Speaker 1: Hello, and welcome to What Goes Up, a weekly markets podcast.
Speaker 1: My name is Mike Reagan. I'm a senior editor at
Speaker 1: Bloomberg and then mal Donna Hark across Acid reporter with Bloomberg.
Speaker 1: This week on the show, Well, in case you missed it,
Speaker 1: there's a little bit of tension brewing on Wall Street.
Speaker 1: Many economists and macro oriented investors are bracing for a
Speaker 1: recession in and with that would likely come a nasty
Speaker 1: drop in corporate profits. But analysts who study individual companies
Speaker 1: haven't reduced their profit estimates enough yet to signal and
Speaker 1: earnings recession is on the way. So what exactly is
Speaker 1: up with this disconnect between the top down and the
Speaker 1: bottom up views of the market and what does it
Speaker 1: mean for your investments in We'll get into it with
Speaker 1: one of Wall Street's best known strategists. But first of all, Donna,
Speaker 1: I gotta tell you, I'm freaking out about something, but
Speaker 1: you're freaking out about a lot of I'm freaking out
Speaker 1: about something. Yeah, what is it? What do you cook
Speaker 1: your cauliflower with? What type of stove do you have?
Speaker 1: Oh my god, this is a sore subject for me.
Speaker 1: Our gas is out in our building. I'm not cooking
Speaker 1: anything that's good, that's good. Why these gas stoves are
Speaker 1: killing us all? Do you realize that they're they're banning
Speaker 1: them right, They're going to ban them all nowhere. I'm
Speaker 1: very alarmed that news came out the same day that
Speaker 1: they turned my gas off, well in my entire building.
Speaker 1: So I'm not I'm just not going to eat. Yeah,
Speaker 1: I'm just not going to eat for the next like
Speaker 1: three months. Probably. I think this is a scheme by
Speaker 1: door dash. I think they want you to go along door.
Speaker 1: What do you think we should check how much they're
Speaker 1: paying lobbyists to kill gas ovens? All right, Well, maybe
Speaker 1: our guest has some thoughts on doordas. She might, she
Speaker 1: might not. Probably not, I'll spoil it, probably not. But
Speaker 1: who doesn't like delivery? Everybody likes celebrity, including our guests.
Speaker 1: Probably I want to bring in Sevita Subramanian. She's the
Speaker 1: head of US equity strategy at Bank of America. Savita,
Speaker 1: welcome to the show. Thanks for having me. B Donna,
Speaker 1: and I do love delivery. Who doesn't. I wish my
Speaker 1: guest stove was out so that I had a good
Speaker 1: excuse not to cook. It is a very good excuse
Speaker 1: to get take out. I always thought my guest stove
Speaker 1: was gonna kill me because the kids always leave the
Speaker 1: pizza box on top of it, and I'm afraid the
Speaker 1: dog's gonna sniff the pizza and go and turn. These
Speaker 1: are some crazy it won't happen. It won't happen. Um
Speaker 1: but sevida so so. Mike mentioned in the introduction, you're
Speaker 1: one of our best known strategies on Wall Street, and
Speaker 1: so I wanted maybe to just start out having you
Speaker 1: tell us about your year and price target for the
Speaker 1: SMP five hundred, and I believe that you guys also
Speaker 1: have different variables and scenes playing out for the year.
Speaker 1: Maybe you can talk about those as well. Yeah. Absolutely,
Speaker 1: it's um so so our official year in target. You know,
Speaker 1: it's it's kind of a point in time forecast where
Speaker 1: we we think the market will close around four thousand
Speaker 1: the SMP five hundred, which is really limited upside from here.
Speaker 1: Um but we think there's a lot of moves within
Speaker 1: the year. So let's talk about a range. I think
Speaker 1: our book case, like, if everything goes right, we think
Speaker 1: the market could go as high as forty hundred, which
Speaker 1: would be a pretty great year, and then our bear
Speaker 1: case and what we think is a reasonable floor for
Speaker 1: the market is three thousand, which would be quite a
Speaker 1: big drop from here. So, you know, I think our
Speaker 1: views are in two thousand twenty three, it might be
Speaker 1: a less than stellar year for the index, for the
Speaker 1: market index, but we think there are gonna be a
Speaker 1: lot of great opportunities within the SMP five hundred. And
Speaker 1: you know, I think that's where we're really focused with
Speaker 1: with our views is what sectors, what themes, you know,
Speaker 1: what areas within the SMP five hundred can actually do
Speaker 1: pretty well this year, you know, amidst a backdrop of
Speaker 1: of relatively muted returns for the overall market. I want
Speaker 1: to get into those themes and sectors sevida. But like
Speaker 1: I said in the introduction, I'm fascinated by this notion
Speaker 1: that pretty much everyone assumes all these earnings estimates from
Speaker 1: the analysts right now or wrong, you know, all the
Speaker 1: top down view of the market is that what are
Speaker 1: they thinking, Uh, these estimates have to be cut? What
Speaker 1: do you think explains that? I mean, our our analysts
Speaker 1: just sort of waiting for the companies themselves to lower guidance.
