Speaker 1: Time here nine minutes past the hour. Our guest is
Speaker 1: Max Wasserman, Founder and senior portfolio manager of Miramar Capital. Max,
Speaker 1: summarizing your notes, I'd say that you do see value
Speaker 1: in the market in the form of some individual companies,
Speaker 1: but at the index level, you don't or may not
Speaker 1: see value at the moment because of some considerations. So
Speaker 1: so you need to look beneath the hood and what
Speaker 1: are you finding. Well, thank you for having me on.
Speaker 1: What we're seeing is that with the interest rates going
Speaker 1: up and the said tightening the money tire supply, it's
Speaker 1: basically not good for growth stocks. And the index is
Speaker 1: SMP five hundred is a market gap weighted index, and
Speaker 1: it's really been a proxy for the last five six
Speaker 1: years for the NASTACK one hundred. So we see the
Speaker 1: multiples on the NASDACK and on the SMP is still
Speaker 1: too high in this environment. But when you look under
Speaker 1: the hood and you look a little bit more broad based,
Speaker 1: we see opportunities in a lot of their is. You
Speaker 1: can see them in healthcare, we can see them in
Speaker 1: the aftermarket auto replacement parts. We like in the defense area.
Speaker 1: We're looking for companies as divid investors that are growing
Speaker 1: their top line revenue, growing their dividends, and have the
Speaker 1: ability to sustain in this market environment. Given what do
Speaker 1: you have just said, what do you see as the
Speaker 1: biggest risk and how do you hedge against that? Well,
Speaker 1: I think we don't. We don't hedge. We're long only
Speaker 1: in our stock portfolio. But how you would defend yourself
Speaker 1: is basically lowering the beta in the portfolio. Not to
Speaker 1: be too technical, but when you have the high growth stocks,
Speaker 1: or what we call the higher risk companies, you've got
Speaker 1: to lower that exposure. So what we've done is we've
Speaker 1: basically lowered our exposure to the NASDAC and in the
Speaker 1: bond market, we shortened our duration because we're not fighting
Speaker 1: with the FET. The FET has told us that they're
Speaker 1: raising interest rates and they're going to continue, so we're
Speaker 1: going to take them at their word. Now, with the
Speaker 1: extraordinary shock that we've seen, how easy is it to
Speaker 1: find companies that are either steady with their dividend or
Speaker 1: raising their dividend and not fear that because of this
Speaker 1: huge dislocation, that that it could change quickly. Well, I
Speaker 1: think you've got to always stay on top of these
Speaker 1: companies and see what they're doing with the payout ratio
Speaker 1: and seeing what they're doing, what they're dividend policy. But
Speaker 1: for example, when you look at the defense companies, they're
Speaker 1: having a tremendous year. Companies like General Dynamics, Lockheed Martin
Speaker 1: which we have investments and have a tremendous year so far,
Speaker 1: and we see their revenue still climbing. Because what people
Speaker 1: don't realize in the defense industry, for example, it's a
Speaker 1: political I mean, the demand is there and given the
Speaker 1: fact there's so few of players and in this environment
Speaker 1: where uncertainty, there's just more demand. And as Europe restocked
Speaker 1: up their their armory, if you will, that's going to
Speaker 1: bode well for us because we supply a lot of it.
Speaker 1: When we look at companies like in the auto replacement area,
Speaker 1: to give an example another way of an investment, like
Speaker 1: Advance Auto Parts, we're looking at a company that is
Speaker 1: basically twelve times earnings, has a dividend payout ratio of
Speaker 1: like paying you about over four percent, and we think
Speaker 1: they have plenty of cash on hand. So we like
Speaker 1: companies with strong cash flow, great balance sheets, and we're
Speaker 1: not looking for companies that stretch out to meet the dividend.
Speaker 1: We want plenty of cash on the balance sheets to
Speaker 1: cover them on the whole nikes. I mean, what assumption
Speaker 1: to are you making about profitability? In three we talk
Speaker 1: about companies still dealing with high inflation, markets still dealing
Speaker 1: with supply chain issues. What does it all mean for
Speaker 1: profit Well, I think you're gonna you're gonna have two
Speaker 1: markets this year. You're gonna have the first quarter. The
Speaker 1: first half is going to be dealing with the slowing economy,
Speaker 1: and I think companies and earnings are not going to
Speaker 1: be a stellar So I think people are and they've
Speaker 1: already been dealing with the supply chain issue. They've already
Speaker 1: been lowering down their earnings estimates and dealing with the
Speaker 1: cost inflation, and we think that's going to come to
Speaker 1: fluition in the first half. That's why we think the
Speaker 1: multiple on the SMP is still too high given the
Speaker 1: earnings outbum So we think the first half of the
Speaker 1: years still gonna be chopping. Given the second half of
Speaker 1: the year, I think you'll see more clarification what the
Speaker 1: FET is doing, and as you'll see inflation we think
Speaker 1: will start coming under control more in the second half.
