, for Apple,
Speaker 5: it's like six seven eight dollars in earnings, right, it's
Speaker 5: some big number. Actually with splits its lower and between
Speaker 5: four and five percent. The median Ford PE has been
Speaker 5: eighteen and a half and forty eight percent of the time.
Speaker 5: It's actually above twenty.
Speaker 4: Anyway, what is it what says inp trading at now?
Speaker 5: Well, then the pe, the Ford PE is probably around eighteen, okay,
Speaker 5: but the median Ford pece sixteen.
Speaker 4: What should we make of the fact that a lot
Speaker 4: of the market is not doing well? So again, you know,
Speaker 4: for those of us who are just like the boring
Speaker 4: put it in an index fund investors, amazing year, But
Speaker 4: there are big chunks of the market that doubts only
Speaker 4: up two percent, I know, or something like that. What
Speaker 4: should we read? Does it say anything that so much
Speaker 4: of the market is doing pretty I guess mediocre this year.
Speaker 5: I think it speaks to a lot of things. One
Speaker 5: is the market is starved for cash, and there's six
Speaker 5: trenty of cash on the sidelines. Finram margindet is like
Speaker 5: twenty percent below where it was in October twenty twenty one,
Speaker 5: So there isn't a lot of money slashing in the
Speaker 5: stock market. I know, it's weird because we're at record highs,
Speaker 5: so that if there is money actively trading, it's just
Speaker 5: buying the high volume sectors, which is tech. From a
Speaker 5: rates perspective, that and I kind of mentioned before, like
Speaker 5: the groups that are hurt by type policy have really
Speaker 5: been sucking wind. So I think if monetary policy eases
Speaker 5: or people aren't more convinced of it than expansion is
Speaker 5: going to be pretty fierce later this year.
Speaker 2: What is your outlook for rates at this point? Because
Speaker 2: you mentioned the strong consumer earlier, but on the other hand,
Speaker 2: we have seen a little bit of weakening in the
Speaker 2: labor market. We have seen CPI start to soften, although
Speaker 2: there's a lot of debate over whether or not that's
Speaker 2: going to be a durable trend.
Speaker 5: But what are you see well, I think inflation, if
Speaker 5: we looked at historically how people looked at inflation, whether
Speaker 5: it's the surveys or ISM's inflation's under control because like
Speaker 5: for instance, the ISM services manufacturing, the price is paid
Speaker 5: component is below the long term average right now. So
Speaker 5: at fifty seven, people think fifty sev means price going up.
Speaker 5: That's not true. It's averaged like fifty eight since inception.
Speaker 5: So actually price trends are below where they have been.
Speaker 5: I think people aren't using history to understand where we
Speaker 5: are now. And if you look at UMISH surveys, both
Speaker 5: one year and five year inflation expectations are below the
Speaker 5: long term average. So consumers and businesses in their perception
Speaker 5: don't think there's inflation. CPI is elevated, but as you
Speaker 5: guys know and talked about, and many economis point out,
Speaker 5: it's really due to two components that are kind of
Speaker 5: lagging right one's shelter and one is auto insurance. And
Speaker 5: you know, the median CPI inflation rate right now is
Speaker 5: one point four percent your year. It's long term average
Speaker 5: is one six Everything except for housing and auto insurance
Speaker 5: is below trend.
Speaker 4: Median is when you just look at what each component
Speaker 4: is doing, and some are higher and some are lower,
Speaker 4: but the median category.
Speaker 5: Yeah, there's one hundred thirty seven components. Another way to
Speaker 5: look at it is what percentage of the basket of
Speaker 5: CPI equal weight is below their long term year year
Speaker 5: growth rate. So take each component and just say where
Speaker 5: is it sit. It's now at fifty five percent fit
Speaker 5: in the long term marriage is fifty. So more than
Speaker 5: five fifty five percent of SLEEPEA components are below their
Speaker 5: long term average, it's considered controlled. When it's fifty percent.
Speaker 4: We're at fifty four to seventy three. Tracy mentioned your
Speaker 4: June target. Do you have a year end target for
Speaker 4: the market or a one year target or anything like
Speaker 4: that one that like, where can we go?
