1 00:00:13,880 --> 00:00:17,119 Speaker 1: Hello, and welcome to What Goes Up, a weekly markets podcast. 2 00:00:17,200 --> 00:00:19,160 Speaker 1: My name is Mike Reagan. I'm a senior editor at 3 00:00:19,160 --> 00:00:22,400 Speaker 1: Bloomberg and then mal Donna Hark across Acid reporter with Bloomberg. 4 00:00:22,800 --> 00:00:25,319 Speaker 1: This week on the show, Well, in case you missed it, 5 00:00:25,560 --> 00:00:27,800 Speaker 1: there's a little bit of tension brewing on Wall Street. 6 00:00:27,920 --> 00:00:31,920 Speaker 1: Many economists and macro oriented investors are bracing for a 7 00:00:31,960 --> 00:00:36,240 Speaker 1: recession in and with that would likely come a nasty 8 00:00:36,320 --> 00:00:41,000 Speaker 1: drop in corporate profits. But analysts who study individual companies 9 00:00:41,040 --> 00:00:44,240 Speaker 1: haven't reduced their profit estimates enough yet to signal and 10 00:00:44,360 --> 00:00:47,519 Speaker 1: earnings recession is on the way. So what exactly is 11 00:00:47,640 --> 00:00:50,320 Speaker 1: up with this disconnect between the top down and the 12 00:00:50,360 --> 00:00:52,680 Speaker 1: bottom up views of the market and what does it 13 00:00:52,720 --> 00:00:56,160 Speaker 1: mean for your investments in We'll get into it with 14 00:00:56,200 --> 00:00:59,720 Speaker 1: one of Wall Street's best known strategists. But first of all, Donna, 15 00:00:59,800 --> 00:01:01,720 Speaker 1: I gotta tell you, I'm freaking out about something, but 16 00:01:02,120 --> 00:01:04,000 Speaker 1: you're freaking out about a lot of I'm freaking out 17 00:01:04,040 --> 00:01:06,360 Speaker 1: about something. Yeah, what is it? What do you cook 18 00:01:06,440 --> 00:01:09,039 Speaker 1: your cauliflower with? What type of stove do you have? 19 00:01:09,520 --> 00:01:11,760 Speaker 1: Oh my god, this is a sore subject for me. 20 00:01:11,920 --> 00:01:14,679 Speaker 1: Our gas is out in our building. I'm not cooking 21 00:01:14,720 --> 00:01:19,040 Speaker 1: anything that's good, that's good. Why these gas stoves are 22 00:01:19,120 --> 00:01:21,880 Speaker 1: killing us all? Do you realize that they're they're banning 23 00:01:21,880 --> 00:01:24,720 Speaker 1: them right, They're going to ban them all nowhere. I'm 24 00:01:24,840 --> 00:01:27,760 Speaker 1: very alarmed that news came out the same day that 25 00:01:27,800 --> 00:01:30,360 Speaker 1: they turned my gas off, well in my entire building. 26 00:01:30,520 --> 00:01:34,080 Speaker 1: So I'm not I'm just not going to eat. Yeah, 27 00:01:34,160 --> 00:01:35,760 Speaker 1: I'm just not going to eat for the next like 28 00:01:36,000 --> 00:01:38,920 Speaker 1: three months. Probably. I think this is a scheme by 29 00:01:38,959 --> 00:01:41,399 Speaker 1: door dash. I think they want you to go along door. 30 00:01:42,160 --> 00:01:44,000 Speaker 1: What do you think we should check how much they're 31 00:01:44,000 --> 00:01:49,040 Speaker 1: paying lobbyists to kill gas ovens? All right, Well, maybe 32 00:01:49,040 --> 00:01:51,960 Speaker 1: our guest has some thoughts on doordas. She might, she 33 00:01:52,080 --> 00:01:57,440 Speaker 1: might not. Probably not, I'll spoil it, probably not. But 34 00:01:57,480 --> 00:02:00,800 Speaker 1: who doesn't like delivery? Everybody likes celebrity, including our guests. 35 00:02:00,840 --> 00:02:03,600 Speaker 1: Probably I want to bring in Sevita Subramanian. She's the 36 00:02:03,600 --> 00:02:07,400 Speaker 1: head of US equity strategy at Bank of America. Savita, 37 00:02:07,560 --> 00:02:09,840 Speaker 1: welcome to the show. Thanks for having me. B Donna, 38 00:02:10,000 --> 00:02:15,800 Speaker 1: and I do love delivery. Who doesn't. I wish my 39 00:02:15,919 --> 00:02:17,799 Speaker 1: guest stove was out so that I had a good 40 00:02:17,840 --> 00:02:21,160 Speaker 1: excuse not to cook. It is a very good excuse 41 00:02:21,200 --> 00:02:24,280 Speaker 1: to get take out. I always thought my guest stove 42 00:02:24,400 --> 00:02:26,239 Speaker 1: was gonna kill me because the kids always leave the 43 00:02:26,240 --> 00:02:28,240 Speaker 1: pizza box on top of it, and I'm afraid the 44 00:02:28,280 --> 00:02:32,200 Speaker 1: dog's gonna sniff the pizza and go and turn. These 45 00:02:32,200 --> 00:02:37,440 Speaker 1: are some crazy it won't happen. It won't happen. Um 46 00:02:37,440 --> 00:02:40,400 Speaker 1: but sevida so so. Mike mentioned in the introduction, you're 47 00:02:40,400 --> 00:02:44,000 Speaker 1: one of our best known strategies on Wall Street, and 48 00:02:44,040 --> 00:02:46,560 Speaker 1: so I wanted maybe to just start out having you 49 00:02:46,639 --> 00:02:48,680 Speaker 1: tell us about your year and price target for the 50 00:02:48,800 --> 00:02:51,600 Speaker 1: SMP five hundred, and I believe that you guys also 51 00:02:52,080 --> 00:02:56,040 Speaker 1: have different variables and scenes playing out for the year. 52 00:02:56,080 --> 00:02:58,720 Speaker 1: Maybe you can talk about those as well. Yeah. Absolutely, 53 00:02:58,760 --> 00:03:01,680 Speaker 1: it's um so so our official year in target. You know, 54 00:03:01,720 --> 00:03:04,120 Speaker 1: it's it's kind of a point in time forecast where 55 00:03:04,120 --> 00:03:07,760 Speaker 1: we we think the market will close around four thousand 56 00:03:08,000 --> 00:03:11,600 Speaker 1: the SMP five hundred, which is really limited upside from here. 57 00:03:11,960 --> 00:03:14,480 Speaker 1: Um but we think there's a lot of moves within 58 00:03:14,560 --> 00:03:17,400 Speaker 1: the year. So let's talk about a range. I think 59 00:03:17,400 --> 00:03:20,959 Speaker 1: our book case, like, if everything goes right, we think 60 00:03:21,000 --> 00:03:24,320 Speaker 1: the market could go as high as forty hundred, which 61 00:03:24,320 --> 00:03:27,320 Speaker 1: would be a pretty great year, and then our bear 62 00:03:27,400 --> 00:03:30,440 Speaker 1: case and what we think is a reasonable floor for 63 00:03:30,520 --> 00:03:34,280 Speaker 1: the market is three thousand, which would be quite a 64 00:03:34,280 --> 00:03:37,120 Speaker 1: big drop from here. So, you know, I think our 65 00:03:37,200 --> 00:03:40,160 Speaker 1: views are in two thousand twenty three, it might be 66 00:03:40,480 --> 00:03:43,680 Speaker 1: a less than stellar year for the index, for the 67 00:03:43,760 --> 00:03:46,800 Speaker 1: market index, but we think there are gonna be a 68 00:03:46,800 --> 00:03:51,040 Speaker 1: lot of great opportunities within the SMP five hundred. And 69 00:03:51,080 --> 00:03:54,120 Speaker 1: you know, I think that's where we're really focused with 70 00:03:54,120 --> 00:03:57,640 Speaker 1: with our views is what sectors, what themes, you know, 71 00:03:57,680 --> 00:04:01,080 Speaker 1: what areas within the SMP five hundred can actually do 72 00:04:01,160 --> 00:04:04,680 Speaker 1: pretty well this year, you know, amidst a backdrop of 73 00:04:04,680 --> 00:04:08,960 Speaker 1: of relatively muted returns for the overall market. I want 74 00:04:08,960 --> 00:04:12,640 Speaker 1: to get into those themes and sectors sevida. But like 75 00:04:12,680 --> 00:04:16,440 Speaker 1: I said in the introduction, I'm fascinated by this notion 76 00:04:16,680 --> 00:04:20,760 Speaker 1: that pretty much everyone assumes all these earnings estimates from 77 00:04:20,760 --> 00:04:23,240 Speaker 1: the analysts right now or wrong, you know, all the 78 00:04:23,279 --> 00:04:25,320 Speaker 1: top down view of the market is that what are 79 00:04:25,360 --> 00:04:28,400 Speaker 1: they thinking, Uh, these estimates have to be cut? What 80 00:04:28,440 --> 00:04:31,080 Speaker 1: do you think explains that? I mean, our our analysts 81 00:04:31,120 --> 00:04:34,040 Speaker 1: just sort of waiting for the companies themselves to lower guidance. 82 00:04:34,120 --> 00:04:37,039 Speaker 1: You know, is this four fourth quarter reporting season really 83 00:04:37,080 --> 00:04:40,480 Speaker 1: gonna pull that out from all the conference calls. You know, 84 00:04:40,560 --> 00:04:43,159 Speaker 1: how do you see this unfolding? I think you're right. 