WEBVTT - Dissecting the Tech Wreck 0:00:12.520 --> 0:00:16.320 Hello, and welcome to What Goes Up, a weekly markets podcast. 0:00:16.400 --> 0:00:18.880 My name is Mike Reagan. I'm a senior editor at 0:00:18.920 --> 0:00:21.560 Bloomberg and I'm hold on a higher across acid reporter 0:00:21.600 --> 0:00:25.200 at Bloomberg. And this week on the show, well, everyone 0:00:25.280 --> 0:00:28.000 has been talking about how higher interest rates are causing 0:00:28.000 --> 0:00:30.840 the sell off in technology stocks, but is that the 0:00:31.000 --> 0:00:34.560 entire story? We'll talk with a veteran equity market strategist 0:00:34.560 --> 0:00:36.720 who thinks there's more to it than just that, and 0:00:36.840 --> 0:00:39.400 will also pick her brain about the upcoming earning season. 0:00:40.000 --> 0:00:42.599 But first they'll thought, I've got a pop quiz for you. 0:00:42.840 --> 0:00:46.640 Are you ready? Probably not, but okay, I know I 0:00:46.880 --> 0:00:48.320 wonder you there would be a pop quiz and you 0:00:48.360 --> 0:00:51.040 got very nervous. Did I've been nervous for the past 0:00:51.080 --> 0:00:56.440 hour for I've been nervous for like the past thirty years, 0:00:57.400 --> 0:01:01.080 but but especially nervous with pop quiz filed outa As 0:01:01.080 --> 0:01:03.520 you know, to make a name for yourself in the 0:01:03.560 --> 0:01:08.039 stock market, you really need to create an acronym of 0:01:08.160 --> 0:01:10.759 your own. So I've got it. There's a new acronym 0:01:10.920 --> 0:01:12.920 that I'm a big fan of. I'm gonna tell you 0:01:13.000 --> 0:01:15.040 what it is, and you tell me what it stands for. 0:01:15.640 --> 0:01:26.119 It's magma m A g m A. Okay, it's meta Amazon, Google, Microsoft, 0:01:26.240 --> 0:01:30.559 Apple in some order and in in one of those orders, 0:01:30.560 --> 0:01:32.600 it's pretty good. I'm not sure if you got them 0:01:32.640 --> 0:01:36.000 all in the right order. Um, we'll find out. I 0:01:36.040 --> 0:01:39.080 also I kind of feel bad for Alphabet. You know, 0:01:39.080 --> 0:01:41.360 they're like, look, guys, we changed our name in alphabet 0:01:41.400 --> 0:01:45.440 and everyone's like, no, you're still Google. Sorry. That consonant 0:01:46.000 --> 0:01:51.960 in in our made it made its way into the acronym. 0:01:52.040 --> 0:01:54.240 So I guess the lesson is, if you're going to 0:01:54.360 --> 0:01:56.720 change your name, there's enough ase you need a you 0:01:56.760 --> 0:02:00.480 need a constant. But luckily for us, that acronym acronym 0:02:00.560 --> 0:02:03.640 is courtesy of this week's Yes, I think she created it. 0:02:03.680 --> 0:02:06.680 Maybe maybe she can shed some light on that for us. 0:02:06.720 --> 0:02:09.520 But well, obviously we'd like to have strategists on the 0:02:09.520 --> 0:02:11.960 show a lot, and we're lucky enough to have one 0:02:11.960 --> 0:02:14.359 of the best in the biz working for us right 0:02:14.360 --> 0:02:16.720 here in house at Bloomberg and very excited ever on 0:02:16.760 --> 0:02:18.760 the show. We really are. And I have noticed that 0:02:18.919 --> 0:02:21.320 acronym in in her recent notes. So I want to 0:02:21.360 --> 0:02:24.919 welcome back Gina Martin Adams. She's the chief equity strategist 0:02:24.960 --> 0:02:28.280 at Bloomberg Intelligence. Thank you for joining us. Thank you. 0:02:28.520 --> 0:02:30.520 And I have to say, if I have Deliver or 0:02:30.560 --> 0:02:33.160 Die by Magma, I might be in trouble. Hopefully I 0:02:33.160 --> 0:02:35.560 can make my name in some other way shape or 0:02:36.960 --> 0:02:39.360 we did come up with Magma. And I'll tell you 0:02:39.400 --> 0:02:43.000 why the G is still there because Google's ticker, Alphabet's 0:02:43.000 --> 0:02:45.760 ticker is still G O O g L, so it's 0:02:45.800 --> 0:02:48.520 based on the ticker. That's why we could still still 0:02:48.560 --> 0:02:50.960 have the G in there. And yeah, our team came 0:02:51.040 --> 0:02:54.040 up with Magma. I can't say it's catching fire, forgive 0:02:54.080 --> 0:02:57.200 the pun, but we're trying to wait until the podcast 0:02:57.240 --> 0:03:00.760 comes out. Yeah, you know, hopefully hopefully we can get magnetistic. 