Speaker 5: Well, our current at the on the first week of
Speaker 5: December twenty twenty three, we had said our target for
Speaker 5: twenty twenty four was fifty two hundred, which at the
Speaker 5: time was almost twenty percent upside. Now our fifty two
Speaker 5: hundred is low because we're above that level. Yeah, we
Speaker 5: haven't changed our target because our practice is typically to
Speaker 5: do it at the mid year.
Speaker 4: Okay, so we're two weeks away give it. Can you
Speaker 4: give us a little hint?
Speaker 5: Yeah, I'd say at the originally we said earnings could
Speaker 5: be two seventy okay, and we'd put like an eighteen
Speaker 5: multiple on that, and that's got to fifty two hundred
Speaker 5: twenty twenty five earnings no longer look like two seventy,
Speaker 5: looks more like two eighty five. And as I was citing,
Speaker 5: is interest rates moved up, the PE should be higher.
Speaker 5: So let's say twenty is a more appropriate PE multiple,
Speaker 5: or even twenty one. Then you get into the fifty
Speaker 5: eight one hundred ish level. But I think the open
Speaker 5: question is, really, if you're in mid June and December
Speaker 5: thirty one, is it a line up or is there
Speaker 5: a pullback and then a lineup? And I'm I would
Speaker 5: probably this is not evidence based, just an opinion. I
Speaker 5: don't see why it would be.
Speaker 2: Straight up, Here's something I always wanted to ask an
Speaker 2: equity strategist. But when you're coming up with the price targets,
Speaker 2: do the specific numbers actually matter for your clients or
Speaker 2: are they mostly interested in the direction the overall direction,
Speaker 2: like line go up, line down?
Speaker 5: Well, it's a do you know this is a lifelong
Speaker 5: debate because for thirty years I covered wireless stocks and
Speaker 5: I had price targets, and our sales people would always say,
Speaker 5: no one cares about your price target. But then the
Speaker 5: first thing in the question meeting people, what do you
Speaker 5: think where do you think this thing goes? So they
Speaker 5: always care about the price target. I don't really value
Speaker 5: people's price targets which is ten percent above where you
Speaker 5: are now, because to me, that's just like that's like
Speaker 5: staying in the middle of the lane, and you can't
Speaker 5: make clients money. So whenever we did stock research, we
Speaker 5: always had to build a base case on what we
Speaker 5: think could happen and then discount it at what we
Speaker 5: think is a reasonable rate. A lot of our price
Speaker 5: targets seemed really crazy. When we did wireless, I remember
Speaker 5: I upgraded you can timestamp but actually show you Almos
Speaker 5: holdings at twenty one cents and it went to twenty
Speaker 5: two dollars. My price target was not thirty cents. It
Speaker 5: was twelve dollars at the time. And we upgraded Western
Speaker 5: Wireless at a dollar seventy four. Our price target was
Speaker 5: twenty five dollars and it ended up going to forty.
Speaker 5: So I think we tried to look at a normalized
Speaker 5: situation and in a normalized world, if this is a
Speaker 5: normal SMP cycle, Okay, following demographics, I could provide a
Speaker 5: chart later SMP should be potentially fifteen thousand by the
Speaker 5: end of the decade. So yeah, so to me, that's
Speaker 5: the more as you move into longer time frames. That's
Speaker 5: probably where I think we're moving towards.
Speaker 4: Can we title this episode, tom Lee, why SMP could
Speaker 4: go to fifteen by twenty thirty?
Speaker 3: Is that for sure?
Speaker 5: Okay, we have we have many charts to explain that number.
Speaker 2: Oh you should send them to us.
Speaker 3: Yeah, well we'll post them. Yeah, yeah, that'd be great.
Speaker 4: I would love to just make this whole episode about
Speaker 4: the wireless in the late nineties, because I have some
Speaker 4: memory of that period. What are the early warning signs?
Speaker 2: You know?
