Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Joining us now Mike Wilson.
Speaker 3: He's chief US equity strategist at Morgan Stanley and exceptionally
Speaker 3: well timed here with a really smart Sunday note, a
Speaker 3: bit of go on, Alpha over beta. Explain the Greek letters,
Speaker 3: Mike Wilson to us, What is alpha?
Speaker 2: What is beta? And why does alpha winy?
Speaker 1: Good morning, Tom, Yeah, I think most of your listeners
Speaker 1: understand this. Beta is sort of your market level risk,
Speaker 1: where you just own the index and an alpha would
Speaker 1: be your stockpicking. It's that simple. And you know what's
Speaker 1: happened in the last three months is that the the
Speaker 1: index itself has gone sideways and and but there's been
Speaker 1: great opportunity under the surface. And that's really the job
Speaker 1: of most investors is to pick stocks and try.
Speaker 2: To beat people.
Speaker 1: So it's it's a good it's a good outcome if
Speaker 1: it can sustain for active managers. And by the way,
Speaker 1: people say, oh, stockpicking market, it doesn't mean it's easy,
Speaker 1: but I mean it does feel like what we're dealing.
Speaker 3: With kids kills me, he puts at the end of
Speaker 3: his notepall enjoy your Sunday. Come on Mike's Sunday Mike,
Speaker 3: I'm looking at the Bloomberg launch pad and I got
Speaker 3: a one ninety nine on the ten year real yield.
Speaker 3: My idiot ambiguity meter is that's a slowing economy. When
Speaker 3: you look at Seth Carpenter and companies work, do you
Speaker 3: model in a slowing or level economy where we walk
Speaker 3: away from double digit earnings growth?
Speaker 2: Yeah?
Speaker 1: Well, I mean, remember the economy is not always the
Speaker 1: market or earnings. And what we've seen in the last
Speaker 1: I would say, really three years is an economy that
Speaker 1: looks fairly robust at the at the aggregate level you
Speaker 1: can talk about at the consumer level or just in
Speaker 1: terms of GDP. But then when you look at earnings
Speaker 1: growth in the last several years, it's been pretty lousy
Speaker 1: for most companies until recently recently we've seen a pickup.
Speaker 1: More companies are starting to grow again. And I attribute
Speaker 1: this to essentially the government being you know, crowding out
Speaker 1: if you will, much of the economy. That is the
Speaker 1: reason we have inflation. For the main the main reason
Speaker 1: we have inflation, too much government spending. Also, it has
Speaker 1: it has kept interest rates higher than they would be normally,
Speaker 1: so real interest rates at two percent is actually quite high, Tom,
Speaker 1: as you know, for in the last fifteen years, and
Speaker 1: we're such a financialized economy that you know, that has
Speaker 1: had a sort of a breaking effect on you know,
Speaker 1: businesses that don't have easy access to capital. So I
Speaker 1: think the FED right now is sort of in a
Speaker 1: you know, tighter place than they probably want to be.
Speaker 1: They would like to cut rates, but they can't because
Speaker 1: inflation now is picking its head up again, so they're
Speaker 1: on hold. They're not going to raise rates in our view,
Speaker 1: but we're trying to find that equilibrium now, like how
Speaker 1: big should the government be? How you how can we
Speaker 1: liberate the private economy in a way where we have
Speaker 1: better velocity kind of in the in the real private
Speaker 1: economy than just government. Mike.
Speaker 4: I'm looking also your chart book where you guys track
Speaker 4: what companies are actually saying on their conference calls. What's
Speaker 4: top of mind for corporate America, And I guess, not surprisingly,
Speaker 4: one of those key issues is tariffs. How did terriffs
Speaker 4: kind of factor into kind of your view of inflation
Speaker 4: and maybe how the FED will proceed and how that
Speaker 4: might impact stocks.