0:03:02.320 --> 0:03:04.160 It's a good one. I've seen a lot of attempts 0:03:04.200 --> 0:03:09.400 to recreate the acronym. You know. Another good one is 0:03:09.480 --> 0:03:12.560 um ed Yar. Denny has a Magnificent seven he's been 0:03:12.639 --> 0:03:15.280 out there with because it's really the top seven stocks 0:03:15.320 --> 0:03:17.639 that everyone talks about instead of the top five anymore. 0:03:18.240 --> 0:03:20.680 So I'll credit him with that one. We're all struggling 0:03:20.680 --> 0:03:23.400 with how to describe this giant group of megacaps that 0:03:23.400 --> 0:03:27.519 really dominates everything in the SNPI. Yeah for sure, and 0:03:27.800 --> 0:03:29.680 we do want to talk to you about that because 0:03:29.680 --> 0:03:32.360 you have been writing a lot of research reports about 0:03:33.200 --> 0:03:34.920 the big tech companies. But I want to start with 0:03:34.960 --> 0:03:37.200 just something that's happened this week, which is we heard 0:03:37.240 --> 0:03:39.880 from Powell this week, and I wanted to ask you 0:03:39.920 --> 0:03:42.720 if you feel like he actually ended up saying anything 0:03:43.120 --> 0:03:46.520 new and why he's hearing in front of Congress sort 0:03:46.520 --> 0:03:49.600 of helped stocks form a bottom from the recent sell 0:03:49.640 --> 0:03:52.080 off that we've been seeing at least four for a 0:03:52.160 --> 0:03:54.640 day or two. Yeah, Well, I think, um, you know, 0:03:54.720 --> 0:03:57.480 did he really say anything new? I don't think so. 0:03:58.720 --> 0:04:01.240 I think that the market is incredibly sensitive to anything 0:04:01.240 --> 0:04:03.400 that happens with the FED. When they hear from the Fed, 0:04:03.440 --> 0:04:06.640 they seem to feel better, right, Really, when the market 0:04:06.680 --> 0:04:09.120 is freaking out is when everyone speculates about what does 0:04:09.160 --> 0:04:12.920 the minutes mean? What did we read here? Uh? Forecaster 0:04:13.040 --> 0:04:15.080 comes out and says we're gonna get six sites instead 0:04:15.080 --> 0:04:17.320 of three, and that creates a lot of panics. So 0:04:18.000 --> 0:04:21.279 I think that just hearing his voice and hearing him 0:04:21.440 --> 0:04:24.960 restate that the FED is still going to be somewhat 0:04:25.000 --> 0:04:28.960 measured in their approach. Um is still going to remain 0:04:29.080 --> 0:04:32.880 vigilant and consider both sides of their mandate. Probably was 0:04:32.960 --> 0:04:35.159 the trigger, but it did he really say anything new, 0:04:35.320 --> 0:04:37.919 in my opinion, not necessarily. I think that they're pretty 0:04:37.960 --> 0:04:41.880 consistent in their messaging. But in the days leading up 0:04:41.920 --> 0:04:45.320 to his speech, the market had gone through a process 0:04:45.360 --> 0:04:48.160 of perhaps getting a little bit too irrational with respect 0:04:48.160 --> 0:04:50.760 to FED expectations. You know, we were pulling forward every 0:04:50.760 --> 0:04:53.720 possible interest rate forecast, talking about fifty basis point moves 0:04:53.760 --> 0:04:56.719 instead of twenty five basis point moves, and starting to 0:04:56.720 --> 0:04:59.120 talk about QT and what that might mean, all in 0:04:59.160 --> 0:05:01.920 the span of a very short time period. So I think, 0:05:01.920 --> 0:05:04.120 if anything, it's sort of squelched a little bit of 0:05:04.120 --> 0:05:07.279 the speculation and allowed the market a minute of a 0:05:07.320 --> 0:05:11.560 minute to just start to breathe again. I'm glad you 0:05:11.560 --> 0:05:14.000 brought that up too. You know, I've had that same thought. 