Speaker 1: You know, is this four fourth quarter reporting season really
Speaker 1: gonna pull that out from all the conference calls. You know,
Speaker 1: how do you see this unfolding? I think you're right.
Speaker 1: I think that analysts are in sort of weight and
Speaker 1: C mode, and maybe even companies are in weight and
Speaker 1: C mode, because you know, the real positive surprise over
Speaker 1: the last few years is that despite rampant inflation, cost
Speaker 1: pressure or wage pressure, you know, everything going up to
Speaker 1: you know, pretty high levels in terms of you know,
Speaker 1: kind of margin pressure, companies have managed to navigate this
Speaker 1: by either you know, pricing products more aggressively or by uh,
Speaker 1: you know, cutting costs. And I think on top of that,
Speaker 1: we're seeing corporates very nimble in terms of cutting costs.
Speaker 1: A lot of the headlines recently have been around megacap
Speaker 1: tech companies, you know, uh, kind of reducing their compensation
Speaker 1: cost structure by by layoffs, you know, not necessarily great
Speaker 1: for the economy, but good for their bottom line. So
Speaker 1: so I think that analysts and you know, in corporates
Speaker 1: are are probably a little less convicted in terms of
Speaker 1: margins and cost pressure and pricing power going forward. Our
Speaker 1: view is that we are likely to see some downward revisions,
Speaker 1: and you know, our forecast for profits growth for three
Speaker 1: is you know, two hundred bucks for the SMP five hundred,
Speaker 1: and that would mean about a ten percent decline in
Speaker 1: earnings peak to trough. Now, you know, I think that
Speaker 1: makes sense to us amidst UH forecasts for a recession.
Speaker 1: This is, you know, one of the most widely telegraphed
Speaker 1: recessions of of all time. I think we're all just
Speaker 1: sitting here bracing ourselves for it. UM, a teen percent
Speaker 1: drop in earnings would actually be half of the typical
Speaker 1: recessionary corporate earnings drop. So so we think that we
Speaker 1: are going to see those estimates come down, and it's
Speaker 1: likely to happen after companies guide more aggressively lower around
Speaker 1: three earnings UM. But you know, I think where we're
Speaker 1: going to see pressures are in companies with more labor intensity,
Speaker 1: like services companies, companies where you're really seeing cost pressure
Speaker 1: remain high. Those are the areas where we think that
Speaker 1: we're going to see some downward guides on on margins
Speaker 1: and savita. I want to ask you about what specifically
Speaker 1: you'll be looking for this earning season, and I think
Speaker 1: you guys have you guys have really great UM daily
Speaker 1: and weekly research. I remember from past earning seasons that
Speaker 1: you have Maybe it's sort of like an AI driven
Speaker 1: model or something along those lines, where you sift through
Speaker 1: all the earnings reports and you look for keywords and
Speaker 1: some of the things that are mentioned the most number
Speaker 1: of times. So if we're behind, if we have peak
Speaker 1: inflation behind us, UM, what will you be looking for?
Speaker 1: What keywords, what trends and and and UM will you
Speaker 1: be sort of cluing into as these earnings reports roll out? Yeah,
Speaker 1: thanks for that question, and thanks for reading our research.
Speaker 1: Always read it. We do a lot of kind of
Speaker 1: text analysis, and you know, some of the things that
Speaker 1: we've been able to unearth UM during different periods are
Speaker 1: you know, kind of inventory pressures, UM, demand destruction, UM
Speaker 1: inability to price. So this quarter what we are laser
Speaker 1: focused on our couple of things. As I mentioned, we
Speaker 1: want to hear more from companies around whether the tightness
Speaker 1: in the labor market is alleviating, because that has been
Speaker 1: the theme for the last you know, almost eight quarters now,
Speaker 1: is just the inability of companies to source labor unless
Speaker 1: they dramatically increase prices, especially at the lower income end. UM.
Speaker 1: We're also listening for more news around layoffs in services sectors.
Speaker 1: So you know, so far we've really heard it only
Speaker 1: from you know, megacab tech companies. We're waiting to see
Speaker 1: whether that spreads to a broader array of companies. UM,
Speaker 1: we're also listening for thoughts around you know, kind of
Speaker 1: this inventory mismatch. So we've seen some of the supply
Speaker 1: chain frictions alleviate, and now we're wondering how much inventory
Speaker 1: companies have to work off, and that could be another
Speaker 1: drag on on pricing, power, demand, earnings pressure, etcetera. We're
Speaker 1: all you I think some of the other factors that
Speaker 1: we're paying attention to from a from an earnings for
Speaker 1: share perspective are buy backs. So you know, the last
Speaker 1: five years we've seen buy backs contribute about ten percentage
Speaker 1: points of SMP profits growth. That's a huge amount and
Speaker 1: it's really unusual versus prior cycles. So if that buy
Speaker 1: back trend also decelerates, and there are good reasons to
Speaker 1: believe it does, I mean, the government is now taxing
Speaker 1: corporate buy backs. You know, companies might be more likely
Speaker 1: to hold cash rather than spend it on buy backs
Speaker 1: if we are worried about a downturn. So that's another
Speaker 1: trend we're listening for um and our view is again
Speaker 1: for share earnings growth has been really juiced up over
Speaker 1: the last five plus years by just um you know,
Speaker 1: rampant buy back activity, and if that cools, that will
Speaker 1: be another source of potential risk to two earnings going forward.