Speaker 4: I think you go back and you start to see
Speaker 4: things in the accounting that's like some of the sales
Speaker 4: quality is deteriorating or whatever. And I guess when people
Speaker 4: look at whether it's the mag seven or Nvidia specifically,
Speaker 4: or some of these other companies that are clearly just
Speaker 4: benefiting from this tremendous KPEX cycle, they're like, well, they
Speaker 4: want to like look at the signs. And granted, I
Speaker 4: know you see a long runway because we're part of
Speaker 4: the silicon or labor to silicon transition, but just going
Speaker 4: to even think about late nineties, What were the sort
Speaker 4: of signs that a company might suddenly not be able
Speaker 4: to live up to the hype, and what are the
Speaker 4: types of things people should look for.
Speaker 5: Yes, I can cite many, I'm not citing them in
Speaker 5: the order of importance.
Speaker 3: Sure.
Speaker 5: The first is I remembered when investors suddenly said our
Speaker 5: price targets weren't adequate. So I remember putting a buy
Speaker 5: rating on a stock and it had twenty five percent
Speaker 5: upside and they're like, Tom, I can make that in
Speaker 5: a week. And it was at a time when many
Speaker 5: people in the markets were famously making thirty thousand dollars
Speaker 5: stocks when they made ten million dollars in a month.
Speaker 5: I mean there were many people I was working with
Speaker 5: that were realizing trades like that. The second is when
Speaker 5: analysts have to suddenly shift discount rates to a level
Speaker 5: that removes all risk. So the ce Lex, for instance,
Speaker 5: you had to apply a five percent cost of money,
Speaker 5: and you assumed everybody was paying market rate for fiber.
Speaker 5: I mean, it was that was not possible, but that's
Speaker 5: you had to fudge it. The third is capital markets.
Speaker 5: There was so much investment banking activity. There's no investment
Speaker 5: banking and IPOs right now. I mean, it's a paucity
Speaker 5: of it. So I don't think you could say there's
Speaker 5: a bubble even in the next two years because there
Speaker 5: aren't tons of AI IPOs. There was so much IPO
Speaker 5: I think it was I don't know if the numbers
Speaker 5: were staggering, like it was forty or fifty percent of
Speaker 5: all ips were tech IPOs. Back then, it was some
Speaker 5: crazy numbers and there were like dozens in a day. Yeah,
Speaker 5: that's right, and they all were doubling or tripling.
Speaker 2: Wait, but is there an argument to be made that
Speaker 2: in the current environment there's less incentive for companies to
Speaker 2: go public? I mean we talk about, yeah, the amount
Speaker 2: of VC money, the amount of money floating around in
Speaker 2: private credit. Is it possible that you know the money
Speaker 2: is just private versus.
Speaker 5: Public that that has been a change. Now if you
Speaker 5: look at the prequel database, there's more privately held companies
Speaker 5: than publicly listed. But every company needs an exit, so
Speaker 5: there was going to be an IPO cycle, or there
Speaker 5: should be a merger cycle, or there should be huge
Speaker 5: amounts of venture money pouring into this where allocators are
Speaker 5: fighting over themselves to allocate I don't see any of
Speaker 5: that today. I think there's a lot of skepticism that
Speaker 5: AI has a lot of hype.
Speaker 4: Wait, but I did see this is a headline again.
Speaker 4: We're recording this June eighteenth. This is the headline that
Speaker 4: ran on the Bloomberg terminal about an hour and a
Speaker 4: half ago. Steve Cohen's point seventy two ready's new hedge
Speaker 4: fund targeting AI stock. Steve Cohens is seeking point seventy two,
Speaker 4: seeking to raise about one billion dollars for a new
Speaker 4: stock picking hedge fund focused on artificial intelligence. According to
Speaker 4: people familiar with the matter, the fund will bet on
Speaker 4: or against AI hardware.
Speaker 3: Blah blah blah. It looks like the.
Speaker 4: Emergence of some vehicles perhaps where people just want to
Speaker 4: play this theme in some way or another.
Speaker 5: Yes, so maybe it's starting. I wouldn't consider that a
Speaker 5: late I would never consider firms like co two or
Speaker 5: point seventy two as late cycle signal.
Speaker 3: Yeah, fair to me.
Speaker 5: There probably the front edge of that.
Speaker 2: Outside of technology stocks more broadly, or the economy more generally.
Speaker 2: And what would make you nervous, what would you watch
Speaker 2: out for as your bear signal?