0:05:14.000 --> 0:05:15.800 I wish someone could almost study that. I don't know 0:05:15.839 --> 0:05:17.400 how you would do it, but it's like, it seems 0:05:17.440 --> 0:05:20.039 like if you were to print out a speech and 0:05:20.120 --> 0:05:22.600 send it out into the market and print form, you'd 0:05:22.600 --> 0:05:24.800 have one reaction. But if you had pal just read 0:05:24.839 --> 0:05:26.800 it in front of the cameras, who would be a 0:05:26.800 --> 0:05:29.800 completely different reaction. There's something about his soothing tone, I think, yeah, 0:05:29.800 --> 0:05:32.520 And I think that already one's really there's there's something 0:05:32.560 --> 0:05:35.840 about the hearing someone say it rather than reading it. 0:05:35.720 --> 0:05:38.320 It comes across more certain. I totally agree. And I 0:05:38.360 --> 0:05:40.640 think it's a legacy aspect too, because if you think 0:05:40.640 --> 0:05:42.719 about how the FED used to operate, you know, you'd 0:05:42.720 --> 0:05:45.440 have teams of people inside banks trying to figure out 0:05:45.960 --> 0:05:48.760 every little language change in a FED statement and what 0:05:48.839 --> 0:05:52.279 that might mean for future interest rate increases and what 0:05:52.320 --> 0:05:55.200 that might mean for future FED policy, and in the 0:05:55.240 --> 0:05:58.359 open era of communication. Really, just the last twenty thirty 0:05:58.440 --> 0:06:02.400 years here, we've become much more accustomed to constant communication, 0:06:02.480 --> 0:06:05.800 and we really crave that constant messaging. And so I 0:06:05.800 --> 0:06:07.680 think there's something to be said for the fact that 0:06:07.760 --> 0:06:10.320 the personal message, we need it, we want it, we 0:06:10.360 --> 0:06:13.120 want to hear it all the time. We've gotten very 0:06:13.120 --> 0:06:17.400 spoiled by it. And when we're there's a vacuum of messaging, 0:06:17.560 --> 0:06:20.680 the market is tendent, has a tendency to revert to 0:06:20.760 --> 0:06:25.280 its worst self and start to extract the late extreme 0:06:25.320 --> 0:06:28.080 potential outcomes. Runs me. In the old days, didn't they 0:06:28.160 --> 0:06:30.000 used to look and try to figure out how heavy 0:06:30.000 --> 0:06:36.280 green spans briefly exactly. But let's let's get into it 0:06:36.400 --> 0:06:40.560 about interest rates in tech and I was noticed that 0:06:40.600 --> 0:06:42.000 in one of your recent notes. I think it's a 0:06:42.920 --> 0:06:46.080 really important topic to kind of dissect a little bit. 0:06:46.120 --> 0:06:48.400 I mean, I think may and maybe it's partly the 0:06:48.400 --> 0:06:51.360 media's fault. We we tend to shorthand this notion of 0:06:51.920 --> 0:06:54.760 rates are up, tech is selling off. You know, it's 0:06:54.800 --> 0:06:59.159 obviously causing effect there, but uh, your work, you you 0:06:59.200 --> 0:07:01.240 seem to think there's more to it. I mean, obviously 0:07:01.720 --> 0:07:05.160 tech long duration stocks are are clearly sensitive interest rates, 0:07:05.400 --> 0:07:07.400 but in your opinion, it's it's and and the work 0:07:07.400 --> 0:07:09.080 you've done, it seems like you think there's a little 0:07:09.120 --> 0:07:11.080 bit more to it, that that's not the whole story. 0:07:11.160 --> 0:07:12.640 Can you can you talk to us a little bit 0:07:12.680 --> 0:07:15.840 about what, um, you know, what is really the story 0:07:15.880 --> 0:07:18.640 with tech and this sort of mini correct Yeah, I 0:07:18.960 --> 0:07:21.400 think it is multifaceted, and I thank you for giving 0:07:21.440 --> 0:07:23.360 me the air time to discuss it because I do. 0:07:23.520 --> 0:07:26.760 I do believe that there is absolutely a tendency, particularly 0:07:26.800 --> 0:07:30.160 in this environment where rates volatility is coming to the forefront, 0:07:30.720 --> 0:07:33.000 where the market is naturally going to trade on duration. 0:07:33.120 --> 0:07:35.600 So your longest duration stocks like the tech and the 0:07:35.680 --> 0:07:39.040 high growth stocks, the stocks with much longer dated cash 0:07:39.080 --> 0:07:42.400 flow growth are likely to perform much worse than the 0:07:42.440 --> 0:07:45.320 lower duration stocks like the financials and the energies of 0:07:45.360 --> 0:07:49.480 the world. That's just a given. That said, when we 0:07:49.520 --> 0:07:52.840 really analyze what's been happening with tech, and specifically what's 0:07:52.840 --> 0:07:55.600 been happening with the Magma, the biggest of the tech stocks, 0:07:56.280 --> 0:08:00.600 we saw this extreme flight into this group throughout twenty 0:08:00.640 --> 0:08:05.080 and much of one, at least the early part of