Speaker 1: You know, Sevita, you've mentioned some of the layoffs among
Speaker 1: the big tech company ease. I think a lot of
Speaker 1: people are bracing for perhaps a wave of layoffs in
Speaker 1: the financial sector, you know, which I'm assuming a lot
Speaker 1: of our listeners are employed in our layoffs. Automatically good
Speaker 1: news for the share price this year is as just
Speaker 1: to be blunt and say it out front. If if
Speaker 1: I see a headline such and such is cutting x percent,
Speaker 1: is that automatically good news for the stock price or
Speaker 1: is it is there more nuanced? Do you think, well,
Speaker 1: you know, it's good news and that the company is
Speaker 1: being nimble and addressing this issue of you know, bloated
Speaker 1: compensation costs and maybe you know, rationalizing capacity. But I
Speaker 1: do think that the the signal it's giving us is
Speaker 1: that this company is in workout mode. So yes, they're
Speaker 1: being nimble, they're addressing these issues. But First of all,
Speaker 1: it means that they you know, sort of misallocated capital
Speaker 1: um in in in a better period of time. And
Speaker 1: second of all, it means that from an economic perspective, especially,
Speaker 1: I think in this getting into this recession, what could
Speaker 1: be different this time is that a lot of the
Speaker 1: layoffs are really happening at the higher income end or
Speaker 1: the skilled labor end. And what that means is that,
Speaker 1: you know, typically in a recession, luxury goods are more
Speaker 1: defensive than lower, lower price point products. But in this recession,
Speaker 1: maybe luxury isn't as defensive because a lot of the
Speaker 1: layoffs are really much more acute at that kind of
Speaker 1: skilled services and tech level. UM. So those are some
Speaker 1: of the things that we're watching from a company perspective.
Speaker 1: For the most part, we've found that investors have lauded
Speaker 1: the news around layoffs um you know, as a source
Speaker 1: of alleviation of margin pressure. But I think that you know,
Speaker 1: whether or not that's enough to offset the Also, deteriorating
Speaker 1: demand is the big question, so top line becomes important. Yes,
Speaker 1: companies are being very nimble at managing costs, but they're
Speaker 1: doing this because they're seeing less demand and and less
Speaker 1: ability to um, you know, continue operations with their current
Speaker 1: labor setups, so that that votes ill for you know,
Speaker 1: demand in uh in terms of uh, you know, kind
Speaker 1: of top line growth. When we look at tech companies,
Speaker 1: one of the things that worries us, and we're underweight
Speaker 1: information technology as well as communication services, and one of
Speaker 1: the things that worries us is that, you know, kind
Speaker 1: of similar to Y two K back in two thousand,
Speaker 1: we've seen this massive pull forward of demand for tech
Speaker 1: during COVID work from home, um, you know kind of
Speaker 1: you know, all of the telecommuting that we've done, and
Speaker 1: so what we're seeing now is potentially a hit to
Speaker 1: CAPEX on software of companies that already sort of you know,
Speaker 1: really address their software spend over the last couple of years.
Speaker 1: So I think that's what we're worried about for tech
Speaker 1: companies is you know, maybe what they're doing is great
Speaker 1: in terms of managing costs, but how much of their
Speaker 1: demand is really cyclical rather than as sticky as what
Speaker 1: everybody was forecasting, you know, in the in prior years.
Speaker 1: And we mentioned recession a couple of times down how
Speaker 1: this is one of the most well telegraphed recessions ever
Speaker 1: but you actually say that this is not your mom
Speaker 1: and dad's recession. So I'm wondering what you are expecting
Speaker 1: and how you might characterize. I will say that was
Speaker 1: good news when I read that, because my dad was
Speaker 1: born right at the beginning of the Great Depression. So
Speaker 1: for me, that's why you could crowd his life. You
Speaker 1: could put like ten pounds of spaghetti on his plate.