85 00:04:43,200 --> 00:04:46,640 Speaker 1: I think that analysts are in sort of weight and 86 00:04:46,720 --> 00:04:49,159 Speaker 1: C mode, and maybe even companies are in weight and 87 00:04:49,279 --> 00:04:53,800 Speaker 1: C mode, because you know, the real positive surprise over 88 00:04:53,839 --> 00:04:59,480 Speaker 1: the last few years is that despite rampant inflation, cost 89 00:04:59,560 --> 00:05:04,000 Speaker 1: pressure or wage pressure, you know, everything going up to 90 00:05:04,760 --> 00:05:07,680 Speaker 1: you know, pretty high levels in terms of you know, 91 00:05:07,760 --> 00:05:11,920 Speaker 1: kind of margin pressure, companies have managed to navigate this 92 00:05:12,080 --> 00:05:17,240 Speaker 1: by either you know, pricing products more aggressively or by uh, 93 00:05:17,279 --> 00:05:20,240 Speaker 1: you know, cutting costs. And I think on top of that, 94 00:05:20,279 --> 00:05:23,919 Speaker 1: we're seeing corporates very nimble in terms of cutting costs. 95 00:05:23,960 --> 00:05:26,360 Speaker 1: A lot of the headlines recently have been around megacap 96 00:05:26,440 --> 00:05:30,440 Speaker 1: tech companies, you know, uh, kind of reducing their compensation 97 00:05:30,839 --> 00:05:35,000 Speaker 1: cost structure by by layoffs, you know, not necessarily great 98 00:05:35,040 --> 00:05:38,000 Speaker 1: for the economy, but good for their bottom line. So 99 00:05:38,000 --> 00:05:40,880 Speaker 1: so I think that analysts and you know, in corporates 100 00:05:40,920 --> 00:05:46,200 Speaker 1: are are probably a little less convicted in terms of 101 00:05:46,640 --> 00:05:50,480 Speaker 1: margins and cost pressure and pricing power going forward. Our 102 00:05:50,560 --> 00:05:55,640 Speaker 1: view is that we are likely to see some downward revisions, 103 00:05:55,800 --> 00:05:59,800 Speaker 1: and you know, our forecast for profits growth for three 104 00:06:00,160 --> 00:06:03,200 Speaker 1: is you know, two hundred bucks for the SMP five hundred, 105 00:06:03,880 --> 00:06:06,320 Speaker 1: and that would mean about a ten percent decline in 106 00:06:06,400 --> 00:06:10,599 Speaker 1: earnings peak to trough. Now, you know, I think that 107 00:06:10,640 --> 00:06:15,520 Speaker 1: makes sense to us amidst UH forecasts for a recession. 108 00:06:15,800 --> 00:06:18,680 Speaker 1: This is, you know, one of the most widely telegraphed 109 00:06:18,720 --> 00:06:21,880 Speaker 1: recessions of of all time. I think we're all just 110 00:06:21,920 --> 00:06:25,560 Speaker 1: sitting here bracing ourselves for it. UM, a teen percent 111 00:06:25,600 --> 00:06:28,200 Speaker 1: drop in earnings would actually be half of the typical 112 00:06:28,320 --> 00:06:32,000 Speaker 1: recessionary corporate earnings drop. So so we think that we 113 00:06:32,040 --> 00:06:34,360 Speaker 1: are going to see those estimates come down, and it's 114 00:06:34,520 --> 00:06:40,040 Speaker 1: likely to happen after companies guide more aggressively lower around 115 00:06:40,400 --> 00:06:43,000 Speaker 1: three earnings UM. But you know, I think where we're 116 00:06:43,000 --> 00:06:47,240 Speaker 1: going to see pressures are in companies with more labor intensity, 117 00:06:47,279 --> 00:06:52,479 Speaker 1: like services companies, companies where you're really seeing cost pressure 118 00:06:52,600 --> 00:06:55,359 Speaker 1: remain high. Those are the areas where we think that 119 00:06:55,400 --> 00:06:58,839 Speaker 1: we're going to see some downward guides on on margins 120 00:07:00,200 --> 00:07:02,479 Speaker 1: and savita. I want to ask you about what specifically 121 00:07:02,480 --> 00:07:06,039 Speaker 1: you'll be looking for this earning season, and I think 122 00:07:06,080 --> 00:07:08,880 Speaker 1: you guys have you guys have really great UM daily 123 00:07:08,880 --> 00:07:13,440 Speaker 1: and weekly research. I remember from past earning seasons that 124 00:07:13,520 --> 00:07:16,200 Speaker 1: you have Maybe it's sort of like an AI driven 125 00:07:16,240 --> 00:07:19,080 Speaker 1: model or something along those lines, where you sift through 126 00:07:19,120 --> 00:07:21,680 Speaker 1: all the earnings reports and you look for keywords and 127 00:07:21,720 --> 00:07:24,360 Speaker 1: some of the things that are mentioned the most number 128 00:07:24,360 --> 00:07:27,239 Speaker 1: of times. So if we're behind, if we have peak 129 00:07:27,440 --> 00:07:30,920 Speaker 1: inflation behind us, UM, what will you be looking for? 130 00:07:31,000 --> 00:07:34,040 Speaker 1: What keywords, what trends and and and UM will you 131 00:07:34,160 --> 00:07:38,560 Speaker 1: be sort of cluing into as these earnings reports roll out? Yeah, 132 00:07:38,560 --> 00:07:41,760 Speaker 1: thanks for that question, and thanks for reading our research. 133 00:07:42,440 --> 00:07:46,440 Speaker 1: Always read it. We do a lot of kind of 134 00:07:46,520 --> 00:07:50,320 Speaker 1: text analysis, and you know, some of the things that 135 00:07:50,360 --> 00:07:53,640 Speaker 1: we've been able to unearth UM during different periods are 136 00:07:54,000 --> 00:07:59,800 Speaker 1: you know, kind of inventory pressures, UM, demand destruction, UM 137 00:08:00,240 --> 00:08:03,400 Speaker 1: inability to price. So this quarter what we are laser 138 00:08:03,440 --> 00:08:06,360 Speaker 1: focused on our couple of things. As I mentioned, we 139 00:08:06,440 --> 00:08:09,560 Speaker 1: want to hear more from companies around whether the tightness 140 00:08:09,600 --> 00:08:12,320 Speaker 1: in the labor market is alleviating, because that has been 141 00:08:12,360 --> 00:08:16,160 Speaker 1: the theme for the last you know, almost eight quarters now, 142 00:08:16,280 --> 00:08:19,680 Speaker 1: is just the inability of companies to source labor unless 143 00:08:19,680 --> 00:08:24,720 Speaker 1: they dramatically increase prices, especially at the lower income end. UM. 144 00:08:24,760 --> 00:08:29,480 Speaker 1: We're also listening for more news around layoffs in services sectors. 145 00:08:29,520 --> 00:08:31,560 Speaker 1: So you know, so far we've really heard it only 146 00:08:31,600 --> 00:08:34,600 Speaker 1: from you know, megacab tech companies. We're waiting to see 147 00:08:34,640 --> 00:08:38,800 Speaker 1: whether that spreads to a broader array of companies. UM, 148 00:08:38,920 --> 00:08:43,079 Speaker 1: we're also listening for thoughts around you know, kind of 149 00:08:43,080 --> 00:08:46,319 Speaker 1: this inventory mismatch. So we've seen some of the supply 150 00:08:46,480 --> 00:08:50,680 Speaker 1: chain frictions alleviate, and now we're wondering how much inventory 151 00:08:50,760 --> 00:08:53,640 Speaker 1: companies have to work off, and that could be another 152 00:08:53,800 --> 00:08:59,600 Speaker 1: drag on on pricing, power, demand, earnings pressure, etcetera. We're 153 00:08:59,600 --> 00:09:01,560 Speaker 1: all you I think some of the other factors that 154 00:09:01,559 --> 00:09:03,880 Speaker 1: we're paying attention to from a from an earnings for 155 00:09:03,960 --> 00:09:07,640 Speaker 1: share perspective are buy backs. So you know, the last 156 00:09:07,760 --> 00:09:11,840 Speaker 1: five years we've seen buy backs contribute about ten percentage 157 00:09:11,840 --> 00:09:15,280 Speaker 1: points of SMP profits growth. That's a huge amount and 158 00:09:15,360 --> 00:09:20,840 Speaker 1: it's really unusual versus prior cycles. So if that buy 159 00:09:20,880 --> 00:09:24,400 Speaker 1: back trend also decelerates, and there are good reasons to 160 00:09:24,440 --> 00:09:27,439 Speaker 1: believe it does, I mean, the government is now taxing 161 00:09:27,559 --> 00:09:30,760 Speaker 1: corporate buy backs. You know, companies might be more likely 162 00:09:30,880 --> 00:09:33,840 Speaker 1: to hold cash rather than spend it on buy backs 163 00:09:33,840 --> 00:09:36,280 Speaker 1: if we are worried about a downturn. So that's another 164 00:09:36,320 --> 00:09:39,319 Speaker 1: trend we're listening for um and our view is again 165 00:09:39,760 --> 00:09:42,840 Speaker 1: for share earnings growth has been really juiced up over 166 00:09:42,880 --> 00:09:46,240 Speaker 1: the last five plus years by just um you know, 167 00:09:46,400 --> 00:09:50,439 Speaker 1: rampant buy back activity, and if that cools, that will 168 00:09:50,480 --> 00:09:55,360 Speaker 1: be another source of potential risk to two earnings going forward. 