one, 0:08:05.240 --> 0:08:10.080 really in and sort of seeking safety, and that resulted 0:08:10.120 --> 0:08:14.000 in this tremendous valuation premium for this group. Not necessarily 0:08:14.040 --> 0:08:19.240 related to interest rates, right, because for most of one 0:08:19.320 --> 0:08:22.240 long term interest rates have been slowly rising, albeit in 0:08:22.360 --> 0:08:26.680 fits and starts. We're certainly off of our lows. So 0:08:26.800 --> 0:08:30.040 if it were all about duration, why would these stocks 0:08:30.040 --> 0:08:32.680 have been performing so well when interest rates were initially 0:08:32.760 --> 0:08:34.480 rising and now all of a sudden not that's not 0:08:34.559 --> 0:08:39.079 the entire story, right, So we saw this incredible valuation 0:08:39.240 --> 0:08:41.760 sort of premium get built into these stocks when there 0:08:41.800 --> 0:08:44.040 was just an absence of growth, in an absence of 0:08:44.080 --> 0:08:47.679 confidence everywhere else. Really, over the course of the last 0:08:47.800 --> 0:08:50.439 six months or so, we've started to see that valuation 0:08:50.640 --> 0:08:53.960 premium compressed as the market has become a little bit 0:08:54.000 --> 0:08:58.120 more confident in growth prospects for everyone else outside of 0:08:58.120 --> 0:09:02.280 this space, and a little less confident that these providers 0:09:02.520 --> 0:09:05.960 are going to be the dominant providers in the marketplace. 0:09:06.000 --> 0:09:08.240 As you've had new entrance to the market, you've had 0:09:08.240 --> 0:09:11.079 a lot more competitive you know, the competitive environment has 0:09:11.160 --> 0:09:14.640 changed so dramatically and the like. On top of that, 0:09:15.040 --> 0:09:18.720 we did see a pretty consequential technical indicator developed in 0:09:18.800 --> 0:09:22.880 November where the tech space in particular had gotten so 0:09:23.040 --> 0:09:27.560 extremely overbought that we were inevitably due for some sort 0:09:27.600 --> 0:09:29.840 of correction. I mean, it was really clear in that 0:09:29.960 --> 0:09:34.400 late October early November rip when everyone just rushed right 0:09:34.440 --> 0:09:37.199 back into tech, that this was a sector that was 0:09:37.280 --> 0:09:39.600 overbought in prime for some degree of correction. So we've 0:09:39.640 --> 0:09:41.880 been really since the middle of November in a period 0:09:41.920 --> 0:09:44.880 of time in which this space has been sort of 0:09:44.960 --> 0:09:48.800 rationalizing that extreme as well. So you've got this multiple 0:09:48.960 --> 0:09:53.040 faceted that this multifaceted story going on with tech. It's 0:09:53.080 --> 0:09:55.480 not just about rates. While I think rates are certainly 0:09:55.480 --> 0:09:59.080 playing a heavy part, you know, it's a longer term story. 0:09:59.320 --> 0:10:03.320 It's also at technical story. It's a story of valuations 0:10:03.440 --> 0:10:06.679 and how those are adjusting to a new reality and 0:10:06.800 --> 0:10:10.520 also earning strenths. Frankly, so, so how do you see 0:10:10.520 --> 0:10:13.520 that all playing out sort of in the longer term? 0:10:13.640 --> 0:10:17.480 You know, um, you know, my my guess is that really, 0:10:18.080 --> 0:10:22.560 you know, high growth tech is always gonna command some 0:10:22.559 --> 0:10:25.400 some sort of multiple premium um in a sort of 0:10:25.440 --> 0:10:30.000 normalized environment where you know, inflations normal below two and 0:10:30.080 --> 0:10:32.400 g d p s you know two or whatever, not 0:10:32.480 --> 0:10:36.120 these off the charts, uh numbers we've seen. I mean, 0:10:36.200 --> 0:10:39.320 is that is that a safe bet? And let me 0:10:39.400 --> 0:10:41.120 let me do one more question on there. I'm making 0:10:41.160 --> 0:10:43.600 a two party But um, the other thing to me 0:10:43.679 --> 0:10:46.600 seems to be that, um, you know what we think 0:10:46.600 --> 0:10:49.640 about is growth really isn't growth anymore? You know, the 0:10:49.679 --> 0:10:53.839 magmas aren't really putting up the the eye popping growth 0:10:53.840 --> 0:10:56.040 that they once did. Is that is that part of 0:10:56.040 --> 0:10:58.000 this is absolutely part of the story, is how do 0:10:58.040 --> 0:11:00.720 you really define these magma companies? Are they growth companies? 