Speaker 1: He'd eat every piece of spaghetti because he yea spaghetti
Speaker 1: is exactly right. I mean, I think that when we
Speaker 1: think about our parents, and you know, prior generations, recessions
Speaker 1: looked really different. And I think I mean, obviously the
Speaker 1: Depression was was one of the most acute recessions we've
Speaker 1: ever seen, I think, even two thousand and eight, when
Speaker 1: when you think about kind of the drama that took
Speaker 1: place within corporate America, within consumers, homeowners, it was really
Speaker 1: broad spread. It was driven by this you know, massive
Speaker 1: credit cycle. And I think the good news is that
Speaker 1: today corporates and consumers actually look pretty well capitalized, at
Speaker 1: least for the time being. And maybe that's just a
Speaker 1: function of really low interest rates, but I think what
Speaker 1: corporates learned in two thousand and eight was that leverage
Speaker 1: is evil, and they have now locked in relatively long
Speaker 1: dated fixed rate obligations on the on the debt side,
Speaker 1: Like to me, the most encouraging number is if you
Speaker 1: compared today's average maturity of debt on SMP balance sheets
Speaker 1: to that in two thousand eight, today debt terms out
Speaker 1: at about on average a eleven years back in a way,
Speaker 1: it was more like seven years. So we've seen this
Speaker 1: this longer duration exposure to to fixed rate debt, which
Speaker 1: I think is good news because that means that higher
Speaker 1: interest rates won't hurt these companies overnight and they have
Speaker 1: time to navigate that that process. Consumers similarly are well.
Speaker 1: They got a big bullus of cash from the government
Speaker 1: in one so you know, balance sheets of consumers and
Speaker 1: corporates look pretty great. The government is holding the bag
Speaker 1: when it comes to debt. So if you look at deficits,
Speaker 1: if you look at FED balance sheets, I think what's
Speaker 1: different today is that the FED has never had this
Speaker 1: type of an asset base. We've seen trillions of dollars
Speaker 1: of you know, kind of bond purchases occur over the
Speaker 1: last ten plus years, which have been great for risk assets,
Speaker 1: but not you know how does the FED navigate unwinding
Speaker 1: all of that debt? I think that's the trillion dollar
Speaker 1: question because we've never seen this movie for and and
Speaker 1: that's what We're a little more worried about the public
Speaker 1: sector than the private sector in this recession. I think
Speaker 1: what blows my mind the most is, you know, we
Speaker 1: are all expecting this recession, and then yet you right
Speaker 1: in your quant models the most attractive sector is financials,
Speaker 1: which you know would not be what you would expect
Speaker 1: ahead of you know, at least these big recessions that
Speaker 1: you know, two thousand and eight, that sort of thing.
Speaker 1: So yeah, I guess to some degree that's just a
Speaker 1: testament to the effectiveness of the of the reforms of
Speaker 1: two thousand and eight, and how what a different economic
Speaker 1: environment it is with the high inflation everything. But walk
Speaker 1: us through what makes financial stick out in your quant
Speaker 1: models to be so attractive? Yeah, I mean it's a
Speaker 1: it's a great question because I think when you think
Speaker 1: about what to own in a recession, financials would probably
Speaker 1: be the last sector you'd want to own. And it's
Speaker 1: because we all think of two thousand and eight, where
Speaker 1: that was the point of maximum pain. Today, I think
Speaker 1: the good news is that financials companies are not necessarily
Speaker 1: holding the credit risk. They haven't really been allowed to
Speaker 1: lend to low quality consumers. They've been you know, kind
Speaker 1: of regulated by the government, um, forced to arguably over
Speaker 1: capitalize balance sheets or you know, today, if you look
Speaker 1: at a chart of leverage for financials, we're at you know,
Speaker 1: a sixth of where we were in terms of leverage
Speaker 1: risk relative to two thousand eight. And we've never seen
Speaker 1: this type of a monstrous drop in leverage going back
Speaker 1: to you know, the nineteen thirties. So I think where
Speaker 1: the lending risk resides is not necessarily in US large
Speaker 1: cap banks or financial companies. It's really outside of the
Speaker 1: financial sector. You know, you've seen a lot of of
Speaker 1: lending through private equity, venture capital UM companies that have
Speaker 1: burgeoned in an environment of zero in trist rates, zero
Speaker 1: hurdle rates, you know, kind of free capital, and I
Speaker 1: think that's where we are more worried about this unwind
Speaker 1: of public sector debt. So yeah, So, like I said,
Speaker 1: it's not your mom and dad's recession and that the
Speaker 1: credit cycle. You know, we are seeing credit conditions tighten,
Speaker 1: but it's not necessarily as threatening. Two banks given that
Speaker 1: they've been regulated to deal with these types of credit
Speaker 1: credit cycles. Um from lessons that we learned in O eight. Uh,
Speaker 1: you know, I think financials is also this sort of
Speaker 1: closet high quality sector. And it feels weird for me
Speaker 1: to say this having lived through the financial crisis, But
Speaker 1: when you look at the earnings variability of financial companies
Speaker 1: relative to the market, you know, tech is a far
Speaker 1: more cyclical sector today than financials is. Financial companies actually
Speaker 1: have lower earnings volatility than the SMP five hundred, which
Speaker 1: is kind of shocking, right, I mean, it's it's almost
Speaker 1: like financial has morphed into the regulated utilities sector because
Speaker 1: of you know, the fact that these companies have been
Speaker 1: so scrutinized and have been so disciplined about capital cushions. Said,
Speaker 1: I also want to ask you about this point that
Speaker 1: you make about how bonds over stocks is now the
Speaker 1: consensus for at least the first half. But then you
Speaker 1: also add, um, given drops in equity sentiment and positioning,
Speaker 1: one of the biggest risks today might be that of
Speaker 1: being under invested in stocks. So how are you thinking
Speaker 1: about this? Because we heard we've also been hearing from
Speaker 1: people I think even gun Luck said it earlier this
Speaker 1: weekest part of his quarterly webcast, that people should be
Speaker 1: positioning six in bonds and stocks, And I'm wondering what
Speaker 1: you think about that. Look. I mean, I think that
Speaker 1: bonds did horrifically last year, so one could argue that
Speaker 1: there is some you know, kind of upside risk to
Speaker 1: fixed income. From a yield perspective, bonds now offer much
Speaker 1: more competitive income than than you know, the dividend yield
Speaker 1: on the S and P five hundred, So a lot
Speaker 1: of things have changed over the last twelve months. But
Speaker 1: I think what worries me is that when you think
Speaker 1: about bonds, the biggest demand for ten year treasuries over
Speaker 1: the last few decades has been from the FED buying
Speaker 1: bonds through quantitative easing and from China buying US treasuries.