Speaker 1: Yeah, well, I think the FED has told you, you know,
Speaker 1: pretty straightforward since December. That the uncertainty around Terrace is
Speaker 1: another reason why they're probably going to take a pause
Speaker 1: on the rate cutting campaign. Now, remember, they have another
Speaker 1: lever they can use, which I think they will, which
Speaker 1: is to basically end QT finally, which is you know,
Speaker 1: a decent amount of repurchases and across the curve. They
Speaker 1: can probably start doing that in May or June, and
Speaker 1: that's another lever that they can sort of pull on.
Speaker 1: As far as companies go, I mean, companies are always
Speaker 1: you know, trying to incorporate these changes into their their
Speaker 1: business models and how they're running their own companies. And
Speaker 1: tariffs are front and center right now because not only
Speaker 1: is that a potential heat, but it's also so uncertainty
Speaker 1: because you know, one day we have them, on the
Speaker 1: next day they're being delayed. And look, that's what companies
Speaker 1: have to manage that process. The good news is, I
Speaker 1: think in the last round of terrorists back in eighteen,
Speaker 1: a lot of companies did relocate some manufacturing, some final
Speaker 1: assembly at the areas like Mexico. I think that may
Speaker 1: be one of the reasons why the President is going
Speaker 1: after Mexico because that was kind of a backdoor way
Speaker 1: of avoiding tariffs on China. So it's just going to
Speaker 1: be you know, six months of uncertainty. And that's why
Speaker 1: companies are mentioning it because you know, they don't want
Speaker 1: to get caught, you know, in a way where they're
Speaker 1: guiding too high and then terrif's end up being a
Speaker 1: headwind for their growth expectations and equity markets.
Speaker 3: We have Mike Wilson with us and Morgan Stanley, Bob
Speaker 3: do All to join later. We welcome all of you
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Speaker 4: Paul Mike, We're gonna get We're gonna hear from Nvidia
Speaker 4: Wednesday after the close, since one of the last big
Speaker 4: big companies reporting earnings in this in this cycle. Here,
Speaker 4: what did you take away from this quarterly's earnings cycle?
Speaker 4: And you know, more importantly, maybe the guidance you've been
Speaker 4: paying attention to.
Speaker 1: Well, first of all, it shows that the fourth quarter
Speaker 1: was boom times now some of that, once again was
Speaker 1: government fiscal deficit was up forty percent year every year,
Speaker 1: but also there was some excitement around you know, just
Speaker 1: a clean election, maybe you have more pro growth, you know, administration,
Speaker 1: and so there was more activity in the fourth quarter,
Speaker 1: and so what we're seeing now is kind of just
Speaker 1: that rolling off a bit. Then maybe we got a
Speaker 1: little ahead of ourselves. Higher rates and hire a stronger
Speaker 1: dollar was weighing on some of the guidance for twenty five.
Speaker 1: You know, companies tend to do that seasonally anyways, they
Speaker 1: want to lower the bar a bit at the beginning
Speaker 1: of the year. But then the other things that have
Speaker 1: been we've been focused on really in no particular order, terrorists,
Speaker 1: as you already mentioned. Number two, we have immigration enforcement,
Speaker 1: which has been a huge fiscal boost and also a
Speaker 1: labor supply boost, and then we have right the department
Speaker 1: government efficiency. They they're off to an aggressive start. I'm
Speaker 1: optimistic that probably more optimistic than the most that they
Speaker 1: can make some headway there. But remember the more successful
Speaker 1: they are in the short term, the more growth negative
Speaker 1: that is in the near term before you get to
Speaker 1: the good stuff. And then of course the positive effects
Speaker 1: of policy like deregulation, maybe extending the tax cuts on
Speaker 1: those come later in the year. Those are those require
Speaker 1: congressional approval, and so that's just not you know, that's
Speaker 1: going to take six and twelve months, and so the
Speaker 1: bad stuff first and good stuff comes later.
Speaker 3: Mike Wilson, to get back to your idea that ELFA
Speaker 3: is the way this works, and let's just generalize that
Speaker 3: as individual stock selection.
Speaker 2: What is the Mike Wilson process?
Speaker 3: There?
Speaker 2: Is it securities research, Graham, Dot and Coddle bottom bottom up?