Speaker 5: Well, in wireless, I did call many tops and stocks
Speaker 5: and had many fundamental shorts, so there is of course,
Speaker 5: the key anchoring is are the price levels disconnected from
Speaker 5: a justifiable fundamental reality? I mean I don't think so.
Speaker 5: I think if we have pees of one hundred for
Speaker 5: Omega capstock, maybe that's something to question. The second, of course,
Speaker 5: is sentiment, because when everybody is bullish, then one cannot
Speaker 5: be convinced there's upside because a lot of the best
Speaker 5: case would be priced it. We at Funstrat don't find
Speaker 5: most of our clients are bullish. Most of them are
Speaker 5: skeptics because many still don't feel October twenty twenty two
Speaker 5: was a complete bottom because markets have since risen while
Speaker 5: the fetes stayed tight. Most people cannot sleep at night
Speaker 5: with that notion. And they want to see how stocks
Speaker 5: react to the first FED cut. And as you know,
Speaker 5: how many people tell you, oh, stocks are going to
Speaker 5: fall as soon as I FED starts cutting. Because many
Speaker 5: people say that I'm probably in the camp the markets
Speaker 5: rally on the first cut.
Speaker 3: I'm curious.
Speaker 4: Sentiment is always one of those things that strikes me
Speaker 4: is easier to talk about measuring than actually measuring, And
Speaker 4: you say it some of the conversations you have with clients.
Speaker 4: Are other sort of surveys or market indicators that you
Speaker 4: have found to be good reliable measures of sentiment over time.
Speaker 5: You know, most sentiment indicators are not reliable because most
Speaker 5: people don't take the time to film out. Okay, but
Speaker 5: at the extremes they're quite useful, like the AAII I
Speaker 5: think is really useful. But if you look at surveys,
Speaker 5: they're not that reliable because the response rates terrible. I mean,
Speaker 5: look at the labor surveys, right, isn't the BLS. Isn't
Speaker 5: the response rate like in the forties Now it's.
Speaker 2: Gone down a lot.
Speaker 1: Yeh.
Speaker 3: Yeah.
Speaker 5: That's why I think as a company we pride ourselves
Speaker 5: we are in conversations with our clients, not you know,
Speaker 5: a blue chip bank. We have many clients that we're
Speaker 5: in constant contact with. But it does represent a meaningful
Speaker 5: percentage of professionally managed money, so we have a very
Speaker 5: real time way to measure sentiment.
Speaker 2: Can I ask about bitcoin, because in addition to getting
Speaker 2: the bull market of recent months and years correct, the
Speaker 2: other prediction that you are known for is bullish calls
Speaker 2: on bitcoin. And can you talk to us maybe about
Speaker 2: how you come up with a price target for bitcoin,
Speaker 2: because to me, it seems difficult to put it mildly like,
Speaker 2: to me, bitcoin is almost a pure expression of momentum
Speaker 2: or flows, and that kind of feeds on itself, and
Speaker 2: it just feels difficult to me to predict. And yet
Speaker 2: you have been very specific in the numbers that you
Speaker 2: will put on this thing.
Speaker 5: Yes, bitcoin is unlike other asset classes because there is
Speaker 5: a cooperative value. You know, the people who contribute to
Speaker 5: the network benefit from it, and that's different than any
Speaker 5: other asset class. When we first wrote about bitcoins in
Speaker 5: twenty seventeen, and bitcoin was around one thousand at the time,
Speaker 5: we published a white paper that said, even if you
Speaker 5: don't really believe in blockchain and the security of the network,
Speaker 5: we had pointed out at the time that just two
Speaker 5: variables explained over eighty percent of the price move a bitcoin,
Speaker 5: which is the number of active wallets and the activity
Speaker 5: per wallet. And at the time we made a simple
Speaker 5: projection we said that in five years, so by twenty
Speaker 5: twenty two, if the number of wallets went up by
Speaker 5: seventy percent and activity per wallet went up by forty
Speaker 5: bitcoin would be twenty five thousand by twenty twenty two.
