WEBVTT - Matrix's Katz on Utilities: Declare Victory and Sell (Audio)

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<v Speaker 1>Global business news twenty four hours a day. If Bloomberg

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<v Speaker 1>dot Com the radio plus Globo l act and on

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<v Speaker 1>your radio. This is a Bloomberg Business Flash from Bloomberg

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<v Speaker 1>World Handquarters, assigned Charlie Palette. Stocks advance trading there a

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<v Speaker 1>record after a three days slide. We saw an increase

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<v Speaker 1>in consumer spending that underscores the strength of the U.

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<v Speaker 1>S economy. Traders meanwhile assessing the outlook for interest rates.

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<v Speaker 1>The tenure up nineteen thirty seconds, the yield there one

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<v Speaker 1>point five six percent, SMP five hundred, indecks up eleven

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<v Speaker 1>to eighty, a gain of five tenths of one percent.

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<v Speaker 1>Nasdaq is up thirteen, a gain of three tenths of

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<v Speaker 1>one percent down Industrials up one hundred and two points,

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<v Speaker 1>a gain of six tenths up one percent. The gold

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<v Speaker 1>price of gold of twenty cents now thirteen eighty ounce,

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<v Speaker 1>a gain of less than point one percent. And crude

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<v Speaker 1>oil West Texas Intermediate down one point three percent, down

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<v Speaker 1>sixty four cents of barrel to forty seven dollars. I'm

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<v Speaker 1>Charlie Pelt, and that's a Bloomberg business flash. You're listening

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<v Speaker 1>to taking stock with Kathleen Hayes and Pim Fox on

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<v Speaker 1>Bloomberg Radio, Taking stock now of the stock market. We've

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<v Speaker 1>got a market that is looking for a reason to

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<v Speaker 1>keep rallying today. A lot of volatility of course around

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<v Speaker 1>the Fed Reserve and comments it has made taking a

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<v Speaker 1>look at what companies are going to be doing well

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<v Speaker 1>in the environment if the Fed does raise race this year,

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<v Speaker 1>and then what did it what if it doesn't. Very

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<v Speaker 1>happy to welcome back to the show. David Kats. He's

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<v Speaker 1>president and c i O, Chief Investment Officer of Matrix

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<v Speaker 1>Asset Advisors right here in New York City. David, welcome, Hey,

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<v Speaker 1>definitely nice to be here. So set back kind of

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<v Speaker 1>you know, the set the stage for us. Here we are,

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<v Speaker 1>it's heading towards the end of August, We're going to

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<v Speaker 1>head into the autumn. How how have this these past

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<v Speaker 1>uh about eight months of the year kind of set

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<v Speaker 1>up the stock market for what's going to happen? Is

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<v Speaker 1>we had to you know, we're almost going to be well.

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<v Speaker 1>The market has been a roller coaster this year. You

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<v Speaker 1>had a historically bad start to the market the first

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<v Speaker 1>six weeks for the worst six weeks in seventy years.

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<v Speaker 1>Then you had a great rally, then post breaks that

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<v Speaker 1>you had a sharp sell off followed by a sharp rebound.

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<v Speaker 1>So lots of volatility, but quietly the market is up

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<v Speaker 1>in the high single digits already. In fact, we if

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<v Speaker 1>we just look at the past couple of months, it's

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<v Speaker 1>certainly hasn't been too bad at this point. How big

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<v Speaker 1>of a threat and how big of an opportunity is

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<v Speaker 1>a FED or could the FED be requity investors? Well,

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<v Speaker 1>we think the Fed is going to get a lot

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<v Speaker 1>of notice. People are becoming obsessed with it. But the

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<v Speaker 1>reality is the Fed once to raise rates. They need

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<v Speaker 1>to raise rates. If they're gonna do it, it's gonna

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<v Speaker 1>be very slowly. So the market at some point is

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<v Speaker 1>going to calm down. If the FED raises in September

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<v Speaker 1>or December but doesn't say that they're going to do

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<v Speaker 1>a lot more raising next year, the equity markets should

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<v Speaker 1>be able to digest it on a day daily basis,

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<v Speaker 1>or the first week. They might sell off, but we

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<v Speaker 1>do believe they're going to settle down. We say you

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<v Speaker 1>probably have a little bit bigger risk in the next

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<v Speaker 1>few months in terms of the election rather than the FED. Well,

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<v Speaker 1>right now, the market is not focused a heck of

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<v Speaker 1>a lot on the election. We think that the oddsmakers

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<v Speaker 1>are putting a Clinton victory as the more likely outcome.

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<v Speaker 1>We think if that were to happen, UH, the market

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<v Speaker 1>would assume it's it's following a lot of the President

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<v Speaker 1>Obama policies with a slightly better economy bias, So that

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<v Speaker 1>would be a modest positive for the market. We think

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<v Speaker 1>if Trump were to win the presidency, which is not

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<v Speaker 1>being factored in, there's a lot more concern and uncertainty.