Speaker 3: Is it a cell side concept of looking at what's
Speaker 3: gonna win?
Speaker 2: Or is it more factor.
Speaker 3: Based where you're looking at different items and trying to
Speaker 3: figure out, like say, well, more momentum or something else win.
Speaker 1: That's a great question, Tom, and it has changed over time.
Speaker 1: I think the main thing that's changed in the institutional
Speaker 1: world anyways is the time horizon. So you know, twenty
Speaker 1: years ago, you know, I would say institutional investors were
Speaker 1: kind of in the six to twelve month time horizon.
Speaker 1: It's now, you know, one to three months and in
Speaker 1: some cases one to three days. So that's what's changed,
Speaker 1: and that means you just got to be really laser
Speaker 1: focused on kind of news at the margin, whether it's
Speaker 1: fundamental news around a specific company, whether it's a macro
Speaker 1: changing event that can affect certain companies differently. So all
Speaker 1: those things we look at, I would say the quantitative
Speaker 1: analysis and factor analysis has probably picked up the most
Speaker 1: most institutional investors now putting ourselves as advising them use
Speaker 1: that tool, and it's quite helpful. As you mentioned, price
Speaker 1: momentum is probably the most important factor variable because everybody
Speaker 1: likes to perform. And I would say, you know that
Speaker 1: can also get you in trouble because what is happening
Speaker 1: as you end up, as I'd like to say, using
Speaker 1: price as your analysts, as opposed to doing the analysis
Speaker 1: and then letting price follow. And I think that's just
Speaker 1: the where we live in now. Everybody's short termism. I
Speaker 1: don't think that's going to change any time soon.
Speaker 3: Bottle that for all of you worldwide, whatever your sophistication.
Speaker 3: What Mike Wilson just said there and Paul Sweden and
Speaker 3: I lived this of where three years became eighteen months
Speaker 3: and twelve months became three months. And what are we
Speaker 3: doing the window dress at the end of the quarter.
Speaker 3: The short term ism now and how can you prosper
Speaker 3: by pushing against that? Is Mike Wilson alluded to there.
Speaker 3: That was extraordinary.
Speaker 4: Yeah, a lot of it, I think coincident with the
Speaker 4: growth of hedge funds as well. Mike, what screens well
Speaker 4: for you guys these days.
Speaker 1: Well, getting back to the stock picking, I mean, you know,
Speaker 1: now this particular factor always screens well, but it's extremely
Speaker 1: important now as earning your vision breath. So companies that
Speaker 1: are showing are showing the ability to kind of, you know,
Speaker 1: continue to raise numbers. You're getting paid for that more
Speaker 1: now that you normally do. You always get paid for that,
Speaker 1: but now you're getting paid for it more and you're
Speaker 1: getting punished for it. On the other side, the other
Speaker 1: factor that's really working is quality. Quality has been working
Speaker 1: really well the last two or three years because of
Speaker 1: that sort of crowding out feature, but in the fall
Speaker 1: we saw a movement towards low quality, and then now
Speaker 1: we're giving that back. So large cap, quality, earnings, division breath.
Speaker 1: Those are the three most important factors, and of course
Speaker 1: price momentum still is important as well.
Speaker 4: How about on the industry side, what stands out to
Speaker 4: you guys these days?
Speaker 1: So it's been consistent really since November. Financials mainly the
Speaker 1: banks as opposed to other financials and capital markets companies. Software,
Speaker 1: particularly relative to say semi connectors and hardware, they're less
Speaker 1: affected by tariffs, and there's some reinvestment now as we
Speaker 1: go from the enabler to the adoption layer for AI.
Speaker 1: That should benefit media entertainment, you know, not just the yep.
Speaker 1: Media and entertainment in a traditional media entertainment names are
Speaker 1: doing well. Remember those are mostly domestic businesses, yeah, mostly domestic. Yeah.
Speaker 1: And then of course services, consumer services, which is the
Speaker 1: one part of the private economy which is still doing
Speaker 1: quite well. Services is doing much better than goods.
