Speaker 1: This is Mesters in Business with Very Results on Bloomberg Radio.
Speaker 1: This week, on the podcast, I have an extra special guest,
Speaker 1: Adam Parker. What a fascinating career UH, top ranked institutional analysts,
Speaker 1: semiconductor analyst, head of research at Sanford Bernstein, head of
Speaker 1: US Equities at Morgan Stanley. Really a master class and
Speaker 1: how to think about creating frameworks for investing, for thinking
Speaker 1: about how to apply quantitative research along with macro and
Speaker 1: fundamental data UH in order to create a differentiated research product.
Speaker 1: Just absolutely a master class in thinking about stocks, and
Speaker 1: thinking about sectors, and thinking about where is the crowd
Speaker 1: wrong and how to come up with a UM very
Speaker 1: outlier perspective, many of which have been giant moneymakers and
Speaker 1: really UH fascinating market calls. I found this conversation to
Speaker 1: be brilliant and insightful, and I think you will also
Speaker 1: with no further ado my conversation with Trivariant Researches Adam Parker.
Speaker 1: This is mesters in Business with Very Results on Bloomberg Radio.
Speaker 1: My special guest this week is Adam Parker. He is
Speaker 1: the founder of Trivariant Research. Previously, he was Global director
Speaker 1: of Research and US equity strategist at Sanford ci Bernstein.
Speaker 1: He was the number one institutional investor ranked analyst in
Speaker 1: semiconductors before he became Morgan Stanley's chief US equity strategist
Speaker 1: and director of Global quant Research. Adam Parker, Welcome to Bloomberg.
Speaker 1: Thanks thanks for having me here. I've been looking forward
Speaker 1: to having this conversation for a while, and I have
Speaker 1: to start with your very interesting academic background. You have
Speaker 1: three agrees and stats, uh not just undergraduate at Michigan,
Speaker 1: but a PhD from Boston University. And in the middle,
Speaker 1: you've got a master's in biostatistics at UNC Chapel Hill.
Speaker 1: Tell us about that. Yeah, well, back then statistics wasn't
Speaker 1: as cool as it is now. Very so I didn't
Speaker 1: know thirty years ago I was going to turn into
Speaker 1: the all the rage and that everyone was kind of
Speaker 1: one a major in you know, data science and analytics.
Speaker 1: It just I was always more of a math guy,
Speaker 1: and I liked having problem sets and then going and
Speaker 1: playing sports, and I didn't want to have to read
Speaker 1: Chaucer or whatever all the other miserable people were doing.
Speaker 1: So kind of motivated me to be a little bit
Speaker 1: more analytical. So so, but the question that raises biostatistics
Speaker 1: is were you always planning on a career in finance
Speaker 1: or was that you know, that was more of UM.
Speaker 1: The biostatistics department was in the School Public Health at UNC,
Speaker 1: and it's really you know, applied statistics applied that at
Speaker 1: that age too, uh, mostly medical data, but it was
Speaker 1: more about learning analytics and you know, programming and UM
Speaker 1: and you can apply it to anything, complied to anything.
Speaker 1: So like my my PhD thesis was about missing data
Speaker 1: UM in a healthcare setting, but as you know, missing
Speaker 1: data exists everywhere, including a finance so it turned out
Speaker 1: to be pretty applicable. So how frustrating is it to
Speaker 1: you to to see either newspaper headlines or social media
Speaker 1: where people just lack of rudimentary understanding of basic statistics
Speaker 1: and probability, you know. I think the big challenges is,
Speaker 1: as you know, because you're good at this, is taking
Speaker 1: things that are somewhat complicated and then making them sound
Speaker 1: like they're simple and explaining them to everybody. I think
Speaker 1: the average UM intellect of people watching and reading mainstream
Speaker 1: media is still in the junior high or high school level.
Speaker 1: So that's what you've got to resonate with. And I
Speaker 1: romanticize the investment community is slightly above that, but it
Speaker 1: probably is less above that than you think, right, So
Speaker 1: so I love We'll talk about try variate a little later.
Speaker 1: I love the name. I wrote a Bloomber column years ago. Um,
Speaker 1: single variable analysis is for soccers or something like that,
Speaker 1: And so I have to talk to you about But
Speaker 1: but let's with all that stat background, how did you
Speaker 1: get to Sanford CT Bernstein? You know in those days? Um,
Speaker 1: you know, I finished my PhD um in the late nineties.
Speaker 1: I you know, I had some buddies that seemed to
Speaker 1: be getting rich on Wall Street and then I didn't
Speaker 1: really know what they were doing. And one of my
Speaker 1: best friends worked at Sanford Bernstein and and uh, they
Speaker 1: were looking for somebody to write, um, you know, software
Speaker 1: and do analysis called quant research on equities. And I
Speaker 1: interviewed there and I loved it. This bunch of crazy,
Speaker 1: you know, wild people who were brilliant and um, kind
Speaker 1: of a little bit a little bit on the edge
Speaker 1: of being unhinged as human beings. And it was just
Speaker 1: kind of my jam, you know. And so, um, you're
Speaker 1: so buttons up, you don't sound like a crazy but
Speaker 1: it was. It was effort and enthusiasm or just like
Speaker 1: getting the PhD berry, it's basically perseverance one percent intelligence.