Speaker 5: So it was really kind of maths that bitcoin, even
Speaker 5: if you don't understand it, and I think it's it's
Speaker 5: an incredible technology, right. Decentralized database is so secure it
Speaker 5: hasn't been hacked. In the fourteen years of existence. Not
Speaker 5: a single entry on the bitcoin ledger is fraudulent. In
Speaker 5: that same period of time, six percent of all bank
Speaker 5: ledger activity is considered suspicious by the FDIC. But today,
Speaker 5: if you look at any time interval and say how
Speaker 5: much of the price move is explained by wallet change
Speaker 5: and activity per wallet, it's still over eighty percent. So
Speaker 5: to me, Bitcoin's price in the future it will be
Speaker 5: depend on how many people further adopted and whether activity
Speaker 5: on the network will grow. We're confident both will take place,
Speaker 5: and that's why you can get some really high exponential
Speaker 5: price levels from here. I know folks like Kathy would
Speaker 5: say it's in the two million, believe it or not.
Speaker 5: If you go out into far enough time frame, let's
Speaker 5: say five years, and you grow the number willlet's at
Speaker 5: a linear rate, you can get in the millions for bitcoin.
Speaker 2: But what drives the opening of wallets or adoption other
Speaker 2: than price like that? Because It seems almost circuitous in
Speaker 2: many ways that people see again the line going up
Speaker 2: into the right, and then they want to get in
Speaker 2: on it, and so they open a wallet. But when
Speaker 2: stuff starts to fall and go in reverse, you can
Speaker 2: have these very dramatic price cuts.
Speaker 5: Yeah, so I think it sounds like we're describing currency
Speaker 5: because like dollar adoption probably look that way, right, I mean,
Speaker 5: not everybody accepted dollars in the beginning, but more people
Speaker 5: accepted dollars, and then as more people accepted they start
Speaker 5: to use it. I think in that way, the history
Speaker 5: of currencies could explain how bitcoin can grow, because over time,
Speaker 5: as bitcoin is more widely held, you can start to
Speaker 5: innovate around it, whether it's pricing off bitcoin, letting people
Speaker 5: lend off bitcoin, or micropayments around bitcoin, or settle things
Speaker 5: on the blockchain. That's what's happening. So I can't give
Speaker 5: you a single use case that will explain the growth
Speaker 5: and wallets, but we know that institutional adoptions growing. I mean,
Speaker 5: I think it was a huge deal that black Rock
Speaker 5: has gotten into bitcoin because it pretty much invalidates the
Speaker 5: idea that this is just a bunch of people in
Speaker 5: their basements playing with you know digital money.
Speaker 4: Going back to real money for a second, or you
Speaker 4: know things that maybe ground traditional additional assets. I want
Speaker 4: to talk more about your twenty thirty calls. So what
Speaker 4: do we say fifteen thousand is a possibility in twenty
Speaker 4: thirty we're at fifty four eighty fifty four eighty three
Speaker 4: oh six as of the time I said those words,
Speaker 4: what have it? So that's you know, six years tripling
Speaker 4: almost What has to take place or what takes place
Speaker 4: from a valuation perspective, et cetera, an earnings growth perspective
Speaker 4: in the next six years that can get us to
Speaker 4: that number.
Speaker 5: Yeah, I haven't updated the numbers recently, so I can
Speaker 5: speak to it from I think three or four years
Speaker 5: ago when we first published that number. It's roughly a
Speaker 5: twenty percent annual price appreciation. Wow, Now earnings growth would
Speaker 5: be twelve to fifteen percent of that total. Okay, so
Speaker 5: then you have five percent a year PE expansion. Now
Speaker 5: can PE expand it five percent a year? I think
Speaker 5: one thing to keep in mind is COVID proved to
Speaker 5: us that businesses are a lot more resilient than we realized,
Speaker 5: So why should we assign the same PE to them?
Speaker 5: That we assigned to them prior to this, knowing that
Speaker 5: if you shut down the global economy, jack up unemployment
Speaker 5: to twenty percent, have huge supply chain disruptions, and yet
Speaker 5: companies could manage earnings. I think they deserve a lot
Speaker 5: more credit. So I think the multiple can compound at
Speaker 5: higher rate than five percent.