169 00:09:56,080 --> 00:09:58,840 Speaker 1: You know, Sevita, you've mentioned some of the layoffs among 170 00:09:58,880 --> 00:10:00,960 Speaker 1: the big tech company ease. I think a lot of 171 00:10:00,960 --> 00:10:03,760 Speaker 1: people are bracing for perhaps a wave of layoffs in 172 00:10:03,800 --> 00:10:06,559 Speaker 1: the financial sector, you know, which I'm assuming a lot 173 00:10:06,559 --> 00:10:10,160 Speaker 1: of our listeners are employed in our layoffs. Automatically good 174 00:10:10,160 --> 00:10:12,880 Speaker 1: news for the share price this year is as just 175 00:10:12,920 --> 00:10:15,360 Speaker 1: to be blunt and say it out front. If if 176 00:10:15,360 --> 00:10:19,280 Speaker 1: I see a headline such and such is cutting x percent, 177 00:10:19,520 --> 00:10:21,840 Speaker 1: is that automatically good news for the stock price or 178 00:10:21,880 --> 00:10:24,079 Speaker 1: is it is there more nuanced? Do you think, well, 179 00:10:24,120 --> 00:10:25,959 Speaker 1: you know, it's good news and that the company is 180 00:10:26,000 --> 00:10:29,080 Speaker 1: being nimble and addressing this issue of you know, bloated 181 00:10:29,520 --> 00:10:34,520 Speaker 1: compensation costs and maybe you know, rationalizing capacity. But I 182 00:10:34,600 --> 00:10:38,720 Speaker 1: do think that the the signal it's giving us is 183 00:10:38,720 --> 00:10:41,840 Speaker 1: that this company is in workout mode. So yes, they're 184 00:10:41,840 --> 00:10:46,000 Speaker 1: being nimble, they're addressing these issues. But First of all, 185 00:10:46,080 --> 00:10:49,600 Speaker 1: it means that they you know, sort of misallocated capital 186 00:10:50,240 --> 00:10:53,679 Speaker 1: um in in in a better period of time. And 187 00:10:53,920 --> 00:10:59,360 Speaker 1: second of all, it means that from an economic perspective, especially, 188 00:10:59,360 --> 00:11:01,880 Speaker 1: I think in this getting into this recession, what could 189 00:11:01,880 --> 00:11:03,880 Speaker 1: be different this time is that a lot of the 190 00:11:03,960 --> 00:11:06,640 Speaker 1: layoffs are really happening at the higher income end or 191 00:11:06,679 --> 00:11:09,680 Speaker 1: the skilled labor end. And what that means is that, 192 00:11:09,760 --> 00:11:12,880 Speaker 1: you know, typically in a recession, luxury goods are more 193 00:11:12,920 --> 00:11:18,280 Speaker 1: defensive than lower, lower price point products. But in this recession, 194 00:11:18,320 --> 00:11:21,319 Speaker 1: maybe luxury isn't as defensive because a lot of the 195 00:11:21,400 --> 00:11:24,360 Speaker 1: layoffs are really much more acute at that kind of 196 00:11:24,400 --> 00:11:28,400 Speaker 1: skilled services and tech level. UM. So those are some 197 00:11:28,480 --> 00:11:31,240 Speaker 1: of the things that we're watching from a company perspective. 198 00:11:31,280 --> 00:11:34,240 Speaker 1: For the most part, we've found that investors have lauded 199 00:11:34,840 --> 00:11:39,280 Speaker 1: the news around layoffs um you know, as a source 200 00:11:39,440 --> 00:11:43,840 Speaker 1: of alleviation of margin pressure. But I think that you know, 201 00:11:44,240 --> 00:11:48,880 Speaker 1: whether or not that's enough to offset the Also, deteriorating 202 00:11:48,960 --> 00:11:53,559 Speaker 1: demand is the big question, so top line becomes important. Yes, 203 00:11:53,640 --> 00:11:57,800 Speaker 1: companies are being very nimble at managing costs, but they're 204 00:11:57,840 --> 00:12:00,720 Speaker 1: doing this because they're seeing less demand and and less 205 00:12:00,760 --> 00:12:04,520 Speaker 1: ability to um, you know, continue operations with their current 206 00:12:04,920 --> 00:12:08,240 Speaker 1: labor setups, so that that votes ill for you know, 207 00:12:08,360 --> 00:12:11,760 Speaker 1: demand in uh in terms of uh, you know, kind 208 00:12:11,760 --> 00:12:14,640 Speaker 1: of top line growth. When we look at tech companies, 209 00:12:14,960 --> 00:12:16,920 Speaker 1: one of the things that worries us, and we're underweight 210 00:12:17,160 --> 00:12:21,120 Speaker 1: information technology as well as communication services, and one of 211 00:12:21,160 --> 00:12:23,400 Speaker 1: the things that worries us is that, you know, kind 212 00:12:23,400 --> 00:12:26,120 Speaker 1: of similar to Y two K back in two thousand, 213 00:12:26,880 --> 00:12:31,560 Speaker 1: we've seen this massive pull forward of demand for tech 214 00:12:31,840 --> 00:12:36,440 Speaker 1: during COVID work from home, um, you know kind of 215 00:12:36,559 --> 00:12:40,200 Speaker 1: you know, all of the telecommuting that we've done, and 216 00:12:40,280 --> 00:12:43,959 Speaker 1: so what we're seeing now is potentially a hit to 217 00:12:44,880 --> 00:12:50,400 Speaker 1: CAPEX on software of companies that already sort of you know, 218 00:12:50,520 --> 00:12:55,520 Speaker 1: really address their software spend over the last couple of years. 219 00:12:55,600 --> 00:12:57,960 Speaker 1: So I think that's what we're worried about for tech 220 00:12:58,000 --> 00:13:01,720 Speaker 1: companies is you know, maybe what they're doing is great 221 00:13:01,760 --> 00:13:04,440 Speaker 1: in terms of managing costs, but how much of their 222 00:13:04,480 --> 00:13:08,400 Speaker 1: demand is really cyclical rather than as sticky as what 223 00:13:08,480 --> 00:13:11,800 Speaker 1: everybody was forecasting, you know, in the in prior years. 224 00:13:12,400 --> 00:13:15,679 Speaker 1: And we mentioned recession a couple of times down how 225 00:13:15,720 --> 00:13:19,520 Speaker 1: this is one of the most well telegraphed recessions ever 226 00:13:19,920 --> 00:13:22,040 Speaker 1: but you actually say that this is not your mom 227 00:13:22,080 --> 00:13:25,640 Speaker 1: and dad's recession. So I'm wondering what you are expecting 228 00:13:25,679 --> 00:13:28,600 Speaker 1: and how you might characterize. I will say that was 229 00:13:28,640 --> 00:13:31,080 Speaker 1: good news when I read that, because my dad was 230 00:13:31,120 --> 00:13:34,880 Speaker 1: born right at the beginning of the Great Depression. So 231 00:13:35,240 --> 00:13:40,120 Speaker 1: for me, that's why you could crowd his life. You 232 00:13:40,120 --> 00:13:42,520 Speaker 1: could put like ten pounds of spaghetti on his plate. 233 00:13:42,760 --> 00:13:48,520 Speaker 1: He'd eat every piece of spaghetti because he yea spaghetti 234 00:13:48,600 --> 00:13:50,880 Speaker 1: is exactly right. I mean, I think that when we 235 00:13:50,960 --> 00:13:55,959 Speaker 1: think about our parents, and you know, prior generations, recessions 236 00:13:56,120 --> 00:13:59,520 Speaker 1: looked really different. And I think I mean, obviously the 237 00:13:59,559 --> 00:14:03,079 Speaker 1: Depression was was one of the most acute recessions we've 238 00:14:03,120 --> 00:14:05,920 Speaker 1: ever seen, I think, even two thousand and eight, when 239 00:14:05,960 --> 00:14:09,440 Speaker 1: when you think about kind of the drama that took 240 00:14:09,440 --> 00:14:15,320 Speaker 1: place within corporate America, within consumers, homeowners, it was really 241 00:14:15,400 --> 00:14:18,160 Speaker 1: broad spread. It was driven by this you know, massive 242 00:14:18,280 --> 00:14:22,280 Speaker 1: credit cycle. And I think the good news is that 243 00:14:22,760 --> 00:14:28,080 Speaker 1: today corporates and consumers actually look pretty well capitalized, at 244 00:14:28,120 --> 00:14:30,720 Speaker 1: least for the time being. And maybe that's just a 245 00:14:30,720 --> 