Speaker 1: And both of those big sources of demand have left
Speaker 1: the building. So I think that that's something we need
Speaker 1: to think about. Is quantitative tightening is happening real time.
Speaker 1: I mean, it started last year, and basically our our
Speaker 1: rates team thinks that quantitative tightening as projected will basically
Speaker 1: remove about you know, a trillion plus dollars of demand
Speaker 1: for treasuries. Over the next twelve months. That's a lot
Speaker 1: of money, and we don't know who is going to
Speaker 1: step in and fill that void. So our view is okay, Yeah,
Speaker 1: bonds are offering a higher yield than they were last year,
Speaker 1: so from an income perspective, they do look on the
Speaker 1: margin more attractive than a lower dividend yielding equity. But
Speaker 1: if rates continue to rise, and if that demand for
Speaker 1: bonds is continuing to wane rather than wax, that's where
Speaker 1: I worry about the upside risk to interest rates and
Speaker 1: thus downside risk from a price perspective to bonds. I think.
Speaker 1: Also what's shocking to me is that over the last
Speaker 1: twelve months all of the equity bulls have become bond goals.
Speaker 1: And the most one of the most consensus themes that
Speaker 1: we hear is, you know, buy bonds in a recession
Speaker 1: and then move into equities and the recovery. Our view
Speaker 1: is this, like I said before, this might be a
Speaker 1: very different recession where bonds don't necessarily hold up as well.
Speaker 1: And the reason is that, you know, the twin deficits,
Speaker 1: the fact that the public sector is holding the leverage.
Speaker 1: So our view is okay, sure, dividends are lower, but
Speaker 1: there are still a bunch of stocks in the SMP
Speaker 1: five hundreds that offer competitive yields with bonds and with
Speaker 1: the fixed income markets. And the good news is that
Speaker 1: equities can grow their earnings if inflation remains sticky and high.
Speaker 1: So buy companies that have you know, reasonable dividend yields
Speaker 1: and also the ability to navigate an inflationary environment or
Speaker 1: rising interest rate environment and continue to grow those dividends
Speaker 1: and remain competitive with fixed income. So I still think
Speaker 1: that the argument for holding equities in a rising interest
Speaker 1: rate environment remains intact. Companies have the ability to grow earnings,
Speaker 1: whereas fixed income is exactly that fixed income. You can't
Speaker 1: grow your earnings in an environment of rising interest rates.
Speaker 1: And with you know, equity income sort of being a
Speaker 1: much bigger potential source of return, I think than it
Speaker 1: than it has been in the last negade or so.
Speaker 1: To simplify it's to sort of the most simplest terms.
Speaker 1: Is it like by the aristocrats index type of thing,
Speaker 1: do you think? Or that type of company? That type
Speaker 1: of company exactly, these boring kind of steady eddie companies.
Speaker 1: In fact, my favorite screen and I tell my parents
Speaker 1: about this. I tell my friends about this, But my
Speaker 1: favorite quantitative screen is like the easiest thing to do.
Speaker 1: So you take the Russell in thousands stocks like the
Speaker 1: one thousand largest companies in the US equity market. Take
Speaker 1: the largest one thousand stocks in the US equity market.
Speaker 1: You look for the dividend yield. You rank all these
Speaker 1: companies by dividend yield, and then instead of buying the
Speaker 1: highest dividend quintile, you buy quintile two. It's that easy.
Speaker 1: So just by quintile two of the Russell in thousand
Speaker 1: by dividend yield, and what that does is it gives
Speaker 1: you kind of competitive yields with the market. So you're
Speaker 1: buying companies higher dividend yields than the overall market. But
Speaker 1: you're also screening out companies that are becoming very high
Speaker 1: dividend yielders because their prices are falling and they're about
Speaker 1: to cut their dividends, because that is anathema, and especially
Speaker 1: during a recession, that's where a lot of these high
Speaker 1: dividend yielding companies end up in purgatory for cutting their dividends.