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<v Speaker 1>If you look at the Trump policies in terms of taxes, Uh,

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<v Speaker 1>that's actually fairly reasonable and a positive. Uh. In terms

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<v Speaker 1>of lowering restrictions and laws for companies, also modest positive

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<v Speaker 1>for business. But the big wild guard is something we're

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<v Speaker 1>very fearful of and that the economy should be very

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<v Speaker 1>fearful of is his comments about trade and starting a

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<v Speaker 1>trade war with China or Mexico in that case. Uh.

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<v Speaker 1>Some of the better economic forecasters say Trump's policies would

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<v Speaker 1>put us into a recession, and clearly that would be

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<v Speaker 1>real bad for the stock market. Yeah, it doesn't get

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<v Speaker 1>too much worse than a recession, so that's obviously a threat.

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<v Speaker 1>Now you're reasonably constructive, it seems on stocks, David uh

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<v Speaker 1>You say you'd use any weakness to add to stocks,

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<v Speaker 1>but it wouldn't change the rally, and it's not the

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<v Speaker 1>time to aggressively add new money to the market. Why, well,

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<v Speaker 1>So what happens is people always feel better after the

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<v Speaker 1>market goes up. So you've just had about a ten

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<v Speaker 1>percent rally in the last six or eight weeks, and

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<v Speaker 1>all of a sudden, people are feeling more comfortable. You

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<v Speaker 1>don't want to buy high. What you want to do

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<v Speaker 1>is say, Okay, I have a long term time horizon.

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<v Speaker 1>I like stocks over the next eighteen months, and rather

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<v Speaker 1>than buying after they've run up, wait for the next self.

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<v Speaker 1>Something's going to happen, whether it's out of Europe or China,

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<v Speaker 1>or people fearful about Trump doing better in the polls.

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<v Speaker 1>And when you have that three or five percent correction

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<v Speaker 1>by companies you like but at prices that you like,

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<v Speaker 1>and you know, that's what is our thinking all year.

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<v Speaker 1>So we've been buying on the dips and then not

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<v Speaker 1>chasing the rallies. You say value investing is coming back.

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<v Speaker 1>It's been lagging growth for nearly a decade. Do you

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<v Speaker 1>say this could be the the beginning of a new multi

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<v Speaker 1>year trend. Why and why, well, thank goodness, more value guys.

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<v Speaker 1>So it's not been fun for the last few years,

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<v Speaker 1>but generally the market trades between value and growth and

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<v Speaker 1>long seven to ten year cycles, growth is vastly outperformed value,

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<v Speaker 1>as you said, in the last seven eight years. Uh,

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<v Speaker 1>this year, value is doing better than growth. And right

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<v Speaker 1>now we think value represents much better opportunity, thank growth,

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<v Speaker 1>and better opportunity than it normally has. So as you

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<v Speaker 1>have the growthier stock slowing down and the market coming

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<v Speaker 1>back to more economically sensitive and or energy and or financials,

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<v Speaker 1>we think value was due for a pretty good UH

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<v Speaker 1>period in the on. Okay, so values back a good

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<v Speaker 1>UH period of the sun. You are thinking that the

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<v Speaker 1>dividend oriented investing trend has more upside, but you have

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<v Speaker 1>to be more discerning, So tell us what you like

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<v Speaker 1>in that trade and why. So right now you can

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<v Speaker 1>get zero in the banks and you can get one

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<v Speaker 1>and a half percent on its tenure treasury. So people

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<v Speaker 1>are seeking yield. A lot of the market is paying

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<v Speaker 1>good dividends, but we be wary of things like utilities

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<v Speaker 1>that are selling at twenty plus times earnings. The flip

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<v Speaker 1>side is you can get companies energy companies, financials, healthcare

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<v Speaker 1>industrials that are paying three and a half to four

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<v Speaker 1>yields that are growing over time at reasonable the evaluations.

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<v Speaker 1>So we think that's a great place to put money.

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<v Speaker 1>We think you get lower volatility and you still have

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<v Speaker 1>some pretty good upside. Okay, okay uh. In terms of

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<v Speaker 1>some of the companies that you're most fond of right now,

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<v Speaker 1>let's just run through it and in the dividend arena.

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<v Speaker 1>In terms of industries, who do you like the best?

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<v Speaker 1>So we like financials the best. Financials have been the

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<v Speaker 1>biggest lagger this year. We think that the businesses are

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<v Speaker 1>actually doing very well. Credit is very good, and if

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<v Speaker 1>interest rates ever go up, they do even that much better.

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<v Speaker 1>But vote our investment thesis is they're going to do

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<v Speaker 1>well either way. Our favorites would be JP Morrigan, MetLife, Wells, Fargo,

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<v Speaker 1>all wonderful businesses uh and under ten eleven times earnings

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<v Speaker 1>paying a three and a half to four percent yield.