0:11:00.720 --> 0:11:02.880 Are are are they value companies? Because a few of them 0:11:02.920 --> 0:11:06.120 are actually in the value indices, which is kind of 0:11:06.160 --> 0:11:10.440 compelling information Uh, so, how are they really growth or not? 0:11:10.600 --> 0:11:13.920 You know, I think that the real clarity you can 0:11:14.000 --> 0:11:16.120 you can direct some real clarity by actually looking at 0:11:16.120 --> 0:11:18.679 the duration of stocks, right, And you can even go 0:11:18.720 --> 0:11:21.680 into the tech sector and decompose what are the highest 0:11:21.760 --> 0:11:26.080 duration versus lowest duration stocks. The Magmas are not necessarily 0:11:26.080 --> 0:11:28.160 the highest duration stocks in tech. If you think about 0:11:28.160 --> 0:11:30.800 what's sold off the most over the course of this 0:11:30.920 --> 0:11:34.160 most recent rip and rates, it's really been some of 0:11:34.200 --> 0:11:36.400 the fintech companies, some of the recent I p O, 0:11:36.559 --> 0:11:38.760 some of the non cash companies, right, the companies that 0:11:38.800 --> 0:11:42.520 aren't even generating cash flow yet aren't even posting positive 0:11:42.559 --> 0:11:45.040 earnings growth, right, those are the companies that are most 0:11:45.120 --> 0:11:49.720 at risk, whereas Magma's kind of a safety play. But 0:11:49.840 --> 0:11:54.440 relative to the entire s MP five, they are higher duration, Right, 0:11:54.559 --> 0:11:57.400 So I think that it's all it's all relative and 0:11:57.480 --> 0:11:59.680 what the universe the universe that you're speaking to that 0:11:59.760 --> 0:12:02.240 really matters. But I think you make a good point 0:12:02.240 --> 0:12:05.640 because when we really look at the growth prospects for Magma, 0:12:06.160 --> 0:12:09.840 that was probably what created the valuation bubble that I 0:12:09.880 --> 0:12:13.960 alluded to. When you think about sort of pre crisis, 0:12:14.000 --> 0:12:16.320 these stocks actually traded at a discount to the rest 0:12:16.320 --> 0:12:20.200 of the SMP five Post crisis, they've traded at a 0:12:20.200 --> 0:12:23.319 massive premium. Why have they traded at a premium? Is 0:12:23.320 --> 0:12:26.520 it really just about interest Rate's probably not. It's mostly 0:12:26.559 --> 0:12:29.360 because they were pumping through double digit cash flow growth, 0:12:29.400 --> 0:12:33.160 really strong earnings growth, still posting revenue growth in an 0:12:33.240 --> 0:12:36.240 environment where many companies were in complete distress and weren't 0:12:36.240 --> 0:12:40.720 you know, we're posting negative earnings in some cases. So 0:12:40.880 --> 0:12:44.280 as we get to an environment where more opportunities emerge 0:12:44.320 --> 0:12:46.720 and other companies in the SMP five hundred and the 0:12:46.760 --> 0:12:50.480 broader markets at large can produce the learnings growth, the 0:12:50.840 --> 0:12:54.640 competitive set for investor dollars suddenly changes. Right, there's oh, 0:12:54.679 --> 0:12:57.480 there are energy companies that I might consider buying now, 0:12:57.640 --> 0:13:00.079 or financial companies that I might consider buying now that 0:13:00.600 --> 0:13:05.000 two years ago I thought might actually go out of business. Um, 0:13:05.040 --> 0:13:06.840 So I think that that's a big part of it. 0:13:06.880 --> 0:13:08.960 But when we look, for instance, over the course of 0:13:09.000 --> 0:13:11.600 this year, this subset of companies that just that five 0:13:11.679 --> 0:13:15.920 Magma companies is expected to still produce faster revenue growth 0:13:15.960 --> 0:13:19.160 than the rest of the SMP five hundred, but slower 0:13:19.200 --> 0:13:22.080 earnings growth than the rest of the SMP five hundred, 0:13:22.120 --> 0:13:24.000 and that's a pretty big contrast to where we were 0:13:24.000 --> 0:13:27.680 two years ago, where they were producing much faster earnings 0:13:27.720 --> 0:13:29.679 growth and revenue growth than the rest of the index. 