00:14:33,320 Speaker 1: function of really low interest rates, but I think what 246 00:14:33,400 --> 00:14:36,440 Speaker 1: corporates learned in two thousand and eight was that leverage 247 00:14:36,480 --> 00:14:41,680 Speaker 1: is evil, and they have now locked in relatively long 248 00:14:41,800 --> 00:14:46,760 Speaker 1: dated fixed rate obligations on the on the debt side, 249 00:14:47,360 --> 00:14:50,320 Speaker 1: Like to me, the most encouraging number is if you 250 00:14:50,400 --> 00:14:54,760 Speaker 1: compared today's average maturity of debt on SMP balance sheets 251 00:14:54,880 --> 00:14:58,560 Speaker 1: to that in two thousand eight, today debt terms out 252 00:14:58,600 --> 00:15:01,520 Speaker 1: at about on average a eleven years back in a way, 253 00:15:01,600 --> 00:15:04,320 Speaker 1: it was more like seven years. So we've seen this 254 00:15:04,320 --> 00:15:08,920 Speaker 1: this longer duration exposure to to fixed rate debt, which 255 00:15:08,920 --> 00:15:10,960 Speaker 1: I think is good news because that means that higher 256 00:15:11,000 --> 00:15:13,720 Speaker 1: interest rates won't hurt these companies overnight and they have 257 00:15:13,840 --> 00:15:18,640 Speaker 1: time to navigate that that process. Consumers similarly are well. 258 00:15:18,680 --> 00:15:21,240 Speaker 1: They got a big bullus of cash from the government 259 00:15:21,880 --> 00:15:26,040 Speaker 1: in one so you know, balance sheets of consumers and 260 00:15:26,080 --> 00:15:29,280 Speaker 1: corporates look pretty great. The government is holding the bag 261 00:15:29,320 --> 00:15:32,040 Speaker 1: when it comes to debt. So if you look at deficits, 262 00:15:32,200 --> 00:15:35,000 Speaker 1: if you look at FED balance sheets, I think what's 263 00:15:35,000 --> 00:15:38,840 Speaker 1: different today is that the FED has never had this 264 00:15:38,960 --> 00:15:42,760 Speaker 1: type of an asset base. We've seen trillions of dollars 265 00:15:42,800 --> 00:15:46,320 Speaker 1: of you know, kind of bond purchases occur over the 266 00:15:46,400 --> 00:15:50,280 Speaker 1: last ten plus years, which have been great for risk assets, 267 00:15:50,320 --> 00:15:53,600 Speaker 1: but not you know how does the FED navigate unwinding 268 00:15:53,640 --> 00:15:56,640 Speaker 1: all of that debt? I think that's the trillion dollar 269 00:15:56,800 --> 00:16:01,000 Speaker 1: question because we've never seen this movie for and and 270 00:16:01,040 --> 00:16:03,880 Speaker 1: that's what We're a little more worried about the public 271 00:16:03,920 --> 00:16:12,960 Speaker 1: sector than the private sector in this recession. I think 272 00:16:12,960 --> 00:16:15,560 Speaker 1: what blows my mind the most is, you know, we 273 00:16:15,640 --> 00:16:19,160 Speaker 1: are all expecting this recession, and then yet you right 274 00:16:19,280 --> 00:16:23,400 Speaker 1: in your quant models the most attractive sector is financials, 275 00:16:23,440 --> 00:16:26,040 Speaker 1: which you know would not be what you would expect 276 00:16:26,880 --> 00:16:30,040 Speaker 1: ahead of you know, at least these big recessions that 277 00:16:30,120 --> 00:16:33,000 Speaker 1: you know, two thousand and eight, that sort of thing. 278 00:16:33,120 --> 00:16:35,080 Speaker 1: So yeah, I guess to some degree that's just a 279 00:16:35,080 --> 00:16:38,840 Speaker 1: testament to the effectiveness of the of the reforms of 280 00:16:38,880 --> 00:16:42,320 Speaker 1: two thousand and eight, and how what a different economic 281 00:16:42,440 --> 00:16:45,120 Speaker 1: environment it is with the high inflation everything. But walk 282 00:16:45,200 --> 00:16:49,040 Speaker 1: us through what makes financial stick out in your quant 283 00:16:49,080 --> 00:16:51,760 Speaker 1: models to be so attractive? Yeah, I mean it's a 284 00:16:51,840 --> 00:16:53,840 Speaker 1: it's a great question because I think when you think 285 00:16:53,880 --> 00:16:56,680 Speaker 1: about what to own in a recession, financials would probably 286 00:16:56,680 --> 00:16:58,960 Speaker 1: be the last sector you'd want to own. And it's 287 00:16:59,000 --> 00:17:01,080 Speaker 1: because we all think of two thousand and eight, where 288 00:17:01,120 --> 00:17:04,760 Speaker 1: that was the point of maximum pain. Today, I think 289 00:17:04,800 --> 00:17:08,960 Speaker 1: the good news is that financials companies are not necessarily 290 00:17:09,080 --> 00:17:11,800 Speaker 1: holding the credit risk. They haven't really been allowed to 291 00:17:11,920 --> 00:17:15,520 Speaker 1: lend to low quality consumers. They've been you know, kind 292 00:17:15,520 --> 00:17:19,040 Speaker 1: of regulated by the government, um, forced to arguably over 293 00:17:19,080 --> 00:17:21,800 Speaker 1: capitalize balance sheets or you know, today, if you look 294 00:17:21,840 --> 00:17:26,080 Speaker 1: at a chart of leverage for financials, we're at you know, 295 00:17:26,119 --> 00:17:29,000 Speaker 1: a sixth of where we were in terms of leverage 296 00:17:29,080 --> 00:17:32,520 Speaker 1: risk relative to two thousand eight. And we've never seen 297 00:17:32,640 --> 00:17:36,080 Speaker 1: this type of a monstrous drop in leverage going back 298 00:17:36,119 --> 00:17:39,119 Speaker 1: to you know, the nineteen thirties. So I think where 299 00:17:39,160 --> 00:17:43,960 Speaker 1: the lending risk resides is not necessarily in US large 300 00:17:44,040 --> 00:17:49,520 Speaker 1: cap banks or financial companies. It's really outside of the 301 00:17:49,560 --> 00:17:52,280 Speaker 1: financial sector. You know, you've seen a lot of of 302 00:17:52,400 --> 00:17:57,080 Speaker 1: lending through private equity, venture capital UM companies that have 303 00:17:57,160 --> 00:18:01,000 Speaker 1: burgeoned in an environment of zero in trist rates, zero 304 00:18:01,119 --> 00:18:04,600 Speaker 1: hurdle rates, you know, kind of free capital, and I 305 00:18:04,640 --> 00:18:08,840 Speaker 1: think that's where we are more worried about this unwind 306 00:18:09,040 --> 00:18:12,680 Speaker 1: of public sector debt. So yeah, So, like I said, 307 00:18:12,800 --> 00:18:15,239 Speaker 1: it's not your mom and dad's recession and that the 308 00:18:15,280 --> 00:18:19,159 Speaker 1: credit cycle. You know, we are seeing credit conditions tighten, 309 00:18:19,359 --> 00:18:24,479 Speaker 1: but it's not necessarily as threatening. Two banks given that 310 00:18:24,520 --> 00:18:28,120 Speaker 1: they've been regulated to deal with these types of credit 311 00:18:27,840 --> 00:18:32,600 Speaker 1: credit cycles. Um from lessons that we learned in O eight. Uh, 312 00:18:32,640 --> 00:18:34,600 Speaker 1: you know, I think financials is also this sort of 313 00:18:34,680 --> 00:18:38,000 Speaker 1: closet high quality sector. And it feels weird for me 314 00:18:38,080 --> 00:18:41,760 Speaker 1: to say this having lived through the financial crisis, But 315 00:18:42,320 --> 00:18:45,560 Speaker 1: when you look at the earnings variability of financial companies 316 00:18:45,600 --> 00:18:48,320 Speaker 1: relative to the market, you know, tech is a far 317 00:18:48,400 --> 00:18:52,359 Speaker 1: more cyclical sector today than financials is. Financial companies actually 318 00:18:52,400 --> 00:18:56,680 Speaker 1: have lower earnings volatility than the SMP five hundred, which 319 00:18:56,720 --> 00:18:59,080 Speaker 1: is kind of shocking, right, I mean, it's it's almost 320 00:18:59,119 --> 00:19:04,640 Speaker 1: like financial has morphed into the regulated utilities sector because 321 00:19:04,840 --> 00:19:08,080 Speaker 1: of you know, the fact that these companies have been 322 00:19:08,119 --> 00:19:14,679 Speaker 1: so scrutinized and have been so disciplined about capital cushions. Said, 323 00:19:15,000 --> 00:19:17,119 Speaker 1: I also want to ask you about this point that 324 00:19:17,160 --> 00:19:21,160 Speaker 1: you make about how bonds over stocks is now the 325 00:19:21,240 --> 00:19:23,919 Speaker 1: consensus for at least the first half. But