Speaker 4: Yeah, Tracy, Actually, I have to say this is something
Speaker 4: that i've like, my thinking is sort of sharpened on
Speaker 4: over the last few years. Essentially, this like US businesses,
Speaker 4: at least the big ones are.
Speaker 3: Really like well run.
Speaker 4: You know, the fact that, as Tom described, so many
Speaker 4: of them were like quickly able to adapt to the
Speaker 4: COVID environment. The fact that when interest rates started going
Speaker 4: up in early twenty twenty two, so much of the
Speaker 4: so many of the overstaffed tech companies were quickly able
Speaker 4: to pivot, and when I say pivot, cut workers and
Speaker 4: maximize for free cash flow, which investors were clamoring to see. Like,
Speaker 4: just from a sort of objective investor based standpoint, my
Speaker 4: estimation of the sort of agility and skill of big
Speaker 4: US corporations I have been impressed over the last several years.
Speaker 2: Never underestimate American companies a reality to make money for real. Okay, well,
Speaker 2: I have to ask one question, which is Tom, You've
Speaker 2: explained very well how you use history and data in
Speaker 2: your thinking. But I guess one thing I would love
Speaker 2: to know is is there anything from the experience, the
Speaker 2: post pandemic experience that has surprised you.
Speaker 5: There's things that have reinforced some things I always wondered about.
Speaker 5: One is I think as much as people say they're
Speaker 5: objective and they only look at things objectively, they always
Speaker 5: have a bias. And I think the bias since COVID
Speaker 5: has been that we are in a state of emergency.
Speaker 5: There's too much debt, there's still a virus out there. Now,
Speaker 5: AI is going to get us, and that is played
Speaker 5: into how people view stocks and not as objective instruments
Speaker 5: of shareholder value. The second thing that is true is
Speaker 5: that there's what I always observed as the youngification of
Speaker 5: money management, which is, let's take you know, the top
Speaker 5: twenty largest hedge funds and the top twenty largest I
Speaker 5: don't know active managers. Well, when we look at the
Speaker 5: average age of a fund manager, I don't know, they're
Speaker 5: probably in their late thirties. If you go back ten years.
Speaker 5: They're also the same age in their late thirties, you know,
Speaker 5: because you know, in hedge fund most people retire because
Speaker 5: they made a lot of money or they don't survive,
Speaker 5: which means that the look back of institutional knowledge isn't
Speaker 5: growing over time. It's the same. You know, they have
Speaker 5: ten years of experience. So today most people don't have
Speaker 5: necessary real time knowledge of GFC that are actually managing money. Yeah,
Speaker 5: so that means the pandemic is influencing how people view
Speaker 5: markets disproportionately without appreciating the historical backdrop, which is what
Speaker 5: you know, which is something I'm continuing to observe.
Speaker 2: Yeah. Yeah, that kind of recency bias is definitely a
Speaker 2: thing because I think for both Joe and myself, the
Speaker 2: two thousand and eight financial crisis looms very large in
Speaker 2: our heads, whereas for a lot of other people, now,
Speaker 2: a lot.
Speaker 5: Of younger people, which is history.
Speaker 2: It's yeah, it's history, and it's like the pandemic that
Speaker 2: they think about. Anyway, Tom, that was so fascinating and
Speaker 2: we're so glad we've been meaning to have you on
Speaker 2: the show for a long time. I don't know why
Speaker 2: it hasn't happened before, but I'm glad we could finally
Speaker 2: do it, So thank you so much.
Speaker 5: And hopefully it's not another thirty years.
Speaker 3: No, we won't wait another thirty years.
Speaker 4: We'll have you back in a twenty thirty when the
Speaker 4: S and P is at fifteen thousand to get.
Speaker 3: Your twenty forty call. Yes, that's right, all right. Looking
Speaker 3: forward to.
Speaker 2: Joe, that was really interesting, particularly hearing about Tom's experience
Speaker 2: as a wireless analyst in the early two thousands. And
Speaker 2: I got to go look up that bankruptcy research project
Speaker 2: that he mentioned because that sounds interesting as well. But
Speaker 2: a couple things stuck out to me. So One, when
Speaker 2: I think of Tom Lee and his work, I do
Speaker 2: often think about those very lofty, specific price targets, and
Speaker 2: so it was interesting to hear him talk about why
Speaker 2: he goes down that route rather than just say, you know,
Speaker 2: ten percent upside or something like that, and it kind
Speaker 2: of makes sense. I guess that's a point of differentiation
Speaker 2: for him versus another equity strategist.