0:13:29.720 --> 0:13:31.679 So that tells you that margins are Another part of 0:13:31.720 --> 0:13:36.120 the story is these companies, while their margins are high, 0:13:36.360 --> 0:13:40.600 they're not getting higher and you've still got margin growth, 0:13:40.679 --> 0:13:44.080 really exponential margin growth for some segments of the SMP 0:13:44.200 --> 0:13:48.000 five hundred to enjoy in this early part of the expansion, 0:13:48.080 --> 0:13:51.800 where this group doesn't have that natural benefits. So I 0:13:51.840 --> 0:13:54.360 think that that's another headwind that we've got to consider 0:13:54.520 --> 0:13:57.360 for this group just in the short term. Doesn't mean 0:13:57.400 --> 0:13:59.160 that over the long run they might not be great 0:13:59.200 --> 0:14:01.520 investment idea US, right, But in the short term, when 0:14:01.520 --> 0:14:04.320 we're thinking three, six, twell months down the road, it 0:14:04.360 --> 0:14:07.040 could be pretty choppy for some of these um you know, 0:14:07.240 --> 0:14:18.600 really big stalwart positions in the SMP. So I was hoping, 0:14:18.640 --> 0:14:21.960 actually that you would dig into the earnings trends for 0:14:22.080 --> 0:14:24.360 some of these companies because I was looking at one 0:14:24.400 --> 0:14:27.800 of your notes and I watched one of your recent 0:14:27.960 --> 0:14:30.840 Boomark TV interviews and you had said that if we 0:14:30.880 --> 0:14:34.000 look at earnings trends. Tech is likely to lag over 0:14:34.040 --> 0:14:37.280 the course of two and your note said the EPs 0:14:37.320 --> 0:14:41.040 growth pace for these companies may remain below the INDEXUS 0:14:41.120 --> 0:14:44.239 into the fourth quarter, and that that sort of diminishes 0:14:44.320 --> 0:14:47.360 some of these the magma's appeal. So can you can 0:14:47.400 --> 0:14:50.440 you go over that? Yeah? Yeah, absolutely So when we 0:14:50.480 --> 0:14:53.040 look out over the landscape of two and this is 0:14:53.080 --> 0:14:57.400 just referencing what is currently in consensus, a couple of 0:14:57.480 --> 0:15:00.320 things are working against Tech number one company. These are 0:15:00.360 --> 0:15:03.440 guiding us to expect less. So this is something that 0:15:03.480 --> 0:15:06.400 really evolved within the October earning season as all of 0:15:06.440 --> 0:15:10.400 a sudden. Whereas in the early part of this recovery, 0:15:10.400 --> 0:15:13.840 companies were persistently guiding analysts to expect more out of 0:15:13.880 --> 0:15:16.920 them and it's a really positive tailwind for stock prices, 0:15:17.560 --> 0:15:20.560 in the third quarter, companies suddenly started saying, hey, analysts, 0:15:20.560 --> 0:15:23.720 maybe you're a little too optimistic, and that really is 0:15:23.720 --> 0:15:26.840 a reversion to normal times pre crisis, that was the norm. 0:15:26.880 --> 0:15:29.160 Companies constantly told analysts, you might be a little bit 0:15:29.200 --> 0:15:31.720 too optimistic. While we all know this earnings game where 0:15:31.720 --> 0:15:33.640 they guide analysts to expect a little less so they 0:15:33.640 --> 0:15:36.440 can beat every quarter. We seem to have reverted back 0:15:36.480 --> 0:15:40.280 to that norm, but that was particularly a profound change 0:15:40.320 --> 0:15:43.440 for tech, where that's where the vast majority of the 0:15:43.480 --> 0:15:45.920 negative guidance started to come from. As all of a sudden, 0:15:45.920 --> 0:15:47.720 the tech companies themselves were saying, you know what, the 0:15:47.800 --> 0:15:49.880 supply chain of stress is gonna last a little longer 0:15:49.920 --> 0:15:53.880 than we were hoping. And even though our sales are 0:15:53.880 --> 0:15:55.720 pretty strong, they may not be as strong as you 0:15:55.760 --> 0:15:58.800 were hoping for. And no, we're not going to be 0:15:58.880 --> 0:16:01.280 able to be as efficient as you had hoped and 0:16:01.320 --> 0:16:04.080 produced that bottom line earnings growth with margin expansion to 0:16:04.120 --> 0:16:07.720 degree that you're expecting. And we see that throughout all 0:16:08.240 --> 0:16:11.840 most of tech, but especially for the Magma