Speaker 4: Mike, I'm guessing from your clients you get an evaluation
Speaker 4: question or two every day. Boy, this market seems expensive.
Speaker 4: How do you respond generally?
Speaker 1: You know, we don't get many questions on valuation anymore.
Speaker 1: I think people have given up on that metric. That
Speaker 1: metric is faded in its importance in the short term, okay,
Speaker 1: And as I like to say, you know, in the
Speaker 1: short term, valuation doesn't matter at all. In the long term,
Speaker 1: it's the only thing that matters. So we've seen, you know,
Speaker 1: as race went back through four and a half percent
Speaker 1: of the upside, we identified that as an area where
Speaker 1: valuation would matter, it has mattered, but not to the
Speaker 1: degree that it has historically. So I'm not sure what's
Speaker 1: going to get us, you know, for that to become
Speaker 1: in vogue again, but it's it's not an important factor
Speaker 1: at the moment.
Speaker 4: Told to us about breath of the market, Mike, A
Speaker 4: lot of folks in a tors And slot today was
Speaker 4: just out with the note from Apollo, just talking about
Speaker 4: the concentration within this equity market par typically in big
Speaker 4: cap US technology names, and how that's really relative to
Speaker 4: the rest of the world just getting more and more pronounced.
Speaker 4: How do you think about breath or lack of breath
Speaker 4: in this market.
Speaker 1: Well, it gets back to quality. So and I would
Speaker 1: say the as bad as the concentration is in the US,
Speaker 1: you know, we have like five stocks or thirty percent,
Speaker 1: it's even worse in places like Germany where we have
Speaker 1: three stocks or thirty five percent or in parts of eight.
Speaker 1: And what's going on is the same thing that's going
Speaker 1: on here, which is that people are crowding into kind
Speaker 1: of these large camp quality stocks. It just so happens
Speaker 1: that the US has more of them, so, you know,
Speaker 1: but in other places of the world there fer them.
Speaker 1: Why the crowding is even more so. So it's just
Speaker 1: more of the same. You know, basically people, you know,
Speaker 1: the markets are smart, they've crowded into what's working. What's
Speaker 1: working is large cap quality, particularly quality growth in that
Speaker 1: because they have scale and they can operate in this
Speaker 1: world where perhaps rates are high. The government is a
Speaker 1: big part of the economy. You have a lot of uncertainty,
Speaker 1: multipolar world, geopolitics is you know, kind of putting pressure
Speaker 1: on certain regions, and you know, I think that continues
Speaker 1: for the foreseeable future. The thing they could change that
Speaker 1: which I'm getting a little excited about it is if
Speaker 1: we can shrink the government. So imagine this, you have
Speaker 1: a recession in government. I'm not sure that that would
Speaker 1: be that bad for the private economy. I'm not sure
Speaker 1: we're going to get that, but if we did, that
Speaker 1: would potentially change that dynamic.
Speaker 3: Mike Wilson very quickly here talk about enthusiasm. I mean
Speaker 3: Michigan State taking up Michigan and basketball. That was like
Speaker 3: Big Ten classic, wasn't it?
Speaker 1: Well classic for if you're not a Michigan fan.
Speaker 2: But they can still come back.
Speaker 1: The Big Ten is always competitive time. As I like
Speaker 1: to say in both basketball and football and other sports
Speaker 1: as well. So and Big Blue has had a good run.
Speaker 3: Yeah, I mean they're in second place. Mission, I mean
Speaker 3: they have the two teams up top.
Speaker 2: Of Big Ten. Is important? Why is USC in the
Speaker 2: Big Ten? Does Mike Wilson understand? Please?
Speaker 4: Hell the kids from Los Angeles that come all the
Speaker 4: way to Piscataway, New Jersey to play basketball, Oregon, it's in.
Speaker 2: The Big Ten. Mike Wilson, this is Unamerican. I hope
Speaker 2: Michigan takes every victory from the way pushes those Westerners
Speaker 2: out of it. Mister Wilson is with Morgan Stanley. Thank
Speaker 2: you so much, Mike Wilson.