then you 326 00:19:24,000 --> 00:19:27,760 Speaker 1: also add, um, given drops in equity sentiment and positioning, 327 00:19:27,800 --> 00:19:30,520 Speaker 1: one of the biggest risks today might be that of 328 00:19:30,560 --> 00:19:33,480 Speaker 1: being under invested in stocks. So how are you thinking 329 00:19:33,480 --> 00:19:35,760 Speaker 1: about this? Because we heard we've also been hearing from 330 00:19:35,760 --> 00:19:38,520 Speaker 1: people I think even gun Luck said it earlier this 331 00:19:38,600 --> 00:19:43,320 Speaker 1: weekest part of his quarterly webcast, that people should be 332 00:19:43,359 --> 00:19:46,879 Speaker 1: positioning six in bonds and stocks, And I'm wondering what 333 00:19:46,920 --> 00:19:49,440 Speaker 1: you think about that. Look. I mean, I think that 334 00:19:49,720 --> 00:19:54,800 Speaker 1: bonds did horrifically last year, so one could argue that 335 00:19:54,840 --> 00:19:58,800 Speaker 1: there is some you know, kind of upside risk to 336 00:19:58,960 --> 00:20:03,320 Speaker 1: fixed income. From a yield perspective, bonds now offer much 337 00:20:03,320 --> 00:20:06,480 Speaker 1: more competitive income than than you know, the dividend yield 338 00:20:06,520 --> 00:20:08,560 Speaker 1: on the S and P five hundred, So a lot 339 00:20:08,560 --> 00:20:12,359 Speaker 1: of things have changed over the last twelve months. But 340 00:20:12,880 --> 00:20:15,520 Speaker 1: I think what worries me is that when you think 341 00:20:15,560 --> 00:20:21,880 Speaker 1: about bonds, the biggest demand for ten year treasuries over 342 00:20:21,920 --> 00:20:26,480 Speaker 1: the last few decades has been from the FED buying 343 00:20:26,520 --> 00:20:31,080 Speaker 1: bonds through quantitative easing and from China buying US treasuries. 344 00:20:31,720 --> 00:20:36,119 Speaker 1: And both of those big sources of demand have left 345 00:20:36,200 --> 00:20:40,240 Speaker 1: the building. So I think that that's something we need 346 00:20:40,280 --> 00:20:44,520 Speaker 1: to think about. Is quantitative tightening is happening real time. 347 00:20:44,560 --> 00:20:48,600 Speaker 1: I mean, it started last year, and basically our our 348 00:20:48,760 --> 00:20:53,800 Speaker 1: rates team thinks that quantitative tightening as projected will basically 349 00:20:54,359 --> 00:20:58,440 Speaker 1: remove about you know, a trillion plus dollars of demand 350 00:20:58,600 --> 00:21:02,359 Speaker 1: for treasuries. Over the next twelve months. That's a lot 351 00:21:02,400 --> 00:21:05,679 Speaker 1: of money, and we don't know who is going to 352 00:21:05,800 --> 00:21:11,240 Speaker 1: step in and fill that void. So our view is okay, Yeah, 353 00:21:11,320 --> 00:21:14,320 Speaker 1: bonds are offering a higher yield than they were last year, 354 00:21:14,400 --> 00:21:17,320 Speaker 1: so from an income perspective, they do look on the 355 00:21:17,320 --> 00:21:21,080 Speaker 1: margin more attractive than a lower dividend yielding equity. But 356 00:21:21,240 --> 00:21:24,119 Speaker 1: if rates continue to rise, and if that demand for 357 00:21:24,240 --> 00:21:28,320 Speaker 1: bonds is continuing to wane rather than wax, that's where 358 00:21:28,359 --> 00:21:31,280 Speaker 1: I worry about the upside risk to interest rates and 359 00:21:31,320 --> 00:21:35,080 Speaker 1: thus downside risk from a price perspective to bonds. I think. 360 00:21:35,080 --> 00:21:38,240 Speaker 1: Also what's shocking to me is that over the last 361 00:21:38,240 --> 00:21:42,560 Speaker 1: twelve months all of the equity bulls have become bond goals. 362 00:21:42,600 --> 00:21:45,600 Speaker 1: And the most one of the most consensus themes that 363 00:21:45,640 --> 00:21:50,159 Speaker 1: we hear is, you know, buy bonds in a recession 364 00:21:50,320 --> 00:21:53,160 Speaker 1: and then move into equities and the recovery. Our view 365 00:21:53,280 --> 00:21:55,960 Speaker 1: is this, like I said before, this might be a 366 00:21:56,080 --> 00:21:59,840 Speaker 1: very different recession where bonds don't necessarily hold up as well. 367 00:22:00,240 --> 00:22:03,160 Speaker 1: And the reason is that, you know, the twin deficits, 368 00:22:03,160 --> 00:22:07,040 Speaker 1: the fact that the public sector is holding the leverage. 369 00:22:07,560 --> 00:22:10,800 Speaker 1: So our view is okay, sure, dividends are lower, but 370 00:22:11,160 --> 00:22:13,200 Speaker 1: there are still a bunch of stocks in the SMP 371 00:22:13,320 --> 00:22:16,960 Speaker 1: five hundreds that offer competitive yields with bonds and with 372 00:22:17,000 --> 00:22:19,399 Speaker 1: the fixed income markets. And the good news is that 373 00:22:19,480 --> 00:22:23,880 Speaker 1: equities can grow their earnings if inflation remains sticky and high. 374 00:22:24,160 --> 00:22:29,199 Speaker 1: So buy companies that have you know, reasonable dividend yields 375 00:22:29,240 --> 00:22:33,000 Speaker 1: and also the ability to navigate an inflationary environment or 376 00:22:33,080 --> 00:22:36,480 Speaker 1: rising interest rate environment and continue to grow those dividends 377 00:22:36,560 --> 00:22:40,880 Speaker 1: and remain competitive with fixed income. So I still think 378 00:22:40,920 --> 00:22:44,800 Speaker 1: that the argument for holding equities in a rising interest 379 00:22:44,920 --> 00:22:49,679 Speaker 1: rate environment remains intact. Companies have the ability to grow earnings, 380 00:22:49,960 --> 00:22:53,840 Speaker 1: whereas fixed income is exactly that fixed income. You can't 381 00:22:53,840 --> 00:22:57,439 Speaker 1: grow your earnings in an environment of rising interest rates. 382 00:22:57,480 --> 00:23:01,000 Speaker 1: And with you know, equity income sort of being a 383 00:23:01,119 --> 00:23:03,760 Speaker 1: much bigger potential source of return, I think than it 384 00:23:03,840 --> 00:23:06,080 Speaker 1: than it has been in the last negade or so. 385 00:23:06,560 --> 00:23:09,480 Speaker 1: To simplify it's to sort of the most simplest terms. 386 00:23:09,560 --> 00:23:12,240 Speaker 1: Is it like by the aristocrats index type of thing, 387 00:23:12,359 --> 00:23:15,000 Speaker 1: do you think? Or that type of company? That type 388 00:23:15,040 --> 00:23:18,480 Speaker 1: of company exactly, these boring kind of steady eddie companies. 389 00:23:18,640 --> 00:23:21,479 Speaker 1: In fact, my favorite screen and I tell my parents 390 00:23:21,520 --> 00:23:23,919 Speaker 1: about this. I tell my friends about this, But my 391 00:23:24,040 --> 00:23:27,640 Speaker 1: favorite quantitative screen is like the easiest thing to do. 392 00:23:27,840 --> 00:23:31,160 Speaker 1: So you take the Russell in thousands stocks like the 393 00:23:31,200 --> 00:23:34,840 Speaker 1: one thousand largest companies in the US equity market. Take 394 00:23:34,880 --> 00:23:37,359 Speaker 1: the largest one thousand stocks in the US equity market. 395 00:23:37,880 --> 00:23:40,400 Speaker 1: You look for the dividend yield. You rank all these 396 00:23:40,400 --> 00:23:43,560 Speaker 1: companies by dividend yield, and then instead of buying the 397 00:23:43,680 --> 00:23:48,879 Speaker 1: highest dividend quintile, you buy quintile two. It's that easy. 398 00:23:49,240 --> 00:23:52,639 Speaker 1: So just by quintile two of the Russell in thousand 399 00:23:52,960 --> 00:23:55,800 Speaker 1: by dividend yield, and what that does is it gives 400 00:23:55,840 --> 00:23:59,239 Speaker 1: you kind of competitive yields with the market. So you're 401 00:23:59,280 --> 00:24:03,560 Speaker 1: buying companies higher dividend yields than the overall market. But 402 00:24:03,680 --> 00:24:08,280 Speaker 1: you're also screening out companies that are becoming very high 403 00:24:08,280 --> 00:24:11,280 Speaker 1: dividend yielders because their prices are falling and they're about 404 00:24:11,320 --> 00:24:14,879 Speaker 1: to cut their dividends, because that is anathema, and especially 405 00:24:15,200 --> 00:24:17,280 Speaker 1: during a recession, that's where a lot of these high 406 00:24:17,280 --> 00:24:21,399 Speaker 1: dividend yielding companies end up in purgatory for cutting their dividends. 