Speaker 1: And then you also basically clip that coupon and you
Speaker 1: avoid companies that are growing too expensive when their dividend
Speaker 1: yield drops, you know, below a certain threshold. So that's
Speaker 1: where I think the real action is going to be
Speaker 1: from a from a total return perspective. And one of
Speaker 1: the things that we found is that quintile to by
Speaker 1: dividend yield has outperformed every other quintile of the market
Speaker 1: and has offered a much lower probability of losing money
Speaker 1: than other areas within that dividend spectrum. So similar to
Speaker 1: the aristocrats, it's really the idea of don't stretch for yield,
Speaker 1: but look for safe and growing dividend. You I wanted
Speaker 1: to ask about your process and say I put you now,
Speaker 1: we know our favorite screens. In fact, I have a
Speaker 1: headline in my head already. That's right. But I'm curious,
Speaker 1: you know, since you and your team are so well followed,
Speaker 1: so respected and influential on Wall Street, I'd love to
Speaker 1: know just kind of the basics of your process. Say
Speaker 1: I were to take you and put you on a
Speaker 1: desert island for a year and then bring you back
Speaker 1: and put you in front of a computer, what what
Speaker 1: would be the first sort of things you would you
Speaker 1: would look at? Yeah, I mean I think that well
Speaker 1: it's always changing. So that's the tricky part. You know.
Speaker 1: For the last ten years, one of the things that
Speaker 1: we've been forced to pay attention to is how much
Speaker 1: the FED and stimulus have juiced up the market. So
Speaker 1: I think having a you know, a whole slew of
Speaker 1: macro charts showing inflation trends, valuation trends, you know, kind
Speaker 1: of UM leverage, you know, kind of the big picture
Speaker 1: story for what's been happening in the world. So if
Speaker 1: in twelve months we come back and we see that
Speaker 1: the FED has successfully unwound all of the quantitative easing
Speaker 1: that that we enjoyed, we'll feel a lot better about
Speaker 1: the market because we were past that point of the unknown. UM.
Speaker 1: I think also, you know, what we try to do
Speaker 1: is look at you know, when when people talk about
Speaker 1: you know, what you want to do is buy the
Speaker 1: cheapest stops in the market. Well, some of the things
Speaker 1: we try to do is we test those theories and
Speaker 1: in many cases they hold true, but in many cases
Speaker 1: they are patently false. So I think, you know, a
Speaker 1: lot of our work, UM would be centered around Okay,
Speaker 1: this seems like it's a it's a thesis that makes sense,
Speaker 1: but Let's test it. Let's see how those stocks that
Speaker 1: had you know, the lowest valuations, the highest free cashulalow yield,
Speaker 1: all these different things that investors care about, Let's see
Speaker 1: how they actually did in the real world. And one
Speaker 1: of the things that I find fascinating is that human
Speaker 1: behavior drives a lot of asset class rotation. And this
Speaker 1: is sort of similar to the bonds versus stocks argument.
Speaker 1: So you know, when you start to see if you know,
Speaker 1: if I come back in a year and everybody hates
Speaker 1: bonds and loves stocks again, that's going to change my
Speaker 1: tune around, you know, whether you want to be in
Speaker 1: stocks or bonds. So I think that also paying attention
Speaker 1: to sentiment, positioning, crowding themes that are just well vaunted
Speaker 1: and everybody is expecting something to happen, those are also
Speaker 1: really important to pay attention to because you know, while
Speaker 1: we learn in finance classes that it's all about earnings,
Speaker 1: growth and terminal rates and you know, all the numbers,
Speaker 1: in reality, there's a huge amount of psychology involved in
Speaker 1: what works in a in a market cycle. So I
Speaker 1: think that's also really important to pay attention to. Basically
Speaker 1: just as much data as I could get my hands on,
Speaker 1: I think would be the answer to your desert island question.
Speaker 1: And memes, of course, don't you don't forgive me Twitter
Speaker 1: the memes, the meme stocks are back in action that
Speaker 1: Beth and Beyond, that's right, Yeah, I mean we don't
Speaker 1: care as much attention to that because I feel like
Speaker 1: the alpha there is so short term, so unpredictable, that
Speaker 1: it's almost easier to fade that and wait for it
Speaker 1: to be behind you. There's some good memes about bed
Speaker 1: Bath and Beyond going around now because apparently they use
Speaker 1: foam to make their towels look so pristine in the stores,
Speaker 1: so now there's pictures of it all over the all
Speaker 1: over Twitter, at which I need to spink less time. Um. Okay,
Speaker 1: one one more very cool point from um one of
Speaker 1: your your notes, you said, the market is hoping for
Speaker 1: a FED pivot, but it really shouldn't. A FED easing
Speaker 1: cycle amid tightening credit conditions. I e, recession has been
Speaker 1: the worst backdrop for stocks, and I feel like nobody.