companies because 0:16:11.840 --> 0:16:13.920 they are so in the spotlight and they did have 0:16:14.000 --> 0:16:17.440 such a gigantic valuation premium developed. But if you're just 0:16:17.480 --> 0:16:20.200 looking at over the next four quarters, for example, that 0:16:20.320 --> 0:16:23.640 Magma group is expected to post about eight hundred basis 0:16:23.680 --> 0:16:27.120 points slower EPs growth than the s MP five at large, 0:16:27.720 --> 0:16:32.640 so significantly slower EPs growth, which is anomalous. Right. This 0:16:32.720 --> 0:16:35.880 is a group that really persistently beat the SNP five 0:16:35.960 --> 0:16:37.920 hundred terms of earning growth right through the middle of 0:16:40.520 --> 0:16:43.600 that seems like a very weird scenario to me, where 0:16:43.680 --> 0:16:46.760 companies are guiding lower and analysts are raising their reestimates. 0:16:46.760 --> 0:16:48.840 Have you ever seen that before? And I mean it 0:16:48.880 --> 0:16:52.000 sounds like you're kind of perhaps uh side more at 0:16:52.000 --> 0:16:55.120 the analysts than the than the management. Yeah. So there's 0:16:55.160 --> 0:16:58.440 always these interesting dichotomies that emerge where companies there are 0:16:58.440 --> 0:17:01.280 more companies guiding lower than positive, but we never get 0:17:01.800 --> 0:17:05.119 one of companies giving us guidance as well, right, So 0:17:05.160 --> 0:17:08.520 we can only derive so much of our expectations from guidance. 0:17:08.560 --> 0:17:12.639 For tech, it's usually pretty good as an indicator because 0:17:13.000 --> 0:17:16.680 more tech companies guide than any other sector save consumer 0:17:16.720 --> 0:17:20.480 discretionary UM, so we get some pretty good guidance out 0:17:20.480 --> 0:17:22.919 of tech. We don't get guidance for all of the 0:17:23.000 --> 0:17:24.800 SMP five hundred though. As a matter of fact, we 0:17:24.800 --> 0:17:26.960 get guidance from less than a hundred companies in the 0:17:27.080 --> 0:17:29.640 SMP five hundreds, So you can only get so much 0:17:29.640 --> 0:17:34.359 out of it. But shifting direction can be meaningful as 0:17:34.400 --> 0:17:39.600 long as analyst expectations are still moving higher. That's generally 0:17:39.800 --> 0:17:43.280 the factor that matters more for equity prices and for 0:17:43.359 --> 0:17:47.520 equity markets at large, because that revision momentum reflects the 0:17:47.800 --> 0:17:51.280 entire herd of the analyst community for all SMP five 0:17:51.359 --> 0:17:55.240 hundred companies that large, So it's a much bigger um 0:17:55.320 --> 0:18:00.359 and broader and deeper indicator than guidances. That said, items 0:18:00.359 --> 0:18:03.040 can be meaningful for certain companies, and we certainly want 0:18:03.080 --> 0:18:06.440 to pay attention to it to some degree, but revisions 0:18:06.440 --> 0:18:10.000 are more important to follow. And frankly, the other thing 0:18:10.040 --> 0:18:12.920 to consider from a guidance perspective is just what does 0:18:12.960 --> 0:18:15.720 it really mean for guidance to be more negative than positive? 0:18:16.560 --> 0:18:19.280 And as I suggested earlier, we were in a really 0:18:19.359 --> 0:18:23.480 abnormal position when guidance was more positive than negative. That's 0:18:23.600 --> 0:18:28.240 where that almost never happens. That's what happened in one 0:18:28.560 --> 0:18:31.120 And I think a big part of why stocks just 0:18:31.240 --> 0:18:34.520 ripped so hard over the last two years is nobody 0:18:34.560 --> 0:18:38.440 thought we could do this well, including companies themselves, and 0:18:38.520 --> 0:18:42.879 so it came as such an incredible shock. Yeah, it 0:18:42.960 --> 0:18:45.679 wasn't that there was a situation where so many companies 0:18:45.800 --> 0:18:49.239 just either pull their guidance or give any because they 0:18:49.280 --> 0:18:51.720 just got up, stay through the cards in the errands, 0:18:52.040 --> 0:18:55.879 get it fold. Yeah, Yeah, which makes me wonder, you know, 0:18:56.080 --> 0:19:01.240 I assume, okay, and you know in on I don't 0:19:01.240 --> 0:19:05.000 think anyone, Uh, you know, it's sort of in your 