407 00:24:22,000 --> 00:24:25,240 Speaker 1: And then you also basically clip that coupon and you 408 00:24:25,320 --> 00:24:29,000 Speaker 1: avoid companies that are growing too expensive when their dividend 409 00:24:29,040 --> 00:24:32,680 Speaker 1: yield drops, you know, below a certain threshold. So that's 410 00:24:32,680 --> 00:24:35,240 Speaker 1: where I think the real action is going to be 411 00:24:35,440 --> 00:24:38,520 Speaker 1: from a from a total return perspective. And one of 412 00:24:38,520 --> 00:24:41,240 Speaker 1: the things that we found is that quintile to by 413 00:24:41,240 --> 00:24:46,360 Speaker 1: dividend yield has outperformed every other quintile of the market 414 00:24:46,960 --> 00:24:50,760 Speaker 1: and has offered a much lower probability of losing money 415 00:24:51,200 --> 00:24:55,439 Speaker 1: than other areas within that dividend spectrum. So similar to 416 00:24:55,520 --> 00:24:59,840 Speaker 1: the aristocrats, it's really the idea of don't stretch for yield, 417 00:25:00,119 --> 00:25:18,200 Speaker 1: but look for safe and growing dividend. You I wanted 418 00:25:18,200 --> 00:25:21,840 Speaker 1: to ask about your process and say I put you now, 419 00:25:21,920 --> 00:25:24,240 Speaker 1: we know our favorite screens. In fact, I have a 420 00:25:24,240 --> 00:25:30,320 Speaker 1: headline in my head already. That's right. But I'm curious, 421 00:25:30,400 --> 00:25:33,080 Speaker 1: you know, since you and your team are so well followed, 422 00:25:33,200 --> 00:25:37,320 Speaker 1: so respected and influential on Wall Street, I'd love to 423 00:25:37,359 --> 00:25:40,520 Speaker 1: know just kind of the basics of your process. Say 424 00:25:40,560 --> 00:25:41,879 Speaker 1: I were to take you and put you on a 425 00:25:41,920 --> 00:25:44,800 Speaker 1: desert island for a year and then bring you back 426 00:25:44,840 --> 00:25:46,520 Speaker 1: and put you in front of a computer, what what 427 00:25:46,560 --> 00:25:48,200 Speaker 1: would be the first sort of things you would you 428 00:25:48,200 --> 00:25:50,800 Speaker 1: would look at? Yeah, I mean I think that well 429 00:25:50,960 --> 00:25:54,480 Speaker 1: it's always changing. So that's the tricky part. You know. 430 00:25:54,560 --> 00:25:56,560 Speaker 1: For the last ten years, one of the things that 431 00:25:56,600 --> 00:26:00,440 Speaker 1: we've been forced to pay attention to is how much 432 00:26:01,119 --> 00:26:04,640 Speaker 1: the FED and stimulus have juiced up the market. So 433 00:26:04,760 --> 00:26:08,480 Speaker 1: I think having a you know, a whole slew of 434 00:26:08,680 --> 00:26:14,520 Speaker 1: macro charts showing inflation trends, valuation trends, you know, kind 435 00:26:14,560 --> 00:26:18,480 Speaker 1: of UM leverage, you know, kind of the big picture 436 00:26:19,040 --> 00:26:22,040 Speaker 1: story for what's been happening in the world. So if 437 00:26:22,119 --> 00:26:24,159 Speaker 1: in twelve months we come back and we see that 438 00:26:24,200 --> 00:26:28,000 Speaker 1: the FED has successfully unwound all of the quantitative easing 439 00:26:28,040 --> 00:26:31,560 Speaker 1: that that we enjoyed, we'll feel a lot better about 440 00:26:31,600 --> 00:26:35,880 Speaker 1: the market because we were past that point of the unknown. UM. 441 00:26:35,920 --> 00:26:37,560 Speaker 1: I think also, you know, what we try to do 442 00:26:37,640 --> 00:26:40,119 Speaker 1: is look at you know, when when people talk about 443 00:26:40,200 --> 00:26:41,960 Speaker 1: you know, what you want to do is buy the 444 00:26:42,040 --> 00:26:44,520 Speaker 1: cheapest stops in the market. Well, some of the things 445 00:26:44,520 --> 00:26:46,600 Speaker 1: we try to do is we test those theories and 446 00:26:46,640 --> 00:26:50,000 Speaker 1: in many cases they hold true, but in many cases 447 00:26:50,160 --> 00:26:53,520 Speaker 1: they are patently false. So I think, you know, a 448 00:26:53,560 --> 00:26:57,959 Speaker 1: lot of our work, UM would be centered around Okay, 449 00:26:58,000 --> 00:27:00,919 Speaker 1: this seems like it's a it's a thesis that makes sense, 450 00:27:01,119 --> 00:27:03,679 Speaker 1: but Let's test it. Let's see how those stocks that 451 00:27:03,800 --> 00:27:06,960 Speaker 1: had you know, the lowest valuations, the highest free cashulalow yield, 452 00:27:06,960 --> 00:27:09,600 Speaker 1: all these different things that investors care about, Let's see 453 00:27:09,600 --> 00:27:12,200 Speaker 1: how they actually did in the real world. And one 454 00:27:12,200 --> 00:27:15,520 Speaker 1: of the things that I find fascinating is that human 455 00:27:16,320 --> 00:27:23,080 Speaker 1: behavior drives a lot of asset class rotation. And this 456 00:27:23,119 --> 00:27:25,919 Speaker 1: is sort of similar to the bonds versus stocks argument. 457 00:27:26,040 --> 00:27:28,399 Speaker 1: So you know, when you start to see if you know, 458 00:27:28,440 --> 00:27:31,359 Speaker 1: if I come back in a year and everybody hates 459 00:27:31,440 --> 00:27:34,840 Speaker 1: bonds and loves stocks again, that's going to change my 460 00:27:35,040 --> 00:27:38,240 Speaker 1: tune around, you know, whether you want to be in 461 00:27:38,320 --> 00:27:41,360 Speaker 1: stocks or bonds. So I think that also paying attention 462 00:27:41,400 --> 00:27:47,520 Speaker 1: to sentiment, positioning, crowding themes that are just well vaunted 463 00:27:47,760 --> 00:27:51,320 Speaker 1: and everybody is expecting something to happen, those are also 464 00:27:51,400 --> 00:27:54,160 Speaker 1: really important to pay attention to because you know, while 465 00:27:54,200 --> 00:27:56,560 Speaker 1: we learn in finance classes that it's all about earnings, 466 00:27:56,560 --> 00:27:59,320 Speaker 1: growth and terminal rates and you know, all the numbers, 467 00:27:59,800 --> 00:28:03,239 Speaker 1: in reality, there's a huge amount of psychology involved in 468 00:28:03,400 --> 00:28:05,520 Speaker 1: what works in a in a market cycle. So I 469 00:28:05,520 --> 00:28:09,200 Speaker 1: think that's also really important to pay attention to. Basically 470 00:28:09,240 --> 00:28:11,359 Speaker 1: just as much data as I could get my hands on, 471 00:28:11,440 --> 00:28:14,360 Speaker 1: I think would be the answer to your desert island question. 472 00:28:14,720 --> 00:28:18,000 Speaker 1: And memes, of course, don't you don't forgive me Twitter 473 00:28:18,200 --> 00:28:20,520 Speaker 1: the memes, the meme stocks are back in action that 474 00:28:20,680 --> 00:28:23,440 Speaker 1: Beth and Beyond, that's right, Yeah, I mean we don't 475 00:28:23,440 --> 00:28:25,560 Speaker 1: care as much attention to that because I feel like 476 00:28:25,600 --> 00:28:29,719 Speaker 1: the alpha there is so short term, so unpredictable, that 477 00:28:29,840 --> 00:28:32,840 Speaker 1: it's almost easier to fade that and wait for it 478 00:28:32,880 --> 00:28:36,440 Speaker 1: to be behind you. There's some good memes about bed 479 00:28:36,520 --> 00:28:39,720 Speaker 1: Bath and Beyond going around now because apparently they use 480 00:28:39,880 --> 00:28:44,760 Speaker 1: foam to make their towels look so pristine in the stores, 481 00:28:45,440 --> 00:28:47,800 Speaker 1: so now there's pictures of it all over the all 482 00:28:47,840 --> 00:28:53,320 Speaker 1: over Twitter, at which I need to spink less time. Um. Okay, 483 00:28:53,320 --> 00:28:55,680 Speaker 1: one one more very cool point from um one of 484 00:28:55,720 --> 00:28:58,360 Speaker 1: your your notes, you said, the market is hoping for 485 00:28:58,400 --> 00:29:01,440 Speaker 1: a FED pivot, but it really shouldn't. A FED easing 486 00:29:01,440 --> 00:29:05,200 Speaker 1: cycle amid tightening credit conditions. I e, recession has been 487 00:29:05,200 --> 00:29:08,600 Speaker 1: the worst backdrop for stocks, and I feel like nobody. 