Speaker 3: No, totally.
Speaker 4: It's interesting that there is this perceptions like people just
Speaker 4: want to know whether things are going up or down,
Speaker 4: which sort of my standpoint. But then then in the
Speaker 4: conversation everyone's like, yeah, so what's the price target? Even
Speaker 4: though that's notoriously hard to well.
Speaker 2: I guess we can see it in this conversation as well,
Speaker 2: because we will probably title this episode. You know, Tom
Speaker 2: Lely sees what was it? The S and P five
Speaker 2: hundred at.
Speaker 3: Thirty thousand, No. Fifteen and twenty thirty. You know, there's
Speaker 3: a lot in there.
Speaker 4: Like I said, I could talk about you know, late
Speaker 4: nineties wireless bubble stuff.
Speaker 2: Go on, Joe, I know you want to No, it.
Speaker 3: Never gets boring.
Speaker 4: On the flip side, I have been thinking about this
Speaker 4: a lot, which is just that the financial crisis really
Speaker 4: is fading into what I would call like capital h
Speaker 4: history as just something that is for you and I.
Speaker 4: It feels like on you know, in many respects, we're
Speaker 4: still living in the aftermath of that event and decisions
Speaker 4: that were made and policies that were in place in
Speaker 4: that aftermath, and you and I could talk forever about
Speaker 4: how they still inform the markets today, I think in
Speaker 4: profound ways. But I don't think that's the case for
Speaker 4: a lot of people think about markets. It's literally something
Speaker 4: that you know, might as well be the Great Depression
Speaker 4: or the nineteen fifties or the Vietnam War or any
Speaker 4: other period that just feels like something you learn in
Speaker 4: history books, but you know, you don't think about as
Speaker 4: applying to your day to day.
Speaker 2: Absolutely. The other thing that stood out for me was,
Speaker 2: I guess the connection between valuations and brates and it
Speaker 2: does feel like maybe there is a growing recognition that
Speaker 2: you can have an environment where companies continue, to your
Speaker 2: point earlier to make money even when treasury yields have
Speaker 2: like doubled, that you know empirically that seems to be happening.
Speaker 4: It's also interesting I hadn't heard. So there is the
Speaker 4: fact that if you're one of these cash rich mega
Speaker 4: caps and higher rates also just directly add to your
Speaker 4: earnings because you don't have dead But then the other
Speaker 4: element of higher rates as a moat that then makes
Speaker 4: new entrance more competitive is a really sort of interesting idea.
Speaker 4: The sort of higher rates as this centralizing force for
Speaker 4: those who already have capital and this penalizing force for
Speaker 4: those who don't as interesting. And then also, as Tom
Speaker 4: pointed out, capital markets activity, and one thing that we
Speaker 4: haven't seen with AI is just this sort of endless
Speaker 4: train of AI related companies coming to the market to
Speaker 4: grab people's wallets and maybe because there's not that many
Speaker 4: good ones out there. But for whatever reason, that aspect
Speaker 4: of the boom has not materialized.
Speaker 2: Yeah, although I suppose, you know, maybe it's only a
Speaker 2: matter of time, or maybe, as we were discussing, more
Speaker 2: of that activity is just taking place in private markets. Now,
Speaker 2: I guess we'll see, we'll see here or two.
Speaker 5: All right, shall we leave it there?
Speaker 3: Let's leave it there.
Speaker 2: This has been another episode of the All Thoughts Podcast.
Speaker 2: I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 4: And I'm Joe Wisenthal. You can follow me at the Stalwart.
Speaker 4: Follow our guest Tom Lee, He's at funstrat. Follow our
Speaker 4: producers Kerman Rodriguez at Kerman armand Dashel Bennett at Dashbot
Speaker 4: and Kelbrooks at Kelbrooks. Thank you to our producer Moses onm.
Speaker 4: For more Oddlogs content, go to Bloomberg dot com slash
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