0:19:05.160 --> 0:19:07.760 type of seat who has to make projections and estimates 0:19:07.800 --> 0:19:10.920 and and sort of predict the future. Uh, and correct 0:19:10.920 --> 0:19:13.480 me if I'm wrong, But I'm assuming your confidence level 0:19:13.720 --> 0:19:16.160 and everything was sort of lower than what it would 0:19:16.160 --> 0:19:19.600 have been, you know in a non pandemic environment. Certainly, 0:19:20.320 --> 0:19:23.760 where's your confidence level now in what you're analyzing for 0:19:23.520 --> 0:19:26.120 the for the future. Has it gotten back to that 0:19:26.359 --> 0:19:28.840 you know pre COVID level? Is it halfway there? You know? 0:19:30.000 --> 0:19:32.200 How do you think about how confident you are in 0:19:32.200 --> 0:19:34.880 in what your actually um? You know, your confidence level 0:19:34.920 --> 0:19:38.680 and predicting market valuations is always low. You know, it's 0:19:38.760 --> 0:19:42.760 just we all struggled for the holy grail of trying 0:19:42.800 --> 0:19:45.880 to find that perfect model that tells you where valuations 0:19:45.920 --> 0:19:48.680 should be. But on my regression models, for example, that 0:19:48.760 --> 0:19:51.600 try to predict the earning side of the SMP five 0:19:51.680 --> 0:19:55.760 hundred equation versus the multiple side, the earnings model is 0:19:55.760 --> 0:19:59.480 is roughly two thirds better than the multiple model, And 0:19:59.680 --> 0:20:01.959 there's is no way to know because when you're predicting 0:20:01.960 --> 0:20:04.879 the multiple, you're predicting sentiment to a certain degree. Obviously, 0:20:04.960 --> 0:20:06.520 how much our investor is going to be willing to 0:20:06.520 --> 0:20:10.000 pay for this cash flow over time. I will say 0:20:10.040 --> 0:20:12.560 that the earnings model I I would argue that you 0:20:12.560 --> 0:20:15.199 should be more confident that earnings growth will be at 0:20:15.240 --> 0:20:17.720 least stable to close to double digit growth over the 0:20:17.760 --> 0:20:20.000 course of this year. And I would say I'm more 0:20:20.040 --> 0:20:22.280 confident in our earnings model than i have been in 0:20:22.320 --> 0:20:26.480 the most recent past because things have finally normalized when 0:20:26.480 --> 0:20:29.160 you're coming right into recovery. Our earnings model is based 0:20:29.160 --> 0:20:32.560 on macroeconomic inputs, so we take things like where is 0:20:32.560 --> 0:20:35.720 the unemployment rate trending? Well. When the unemployment rate was 0:20:35.720 --> 0:20:40.960 trending back to five that created a lot of distortion 0:20:41.000 --> 0:20:44.240 in the model, as you might imagine, And now that 0:20:44.280 --> 0:20:47.360 we're back to more normalized conditions of unemployment, we can 0:20:47.480 --> 0:20:50.400 use a model more effectively when it's driven that way. 0:20:50.440 --> 0:20:52.280 And it's the same with durable goods orders. I have 0:20:52.359 --> 0:20:55.680 reasonable confidence that at this stage of the economic cycle 0:20:55.720 --> 0:20:59.120 will probably get pretty strong durable goods orders growth. That's 0:20:59.119 --> 0:21:02.120 an input to the mall at all. Um The things 0:21:02.160 --> 0:21:04.720 that are more uncertain right now are really more multiple 0:21:04.720 --> 0:21:07.560 and valuation based, which you know is kind of an 0:21:07.640 --> 0:21:12.760 environment of normal again. You know what was abnormal was 0:21:12.800 --> 0:21:18.160 an environment where the FED was printing money, more money 0:21:18.160 --> 0:21:21.280 than we'd ever seen. The balance she was expansion expanding 0:21:21.400 --> 0:21:23.919 faster than we've ever seen. Now we're moving into a 0:21:23.960 --> 0:21:28.160 more normalized environment, So hopefully the valuation model proves itself 0:21:28.200 --> 0:21:30.639 to be a little bit more predictable as well. But 0:21:31.640 --> 0:21:34.760 you know, interest rates I think are the big question 0:21:34.800 --> 0:21:38.639 mark for this year as opposed to economic conditions, and 0:21:38.720 --> 0:21:41.440 usually economic conditions drive the earnings models, so we should 0:21:41.440 --> 0:21:45.240