488 00:29:08,840 --> 00:29:11,680 Speaker 1: You're like the first person I've heard say this. Yeah, 489 00:29:11,680 --> 00:29:13,800 Speaker 1: I mean I think what what a FED pivot would 490 00:29:13,840 --> 00:29:17,960 Speaker 1: suggest is that the FED is worried and you know, 491 00:29:18,000 --> 00:29:21,520 Speaker 1: I think basically what we found is that when you're 492 00:29:21,720 --> 00:29:25,400 Speaker 1: in that environment where the FED has been tightening, credit 493 00:29:25,440 --> 00:29:28,840 Speaker 1: conditions have been tightening, and the FED feels as though 494 00:29:29,800 --> 00:29:34,320 Speaker 1: they're tightening has actually worked, it's sort of too late 495 00:29:34,600 --> 00:29:39,760 Speaker 1: and the damage is done within markets, and until credit 496 00:29:39,800 --> 00:29:43,840 Speaker 1: conditions actually ease, you don't want to be involved in equities. 497 00:29:44,400 --> 00:29:47,400 Speaker 1: So our view is right now it's happening, is the 498 00:29:47,440 --> 00:29:51,080 Speaker 1: feed is tightening and credit conditions are tightening. What would 499 00:29:51,080 --> 00:29:56,800 Speaker 1: be a better outcome is if credit conditions actually eased 500 00:29:57,280 --> 00:29:59,560 Speaker 1: in the next twelve months, and we don't think that's 501 00:29:59,560 --> 00:30:01,360 Speaker 1: going to up, and we think the FETE is going 502 00:30:01,400 --> 00:30:05,720 Speaker 1: to continue to tighten to try to cool this white 503 00:30:05,760 --> 00:30:11,120 Speaker 1: hot economy, super high inflation, and they will it like 504 00:30:11,320 --> 00:30:14,240 Speaker 1: they have in every other cycle, will probably go too far, 505 00:30:15,040 --> 00:30:17,520 Speaker 1: at which point you really don't want to be in equities. 506 00:30:17,560 --> 00:30:21,280 Speaker 1: You're you're really in that demand destruction recession mode, which 507 00:30:21,320 --> 00:30:24,120 Speaker 1: is a period of time where equities generally do the 508 00:30:24,280 --> 00:30:28,720 Speaker 1: most poorly. So I think that, you know, what what 509 00:30:28,720 --> 00:30:31,040 Speaker 1: we're seeing right now is sort of the FETE is 510 00:30:31,080 --> 00:30:33,800 Speaker 1: doing what they probably need to do. They're trying to 511 00:30:33,840 --> 00:30:36,120 Speaker 1: cool inflation, they're trying to unwind a lot of the 512 00:30:36,160 --> 00:30:39,479 Speaker 1: benefits that we enjoyed over the last ten years, and 513 00:30:39,520 --> 00:30:43,200 Speaker 1: them stopping prematurely wouldn't necessarily be a great sign. It 514 00:30:43,200 --> 00:30:45,920 Speaker 1: would be a sign that, you know, we're really in 515 00:30:45,920 --> 00:30:49,320 Speaker 1: in a demand slow down, and that would be negative 516 00:30:49,320 --> 00:30:52,000 Speaker 1: for earnings, that would be negative for cyclicals, that would 517 00:30:52,000 --> 00:30:55,360 Speaker 1: be negative for the economy, etcetera, etcetera. And that's you know, 518 00:30:55,400 --> 00:31:01,280 Speaker 1: precisely when you don't want to own cyclical equities. Savida Supermannian. 519 00:31:01,360 --> 00:31:03,760 Speaker 1: It's so great to catch up with you and hear 520 00:31:03,800 --> 00:31:06,000 Speaker 1: your take on the markets. We can't let you go 521 00:31:06,120 --> 00:31:08,520 Speaker 1: just yet, though. We have a little tradition here on 522 00:31:08,560 --> 00:31:13,280 Speaker 1: the podcast, Ldonna, what's it called craziest thing? I always 523 00:31:13,280 --> 00:31:15,640 Speaker 1: get it wrong? Weirdest? How many times we have we 524 00:31:15,680 --> 00:31:18,920 Speaker 1: done this, I always call it weirdest, right, and we 525 00:31:18,960 --> 00:31:20,960 Speaker 1: can call it weirdest if you want. I always get 526 00:31:20,960 --> 00:31:23,320 Speaker 1: it wrong. I'm sorry. I will literally never learn. I 527 00:31:23,320 --> 00:31:26,040 Speaker 1: will go first. Mine is actually very good. Okay, it's 528 00:31:26,040 --> 00:31:30,280 Speaker 1: super fun. Okay, I picked it with you in mind. 529 00:31:31,160 --> 00:31:34,560 Speaker 1: There's an India based company called Dream eleven. It runs 530 00:31:34,640 --> 00:31:38,720 Speaker 1: a fantasy sports platform and now their employees have to 531 00:31:38,760 --> 00:31:41,760 Speaker 1: pay a fine of one thousand, two hundred dollars if 532 00:31:41,800 --> 00:31:45,480 Speaker 1: they contact a colleague while the colleague is on a 533 00:31:45,600 --> 00:31:51,800 Speaker 1: day off. Isn't that crazy? I guess this company has 534 00:31:51,840 --> 00:31:54,080 Speaker 1: like a policy where workers have to take at least 535 00:31:54,120 --> 00:31:57,920 Speaker 1: a week off annually, and so if somebody emails you, 536 00:31:58,920 --> 00:32:02,560 Speaker 1: they have to pay this huge fine. Why did you 537 00:32:02,600 --> 00:32:04,200 Speaker 1: think of me on that? Because you love to email 538 00:32:04,240 --> 00:32:09,440 Speaker 1: me when I'm on, when I'm on, but it's usually 539 00:32:09,480 --> 00:32:12,280 Speaker 1: about the Buffalo bills or something that yeah, or about 540 00:32:12,280 --> 00:32:17,000 Speaker 1: the podcast. How about you, Savida? Have you seen anything 541 00:32:17,000 --> 00:32:20,360 Speaker 1: crazy recently? Here's what I think is crazy. Feels like 542 00:32:20,400 --> 00:32:23,440 Speaker 1: every investor is laser focused on what the FED is 543 00:32:23,520 --> 00:32:27,080 Speaker 1: doing with the short end, with you know, FED funds rates, 544 00:32:27,080 --> 00:32:29,680 Speaker 1: how much they're tightening on the short end. But the 545 00:32:29,720 --> 00:32:33,520 Speaker 1: truth is it doesn't actually matter that much. The long 546 00:32:33,680 --> 00:32:37,200 Speaker 1: end is much more important, and nobody is talking about 547 00:32:37,280 --> 00:32:40,960 Speaker 1: quantitative tightening. That to me is the craziest thing in 548 00:32:40,960 --> 00:32:43,760 Speaker 1: the market is that we are all focused on the 549 00:32:43,840 --> 00:32:47,920 Speaker 1: exact wrong part of the curve. That's pretty good, that's 550 00:32:47,960 --> 00:32:51,000 Speaker 1: pretty good. What I mean, is there a potential for 551 00:32:51,080 --> 00:32:55,200 Speaker 1: them to ease up on quantitative tightening before cutting rates? 552 00:32:55,240 --> 00:32:58,080 Speaker 1: You think? And how would that be? Perceived. Well, I 553 00:32:58,080 --> 00:33:00,680 Speaker 1: think that that's what everybody is hoping for, but I 554 00:33:00,720 --> 00:33:03,320 Speaker 1: don't necessarily know if that happens. If they really want 555 00:33:03,320 --> 00:33:06,360 Speaker 1: to control inflation, they need to tighten on both ends. 556 00:33:06,480 --> 00:33:08,640 Speaker 1: So I mean, I just feel like this is a 557 00:33:08,720 --> 00:33:11,880 Speaker 1: market cycle where well, oh, here's the other crazy things. 