Speaker 1: The pressures will ease on the companies, but we think
Speaker 1: the first quarter is still going to be challenging two
Speaker 1: companies with earnings, and you're already seeing that a lot
Speaker 1: of great companies have basically been hit very hard due
Speaker 1: to inflation and rising dollar, supply chain issues. So as
Speaker 1: those ease going into the second half of next year,
Speaker 1: we think it's gonna be a much better market. But
Speaker 1: the FETE is still raising interest rates, You're still having
Speaker 1: some supply chain issues, You're still having some uncertainty. So
Speaker 1: that's where we think it's going to be chopping for
Speaker 1: a little while longer. Do do you think the reopening
Speaker 1: of China could mean an inflation problem is sort of
Speaker 1: stoked a little further this year and that it may
Speaker 1: take longer for central banks to get inflation under control. Well,
Speaker 1: that's a great question. That's what we've been really debating here.
Speaker 1: A lot we thought that the FED was going to
Speaker 1: change your policy in November December of last year. In
Speaker 1: the fetus, it was transitory and when they did. Now
Speaker 1: we believe the Fed, we believe that they will not
Speaker 1: necessarily be cutting interest rates the second half the year,
Speaker 1: which a lot of market analysts are looking for. We
Speaker 1: don't see that happening as quickly. Mediumuggle neutral, but I
Speaker 1: don't know if they're gonna be cutting interest rates. And
Speaker 1: with China opening up, that's more inflationary pressure. That's gonna
Speaker 1: put pressure on oil, that's gonna put demand. Hopefully they
Speaker 1: clears up supply chain. So we think we have a
Speaker 1: little ways before the FED were to stop. So if
Speaker 1: the Feds looking to raise another let's say a hundred
Speaker 1: basis points, they may do it in increments of fifty
Speaker 1: or quarter. But we don't see them doing an about
Speaker 1: face this summer, like everybody else is predicting. So we
Speaker 1: think it's as the China opens up, we think that's
Speaker 1: gonna put more pressure on the FED to stay the
Speaker 1: course they're on. So, Mike's what's the base case for
Speaker 1: the US economy. I mean, we're seeing a spike in
Speaker 1: layoffs at tech companies and bangs. Do you read that
Speaker 1: as a signal for an impending recession or not? I
Speaker 1: think the market it's whether or not where we feel it.
Speaker 1: But the body markets saying that that the economy is
Speaker 1: going to be slowing down. But I think what you're
Speaker 1: gonna see is it's going to be a reevaluation of
Speaker 1: what the earnings are going to be for the SMP.
Speaker 1: So right now people are looking for two twenty five
Speaker 1: and earnings um for next year, and we think it's
Speaker 1: going to be more like around two hundred. So at
Speaker 1: two hundred you're looking about still a seventeen multiple. So
Speaker 1: we think you can see the multiple come down one
Speaker 1: or two times. Again, it's a market weighted cap index,
Speaker 1: so we think it's gonna be very challenging. Yes, we
Speaker 1: think you could. You could see a recession, but the market,
Speaker 1: i think is starting to discount that already. I think
Speaker 1: what concerns us is the fact that everybody keeps thinking
Speaker 1: this is going to do about face and that the
Speaker 1: Fed's going to bail everybody out on the second half
Speaker 1: by cutting interest rates. We're not so convinced that that's
Speaker 1: going to happen. So we're cautioning people still stay away
Speaker 1: from the high risk areas of the market. And we're
Speaker 1: not convinced that you should be jumping out on the
Speaker 1: yield curve yet. But we may be getting towards the
Speaker 1: peak of inflation and the end of of higher rates,
Speaker 1: and if you look at cyclical companies or if you
Speaker 1: just look at say financials and energy, they're nowhere near
Speaker 1: the lows of the year, and they've made some pretty
Speaker 1: handsome moves here in the past couple of months. Is
Speaker 1: that suggesting a trend that looks much better to say,
Speaker 1: six months out. Yeah. I think energy specifically, as was
Speaker 1: in such trouble for so many years that people just
Speaker 1: forget you're on the verge of bankrupts either cutting their dividends.
Speaker 1: We still think that's gonna The energy is on a
Speaker 1: different cycle, we believe right now with the shutdown and production,
Speaker 1: with the fact that the US energy policy is a
Speaker 1: little bit all over the place, and the fact that
Speaker 1: oil demand we think are going to stay with us
Speaker 1: for a while, we could see energy staying at this
Speaker 1: oil stand at these prices are to a hundred dollars
Speaker 1: a barrel. That could be consistent through the year, regardless um,
Speaker 1: maybe a slowdown in the US because of trying to
Speaker 1: comes back on the market that put up up pressure
Speaker 1: on it. Industrials, we like it. We just like it selectively. Financials.
Speaker 1: You know, financials has not been the greatest for the banks.
Speaker 1: The banks have had a very challenging time and we
Speaker 1: think maybe next year could be a little bit better
Speaker 1: for them and evaluation perspective, and again as divid investors,
Speaker 1: you know, we like the three to four percent eiels
Speaker 1: we're getting on major banks which have strong balance sheets,
Speaker 1: so we look financials will be good. We just think
Speaker 1: the area that's not going to be as strong, the
Speaker 1: leadership is not going to re emerge as quickly is technology.
Speaker 1: We think those multiples are still too hot. We're still
Speaker 1: reading the leaves. Mix Wassaman, Founder and Senior portfolio manager
Speaker 1: of Merrimount Capital, We thank you so much for your
Speaker 1: insights today