Speaker 1: You're like the first person I've heard say this. Yeah,
Speaker 1: I mean I think what what a FED pivot would
Speaker 1: suggest is that the FED is worried and you know,
Speaker 1: I think basically what we found is that when you're
Speaker 1: in that environment where the FED has been tightening, credit
Speaker 1: conditions have been tightening, and the FED feels as though
Speaker 1: they're tightening has actually worked, it's sort of too late
Speaker 1: and the damage is done within markets, and until credit
Speaker 1: conditions actually ease, you don't want to be involved in equities.
Speaker 1: So our view is right now it's happening, is the
Speaker 1: feed is tightening and credit conditions are tightening. What would
Speaker 1: be a better outcome is if credit conditions actually eased
Speaker 1: in the next twelve months, and we don't think that's
Speaker 1: going to up, and we think the FETE is going
Speaker 1: to continue to tighten to try to cool this white
Speaker 1: hot economy, super high inflation, and they will it like
Speaker 1: they have in every other cycle, will probably go too far,
Speaker 1: at which point you really don't want to be in equities.
Speaker 1: You're you're really in that demand destruction recession mode, which
Speaker 1: is a period of time where equities generally do the
Speaker 1: most poorly. So I think that, you know, what what
Speaker 1: we're seeing right now is sort of the FETE is
Speaker 1: doing what they probably need to do. They're trying to
Speaker 1: cool inflation, they're trying to unwind a lot of the
Speaker 1: benefits that we enjoyed over the last ten years, and
Speaker 1: them stopping prematurely wouldn't necessarily be a great sign. It
Speaker 1: would be a sign that, you know, we're really in
Speaker 1: in a demand slow down, and that would be negative
Speaker 1: for earnings, that would be negative for cyclicals, that would
Speaker 1: be negative for the economy, etcetera, etcetera. And that's you know,
Speaker 1: precisely when you don't want to own cyclical equities. Savida Supermannian.
Speaker 1: It's so great to catch up with you and hear
Speaker 1: your take on the markets. We can't let you go
Speaker 1: just yet, though. We have a little tradition here on
Speaker 1: the podcast, Ldonna, what's it called craziest thing? I always
Speaker 1: get it wrong? Weirdest? How many times we have we
Speaker 1: done this, I always call it weirdest, right, and we
Speaker 1: can call it weirdest if you want. I always get
Speaker 1: it wrong. I'm sorry. I will literally never learn. I
Speaker 1: will go first. Mine is actually very good. Okay, it's
Speaker 1: super fun. Okay, I picked it with you in mind.
Speaker 1: There's an India based company called Dream eleven. It runs
Speaker 1: a fantasy sports platform and now their employees have to
Speaker 1: pay a fine of one thousand, two hundred dollars if
Speaker 1: they contact a colleague while the colleague is on a
Speaker 1: day off. Isn't that crazy? I guess this company has
Speaker 1: like a policy where workers have to take at least
Speaker 1: a week off annually, and so if somebody emails you,
Speaker 1: they have to pay this huge fine. Why did you
Speaker 1: think of me on that? Because you love to email
Speaker 1: me when I'm on, when I'm on, but it's usually
Speaker 1: about the Buffalo bills or something that yeah, or about
Speaker 1: the podcast. How about you, Savida? Have you seen anything
Speaker 1: crazy recently? Here's what I think is crazy. Feels like
Speaker 1: every investor is laser focused on what the FED is
Speaker 1: doing with the short end, with you know, FED funds rates,
Speaker 1: how much they're tightening on the short end. But the
Speaker 1: truth is it doesn't actually matter that much. The long
Speaker 1: end is much more important, and nobody is talking about
Speaker 1: quantitative tightening. That to me is the craziest thing in
Speaker 1: the market is that we are all focused on the
Speaker 1: exact wrong part of the curve. That's pretty good, that's
Speaker 1: pretty good. What I mean, is there a potential for
Speaker 1: them to ease up on quantitative tightening before cutting rates?
Speaker 1: You think? And how would that be? Perceived. Well, I
Speaker 1: think that that's what everybody is hoping for, but I
Speaker 1: don't necessarily know if that happens. If they really want
Speaker 1: to control inflation, they need to tighten on both ends.
Speaker 1: So I mean, I just feel like this is a
Speaker 1: market cycle where well, oh, here's the other crazy things.
Speaker 1: So if you think about the average portfolio manager, the
Speaker 1: average age of a portfolio manager in the United States
Speaker 1: is about forty I think it's like forty three years old.
Speaker 1: Make me feel old, the oldest person in the room,
Speaker 1: and fine, and forty three years old, So think about it.