558 00:33:11,880 --> 00:33:14,960 Speaker 1: So if you think about the average portfolio manager, the 559 00:33:15,000 --> 00:33:17,560 Speaker 1: average age of a portfolio manager in the United States 560 00:33:17,640 --> 00:33:20,280 Speaker 1: is about forty I think it's like forty three years old. 561 00:33:21,240 --> 00:33:26,640 Speaker 1: Make me feel old, the oldest person in the room, 562 00:33:26,680 --> 00:33:30,080 Speaker 1: and fine, and forty three years old, So think about it. 563 00:33:30,480 --> 00:33:34,600 Speaker 1: This has been a cohort of individuals who have worked 564 00:33:34,800 --> 00:33:38,040 Speaker 1: during a period where all you needed to do was 565 00:33:38,120 --> 00:33:41,600 Speaker 1: by the stocks that went up. Momentum was the best 566 00:33:41,880 --> 00:33:45,160 Speaker 1: stock selection factor for the last you know, couple of 567 00:33:45,200 --> 00:33:50,200 Speaker 1: decades here. So that's what portfolio managers and professional investors 568 00:33:50,200 --> 00:33:53,280 Speaker 1: have been sort of trained to do on this almost 569 00:33:53,280 --> 00:33:58,240 Speaker 1: in this Pavlovian process. And you know, valuation hasn't mattered 570 00:33:58,320 --> 00:34:00,720 Speaker 1: for a very long time up until us the last 571 00:34:00,720 --> 00:34:04,000 Speaker 1: couple of years. So I think that's another very interesting 572 00:34:04,120 --> 00:34:09,080 Speaker 1: part of this environment. Yeah, definitely on the flip side, though, 573 00:34:09,120 --> 00:34:13,480 Speaker 1: they also grew up with supercomputers, and you know, we 574 00:34:13,520 --> 00:34:16,319 Speaker 1: didn't even know what quant and factor investing was back 575 00:34:16,360 --> 00:34:18,600 Speaker 1: in the day, So you know there there maybe there's 576 00:34:18,640 --> 00:34:21,879 Speaker 1: an edge there too, to the youth and the technocratic 577 00:34:21,960 --> 00:34:29,799 Speaker 1: nature of it. True, you young whipper snapforts, all right, 578 00:34:29,840 --> 00:34:32,400 Speaker 1: that's pretty good. All right to my crazy thing. I 579 00:34:32,480 --> 00:34:36,080 Speaker 1: had you in mind, and Voldonna, because I'm gonna put 580 00:34:36,200 --> 00:34:38,880 Speaker 1: the two of you against each other in our game show. 581 00:34:39,280 --> 00:34:43,440 Speaker 1: The prices prices precise, not the prices, right, Savita, Yes, 582 00:34:43,600 --> 00:34:47,640 Speaker 1: completely different, so differently, completely different. But Savida, I know 583 00:34:47,719 --> 00:34:51,799 Speaker 1: you look at a million different points of data. One 584 00:34:51,840 --> 00:34:54,600 Speaker 1: thing I don't ever hear anyone talking about is actually 585 00:34:54,680 --> 00:34:58,799 Speaker 1: the share prices of different companies. You'd never hear any 586 00:34:58,840 --> 00:35:01,840 Speaker 1: analysis for good reason. What's it really matter? Where does it? 587 00:35:01,920 --> 00:35:06,400 Speaker 1: I don't know. So the question is what's the highest 588 00:35:06,719 --> 00:35:09,480 Speaker 1: stock price in the sp I'm not talking about evaluation, 589 00:35:09,640 --> 00:35:13,200 Speaker 1: I'm not talking about Hathway. It's not it's not Berkshire 590 00:35:13,239 --> 00:35:16,880 Speaker 1: Hathway what they used to well remember they were excluded 591 00:35:16,920 --> 00:35:19,000 Speaker 1: from the SMP for a long time before they did 592 00:35:19,239 --> 00:35:23,320 Speaker 1: the split. To uh, it's not Berkshire hath not Perkshure Hathway. 593 00:35:23,400 --> 00:35:26,759 Speaker 1: The highest price stock in the SMP five hundred just 594 00:35:26,920 --> 00:35:32,719 Speaker 1: share price, not priced the book. Just watch her down 595 00:35:32,760 --> 00:35:36,360 Speaker 1: to make sure she doesn't pull up her I'm looking 596 00:35:36,360 --> 00:35:40,160 Speaker 1: straight at the camera. I mean, I would have to 597 00:35:40,160 --> 00:35:42,360 Speaker 1: say it's like one of the mega cab tech companies 598 00:35:42,400 --> 00:35:45,000 Speaker 1: that have just never that haven't split. But I feel 599 00:35:45,000 --> 00:35:47,759 Speaker 1: like all of them have split. Um, that's true. And 600 00:35:48,400 --> 00:35:51,560 Speaker 1: remember it's a crazy thing because you're probably not gonna 601 00:35:51,600 --> 00:35:55,360 Speaker 1: get it. It's exactly we never hear much about. Is 602 00:35:55,400 --> 00:35:57,399 Speaker 1: it one of those like I'll give you You're right. 603 00:35:57,640 --> 00:35:59,160 Speaker 1: I don't think it's ever done to split it did 604 00:35:59,200 --> 00:36:03,000 Speaker 1: a reverse one for thirty split way back in nineteen three. 605 00:36:03,760 --> 00:36:06,120 Speaker 1: No splits. Since I bet it's one of those like 606 00:36:06,320 --> 00:36:09,319 Speaker 1: research companies, what's the one they just like have like 607 00:36:09,440 --> 00:36:17,760 Speaker 1: public profiles and do consulting for different public companies like shoot, 608 00:36:17,800 --> 00:36:20,800 Speaker 1: I'll remember it all right, wild guests, just at the price, 609 00:36:21,040 --> 00:36:24,160 Speaker 1: you don't have to name the company. Undred eighteen hundred 610 00:36:24,160 --> 00:36:28,360 Speaker 1: dollars Sevita, what do you think three thousand, three thousand 611 00:36:29,840 --> 00:36:32,960 Speaker 1: Sevita is a little bit closer four thousand, eight hundred 612 00:36:33,200 --> 00:36:36,520 Speaker 1: and twenty eight dollars from shared down from a peak 613 00:36:36,560 --> 00:36:42,000 Speaker 1: by the way of fifty nine dollars in December. You'll 614 00:36:42,040 --> 00:36:45,600 Speaker 1: never in a million years guess the company NVR Inc. 615 00:36:45,960 --> 00:36:51,520 Speaker 1: The trades for almost five thousand dollars a share. I 616 00:36:51,520 --> 00:36:53,920 Speaker 1: don't even know this company, so you think about that 617 00:36:54,200 --> 00:36:57,680 Speaker 1: or a round lot of you know of NVR is 618 00:36:57,680 --> 00:37:00,600 Speaker 1: gonna cost you half a million dollars? Basically, isn't it 619 00:37:00,640 --> 00:37:03,040 Speaker 1: silly not to split that Sevida Like, he's never a 620 00:37:03,320 --> 00:37:05,880 Speaker 1: liquidity premium that you're missing out on and everything. I 621 00:37:05,920 --> 00:37:11,000 Speaker 1: mean absolutely, that is why how many shares are outstanding? 622 00:37:12,040 --> 00:37:14,560 Speaker 1: I don't know. I think it's like a fifteen billion 623 00:37:14,600 --> 00:37:21,120 Speaker 1: dollar ish market cap, so interesting. I never would have 624 00:37:21,160 --> 00:37:23,400 Speaker 1: guessed it. I never and that's why I think it's 625 00:37:23,440 --> 00:37:26,680 Speaker 1: the craziest thing I saw this week. That is wild. 626 00:37:27,040 --> 00:37:29,760 Speaker 1: I need But now I'm so bothered by not having 627 00:37:30,120 --> 00:37:32,040 Speaker 1: not being able to remember the other company I was 628 00:37:32,080 --> 00:37:40,360 Speaker 1: thinking of because I didn't really even guess one r NVR. Okay, 629 00:37:40,440 --> 00:37:43,359 Speaker 1: that's wild. Is the craziest thing I saw this week. 630 00:37:43,480 --> 00:37:45,560 Speaker 1: Wild thing I saw. But I'm glad you didn't guess it. 631 00:37:45,560 --> 00:37:48,800 Speaker 1: Actually I was. I was thinking Sevida is going to 632 00:37:48,840 --> 00:37:51,160 Speaker 1: get this, But I'm glad you don't know. No, I'm like, 633 00:37:51,320 --> 00:37:54,319 Speaker 1: I'm more. I don't. I don't. I'm not a stock jock. 634 00:37:54,400 --> 00:37:59,880 Speaker 1: I'm more of like a macro. So yeah, I was 635 00:38:00,160 --> 00:38:03,200 Speaker 1: lummoxed by that one. That is a good question. That's good. 636 00:38:03,320 --> 00:38:05,439 Speaker 1: I find it still a company would let their stock 637 00:38:05,480 --> 00:38:08,440 Speaker 1: price trade that high, but real maybe they're proud of it. 638 00:38:08,920 --> 00:38:17,200 Speaker 1: Yeah exactly, I mean we're talking about it, so right. Anyway, Savita, 639 00:38:17,280 --> 00:38:20,320 Speaker 1: is so great to catch up with you. Really fascinating conversation. 640 00:38:20,320 --> 00:38:22,560 Speaker 1: I hope we can have you back something likewise. Thank 641 00:38:22,600 --> 00:38:33,840 Speaker 1: you again, Yeah, thank you for joining us What Goes Up. 642 00:38:33,880 --> 00:38:35,759 Speaker 1: We'll be back next week and so then you can 643 00:38:35,760 --> 00:38:38,680 Speaker 1: find us on the Bloomberg Terminal website and app or 644 00:38:38,680 --> 00:38:41,480 Speaker 1: wherever you get your podcasts. We'd love it if you 645 00:38:41,520 --> 00:38:43,520 Speaker 1: took the time to rate and review the show on 646 00:38:43,600 --> 00:38:46,840 Speaker 1: Apple Podcasts so more listeners can find us. And you 647 00:38:46,880 --> 00:38:49,680 Speaker 1: can find us on Twitter, follow me at Rea Anonymous, 648 00:38:50,320 --> 00:38:53,640 Speaker 1: Bill Donna Hich is at Bildonna Hich. You can also 649 00:38:53,760 --> 00:38:58,480 Speaker 1: follow Bloomberg Podcasts at Podcasts. What Goes Up is produced 650 00:38:58,480 --> 00:39:01,279 Speaker 1: by Stacy Wong. That for listening, to see you next time. 651 00:39:07,680 --> 00:39:09,120 Speaker 1: Thank thank thank