Speaker 1: And this was like you get in there and there
Speaker 1: was just no rules, like find something interesting and write
Speaker 1: about it. And so for me, you know, there's this
Speaker 1: database of information on hundreds of stocks and you could
Speaker 1: go in there and analyze as it reached conclusions. Oh way,
Speaker 1: you know along the top market kept name and sure
Speaker 1: these against it or do this or you know, it
Speaker 1: just kind of empirically test everything. And there was a
Speaker 1: bunch of incredibly brilliant people there. So I loved it. Um,
Speaker 1: I loved the environment, and I didn't I didn't even
Speaker 1: know what I was getting into, to be honest with you.
Speaker 1: And then from quant work at Bernstein were you were
Speaker 1: you an analyst and Semmi's there all yeah, so I
Speaker 1: switched to being sem Look at that time, being late
Speaker 1: nineties into the you know TMT bubble, what seemed cool
Speaker 1: to young young Adam Parker was being an analyst. Oh man,
Speaker 1: these tech analysts, they seem that seems like a great job.
Speaker 1: And Bernstein in those days, you know, you were really
Speaker 1: an expert you wrote, you know, a hundred hundred un
Speaker 1: page black book. It was called on an Industry, and
Speaker 1: you you could tear apart the p and ls of
Speaker 1: the companies and you really understood, Um, you know, we
Speaker 1: spend all our time on six to ten stocks, so
Speaker 1: you really knew those companies, that management teams, the things
Speaker 1: that impacted the volatility of the pan l you you
Speaker 1: kind of became an expert. And so I really want
Speaker 1: to do that. And I just got lucky that it
Speaker 1: was semiconductors. Um. I basically just kept going in saying
Speaker 1: I want to do this, I want to do this.
Speaker 1: And the first sector they offered me very was European
Speaker 1: electric utilities. So much fun. Yeah, and I I really
Speaker 1: struggled with how I'm going to communicate to them. I'm
Speaker 1: really on board with the fact that you you you're
Speaker 1: allowing me to be an analyst, but I can't move
Speaker 1: to London. Yeah, that's it. I can't move to London.
Speaker 1: I just I just got engaged or whatever. So I
Speaker 1: I enabled to sort of convince them, yes, thank you,
Speaker 1: I'm an analysts, but no, I'll wait for the first
Speaker 1: US one. And it could have been anything. It could
Speaker 1: have been food it could have been I didn't really care.
Speaker 1: And when Semi get you have you didn't have a
Speaker 1: tech background. I have been engineering because a lot of
Speaker 1: the analysts covering Semi's they're they're electric consigners, executor software design.
Speaker 1: I used to, you know, and and Burnstein's hiring model
Speaker 1: back then was basically get a mckensey guy who was
Speaker 1: an expert on an industry or somebody who worked at
Speaker 1: one of those companies. I was one of the rare
Speaker 1: counter examples of you know, um from within. Yeah, I
Speaker 1: think the PhD and statistics probably helped me. I used
Speaker 1: to just say, look, I'm probably better accounting the chips
Speaker 1: and knowing what they are, you know. And and it
Speaker 1: turned out that in those days would really matter to
Speaker 1: getting the stocks right was sort of a non consensus
Speaker 1: in correct view of the gross margins six months forward,
Speaker 1: and so that didn't really require the expertise on circuit
Speaker 1: design and the like. In fact, you know this, but
Speaker 1: sometimes those the people who work at the companies turned
Speaker 1: out to be not very good at calling the stock
Speaker 1: price of the owned company they worked at, because you
Speaker 1: have all kinds of biases from the people you like,
Speaker 1: and you don't like and that kind of stuff. So, um,
Speaker 1: it worked to my advantage, but I think probably wouldn't
Speaker 1: have happened if I didn't labor through that PhD. So
Speaker 1: how do you get from Bernstein to Morgan Stanley? Yeah?
Speaker 1: So after I did SEMIS for a few years, and
Speaker 1: you know, that's a very competitive, you know business. You
Speaker 1: get up every day and there's a there's a there's
Speaker 1: a person at admiral and a person that you know, uh,
Speaker 1: every there your competitors you want to like just you
Speaker 1: want to make them look stupid on the conference calls,
Speaker 1: and you want to ask the smartest question and you
Speaker 1: want to be number one ranked, right, So you do that,
Speaker 1: and you know very you know, once you get number
Speaker 1: one a few times, all you think about is like,
Speaker 1: am I gonna lose it? There's no joy in repeating
Speaker 1: as number one, There's only the fear of losing it, right,
Speaker 1: because then you're like, wait a minute, Like investors don't
Speaker 1: like me as much as I used to. So you know,
Speaker 1: I felt like I wasn't really incrementally you know, doing
Speaker 1: that again wasn't going to drive me anymore. And um,
Speaker 1: you know I was offered, um, you know, this position
Speaker 1: to run research at Burnstein, and so I transitioned to
Speaker 1: be the director of research for a while, which was
Speaker 1: attracting and retaining, hiring, firing, that kind of stuff. Management position,
Speaker 1: not research got me away from that. But the beautiful
Speaker 1: for a year. But the beautiful part was I then
Speaker 1: was helping other analysts RAMP and so I got to learn, Okay,
Speaker 1: I'm gonna lauch the household products guy, I'm gonna launch
Speaker 1: the capital equipment guy industrial and so in that year
Speaker 1: I was helping kind of four or five analysts RAMP.