Speaker 1: This has been a cohort of individuals who have worked
Speaker 1: during a period where all you needed to do was
Speaker 1: by the stocks that went up. Momentum was the best
Speaker 1: stock selection factor for the last you know, couple of
Speaker 1: decades here. So that's what portfolio managers and professional investors
Speaker 1: have been sort of trained to do on this almost
Speaker 1: in this Pavlovian process. And you know, valuation hasn't mattered
Speaker 1: for a very long time up until us the last
Speaker 1: couple of years. So I think that's another very interesting
Speaker 1: part of this environment. Yeah, definitely on the flip side, though,
Speaker 1: they also grew up with supercomputers, and you know, we
Speaker 1: didn't even know what quant and factor investing was back
Speaker 1: in the day, So you know there there maybe there's
Speaker 1: an edge there too, to the youth and the technocratic
Speaker 1: nature of it. True, you young whipper snapforts, all right,
Speaker 1: that's pretty good. All right to my crazy thing. I
Speaker 1: had you in mind, and Voldonna, because I'm gonna put
Speaker 1: the two of you against each other in our game show.
Speaker 1: The prices prices precise, not the prices, right, Savita, Yes,
Speaker 1: completely different, so differently, completely different. But Savida, I know
Speaker 1: you look at a million different points of data. One
Speaker 1: thing I don't ever hear anyone talking about is actually
Speaker 1: the share prices of different companies. You'd never hear any
Speaker 1: analysis for good reason. What's it really matter? Where does it?
Speaker 1: I don't know. So the question is what's the highest
Speaker 1: stock price in the sp I'm not talking about evaluation,
Speaker 1: I'm not talking about Hathway. It's not it's not Berkshire
Speaker 1: Hathway what they used to well remember they were excluded
Speaker 1: from the SMP for a long time before they did
Speaker 1: the split. To uh, it's not Berkshire hath not Perkshure Hathway.
Speaker 1: The highest price stock in the SMP five hundred just
Speaker 1: share price, not priced the book. Just watch her down
Speaker 1: to make sure she doesn't pull up her I'm looking
Speaker 1: straight at the camera. I mean, I would have to
Speaker 1: say it's like one of the mega cab tech companies
Speaker 1: that have just never that haven't split. But I feel
Speaker 1: like all of them have split. Um, that's true. And
Speaker 1: remember it's a crazy thing because you're probably not gonna
Speaker 1: get it. It's exactly we never hear much about. Is
Speaker 1: it one of those like I'll give you You're right.
Speaker 1: I don't think it's ever done to split it did
Speaker 1: a reverse one for thirty split way back in nineteen three.
Speaker 1: No splits. Since I bet it's one of those like
Speaker 1: research companies, what's the one they just like have like
Speaker 1: public profiles and do consulting for different public companies like shoot,
Speaker 1: I'll remember it all right, wild guests, just at the price,
Speaker 1: you don't have to name the company. Undred eighteen hundred
Speaker 1: dollars Sevita, what do you think three thousand, three thousand
Speaker 1: Sevita is a little bit closer four thousand, eight hundred
Speaker 1: and twenty eight dollars from shared down from a peak
Speaker 1: by the way of fifty nine dollars in December. You'll
Speaker 1: never in a million years guess the company NVR Inc.
Speaker 1: The trades for almost five thousand dollars a share. I
Speaker 1: don't even know this company, so you think about that
Speaker 1: or a round lot of you know of NVR is
Speaker 1: gonna cost you half a million dollars? Basically, isn't it
Speaker 1: silly not to split that Sevida Like, he's never a
Speaker 1: liquidity premium that you're missing out on and everything. I
Speaker 1: mean absolutely, that is why how many shares are outstanding?
Speaker 1: I don't know. I think it's like a fifteen billion
Speaker 1: dollar ish market cap, so interesting. I never would have
Speaker 1: guessed it. I never and that's why I think it's
Speaker 1: the craziest thing I saw this week. That is wild.
Speaker 1: I need But now I'm so bothered by not having
Speaker 1: not being able to remember the other company I was
Speaker 1: thinking of because I didn't really even guess one r NVR. Okay,
Speaker 1: that's wild. Is the craziest thing I saw this week.
Speaker 1: Wild thing I saw. But I'm glad you didn't guess it.
Speaker 1: Actually I was. I was thinking Sevida is going to
Speaker 1: get this, But I'm glad you don't know. No, I'm like,
Speaker 1: I'm more. I don't. I don't. I'm not a stock jock.
Speaker 1: I'm more of like a macro. So yeah, I was
Speaker 1: lummoxed by that one. That is a good question. That's good.
Speaker 1: I find it still a company would let their stock
Speaker 1: price trade that high, but real maybe they're proud of it.
Speaker 1: Yeah exactly, I mean we're talking about it, so right. Anyway, Savita,
Speaker 1: is so great to catch up with you. Really fascinating conversation.
Speaker 1: I hope we can have you back something likewise. Thank
Speaker 1: you again, Yeah, thank you for joining us What Goes Up.
Speaker 1: We'll be back next week and so then you can
Speaker 1: find us on the Bloomberg Terminal website and app or
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Speaker 1: can find us on Twitter, follow me at Rea Anonymous,
Speaker 1: Bill Donna Hich is at Bildonna Hich. You can also
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Speaker 1: by Stacy Wong. That for listening, to see you next time.
Speaker 1: Thank thank thank