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<v Speaker 1>Okay uh. You also are have a couple of consumer

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<v Speaker 1>discretionary stocks you like. So consumer discretionary has been uh,

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<v Speaker 1>pretty volatile this year, the retailers have gotten beaten up,

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<v Speaker 1>and by and large, we are a little bit wary

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<v Speaker 1>about a lot of retailers because of the effects on

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<v Speaker 1>from Amazon. But one that we do like is Target.

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<v Speaker 1>We think that the company is very well run. They

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<v Speaker 1>recently lowered guidance or the upper end of guidance for

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<v Speaker 1>the balance of the year. The stocks hold off. They've

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<v Speaker 1>y the dividend for forty five years in a row.

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<v Speaker 1>They're paying a three and a half percent yields, it's

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<v Speaker 1>at fourteen times earnings, and we think that there is

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<v Speaker 1>a place for a Target, and they compete well against

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<v Speaker 1>the Internet. Um. The the other um you know, uh.

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<v Speaker 1>One that we like in that space is like a

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<v Speaker 1>Harley Davidson. We think is a pretty good company there.

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<v Speaker 1>And we also like McDonald's which pays a rock solid dividend,

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<v Speaker 1>growing nicely, low volatility. Okay, let's run quickly through a

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<v Speaker 1>couple more Cisco and CAALCLM in the tech space. So

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<v Speaker 1>technology is doing well this year. Some of the old

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<v Speaker 1>technology companies like the qal Comm and Cisco if something

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<v Speaker 1>finally started to perk up, but they still sell it

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<v Speaker 1>reasonable valuations, so we easily think they have another fifteen

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<v Speaker 1>or twenty percent on the upside, and you're getting a

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<v Speaker 1>three and a half percent plus yield while you're waiting. Alrighty,

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<v Speaker 1>so how about what you like in the telegom space.

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<v Speaker 1>So telecom is like utilities, but you're getting them in

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<v Speaker 1>a much better price. So we like both Verizon and

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<v Speaker 1>A T and T. You're getting a four and a

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<v Speaker 1>half percent yield and you're buying the stocks of like

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<v Speaker 1>fourteen times earnings. So we compare that to like a

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<v Speaker 1>Duke Energy, which is selling its twenty one times earnings.

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<v Speaker 1>We think the prospects for the telecoms are good, but

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<v Speaker 1>you're not paying a heck of a lot for that. Okay, Um,

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<v Speaker 1>you would be sellers, you'd be seller utilities? Why and

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<v Speaker 1>is there anybody in particular that you'd say, please get

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<v Speaker 1>out of this fast? So really, if you've been buying

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<v Speaker 1>utilities for the yield and you've they've been doing well,

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<v Speaker 1>so you're happy. We use this as an opportunity to

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<v Speaker 1>declare victory. If you look at utilities over the last

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<v Speaker 1>thirty years, they fell between eight times earnings and sixteen

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<v Speaker 1>times earnings. Today many of them are north of twenty

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<v Speaker 1>times earnings. Uh, if they were a dynamic growth business,

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<v Speaker 1>maybe you could rationalize that twenty times earnings. But utilities

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<v Speaker 1>are not. They're going to grow their earnings a two

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<v Speaker 1>or three percent to yield their lowest levels that they've

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<v Speaker 1>been in years. So we think that they've been marked

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<v Speaker 1>up because of people are just trying to chase dividends. Uh,

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<v Speaker 1>don't get caught up in that. Take your profits read

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<v Speaker 1>deploy into some of the other names that we talked about.

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<v Speaker 1>So what is the biggest risk? What? What? What should

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<v Speaker 1>I be watching very closely? If I'm in the market,

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<v Speaker 1>I'm not going to add stocks aggress so that could

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<v Speaker 1>turn that around. What would you say? Oops, So I

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<v Speaker 1>gotta be a little care cautious in here. Well, the

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<v Speaker 1>the our biggest concern, as you mentioned a little bit earlier,

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<v Speaker 1>is what's going on with the US election. Um, you know,

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<v Speaker 1>we just think that if Trump were to be looking

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<v Speaker 1>better in the police, he's been pretty erratic in his policy,

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<v Speaker 1>so it's very difficult to handicaps. You know. While President

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<v Speaker 1>Obama hasn't been the best in the world for the economy,

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<v Speaker 1>it's it's been pretty understandable. Uh. And we think Clinton

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<v Speaker 1>brings the same to the table with a little bit

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<v Speaker 1>more pro business bias or pro economy bias, not pro

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<v Speaker 1>business um. But that's our biggest concern right now. It

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<v Speaker 1>looks like the break that is going okay, so we're

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<v Speaker 1>keeping an eye on up, but we think that's okay.

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<v Speaker 1>All right. Well, David cats a green light on buying

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<v Speaker 1>some stocks and the dividend play. He likes the financials

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<v Speaker 1>the death. So we're heading towards the market closed now,

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<v Speaker 1>movers and shakers. Our stocks editor Dave Wilson will be

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<v Speaker 1>joining us at the top of the hour. I'm Kathleen Hayes,

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<v Speaker 1>and this is Bloomberg