Speaker 1: I started realizing like this kind of interesting, I'm kind
Speaker 1: of I can apply what I know with Sammy's and
Speaker 1: helped them. And so early in oh eight, at the
Speaker 1: very beginning of a wait, the strategy and quant research
Speaker 1: job opened up at Burnstein and that's how I transitioned
Speaker 1: to being a little bit more quote unquote macro. So
Speaker 1: I did that for a couple of years, and then
Speaker 1: I transitioned to Morgan Stanley to be the strategist there.
Speaker 1: And for people who may not remember this, in the nineties,
Speaker 1: Bernstein's uh bevy of analysts were top top. So in
Speaker 1: oh seven, when I was a director of research at Burnstein.
Speaker 1: These the data UM Burnstein at twenty three u s
Speaker 1: and also that were publishing eighteen were ranked in the
Speaker 1: top three and eleven were number one. That's unbelievable. So
Speaker 1: it was really a number one machine UM in terms
Speaker 1: of the analysts UM that worked there. And you know,
Speaker 1: I I, you know, was my job was get the
Speaker 1: five that weren't in the top three in the top
Speaker 1: three and hire a few more that will eventually be
Speaker 1: you know, number one in the future, you know. And
Speaker 1: and then that was in the US, and we also
Speaker 1: were building a European business too, So so obvious obvious
Speaker 1: after the fact question. Bernstein was substantial in size, But
Speaker 1: they weren't you know, Gulman, Saxmom Stanley, Merrill, Lynch. What
Speaker 1: was the secret of success? Why were they punching so
Speaker 1: far outside of that weight class? I think they're you know, um,
Speaker 1: it was the it was multiple things. But I'd say,
Speaker 1: you know, you don't have a prime brokerage business, you
Speaker 1: don't have a banking business. So there was this perception
Speaker 1: of independence. You hire people who were you know, generally
Speaker 1: were you know, experts in the industry. I was an exception,
Speaker 1: but there were generally people who were running the Mackenzie
Speaker 1: practice consulting the aerospace companies, and they would be hired
Speaker 1: to cover Boeing or those kind of things. So kind
Speaker 1: of the industry now, and I think the Bye side,
Speaker 1: you know, relied on that is sort of a you know,
Speaker 1: an external voice. When you interview the Bye side, they
Speaker 1: tend to not care if the Cell side are good
Speaker 1: stock pickers or not. They might blame them if they're bad,
Speaker 1: but they're never gonna say I rely on the Cell
Speaker 1: side for their stock selection skills. That's what they're supposed
Speaker 1: to be doing. So I think what helped Bernstein gain
Speaker 1: prominence was the fact that all right, we don't even
Speaker 1: try to do that at an expert level, just try
Speaker 1: to help people be smarter about the investment countries and
Speaker 1: controversies and write detailed, um, you know, sensible issues on
Speaker 1: those investment convers So that that was that was a
Speaker 1: business model, and it really worked back through and at least,
Speaker 1: you know, until maybe ten years ago. So so let
Speaker 1: you raise such a fascinating question I want to ask
Speaker 1: you about. And we're recording this UM late April, after Netflix,
Speaker 1: which had fallen fifty from its October peak UM at
Speaker 1: their earnings call, they announced a decrease in subscribers. The
Speaker 1: stock falls another overnight the next day. There are all
Speaker 1: these down grades from the major cell side shops, cut
Speaker 1: cut to neutral, cut to hold, cut to and it
Speaker 1: raises the question, and I'm sure lay people asked this
Speaker 1: question to themselves all the time. Hey, the stock is
Speaker 1: now down from where you told me to buy it.
Speaker 1: What's the point of this down grade? Thanks for nothing? Yeah,
Speaker 1: I mean the south side um defend the entire analysts
Speaker 1: go okay, yeah, you know. I when I got to
Speaker 1: Morgan Stanley in I'll answer this one. I got in
Speaker 1: the late fall of I wondered if the research department
Speaker 1: there generated any alpha with the recommendations, and so I
Speaker 1: analyzed they had stored data from three to ten. There's
Speaker 1: about thirty five stock recommendations that were kind of stored,
Speaker 1: so you let the statistician loose on the data. And
Speaker 1: about half were overweight rated half were equal underweight. So
Speaker 1: I thought, all right, did the overweights beat the equal underweights?
Speaker 1: Your exact question, I considered, So I didn't stock down
Speaker 1: after mark it, and then they downgradeed. You do not
Speaker 1: give them credit for that being a credit You lack
Speaker 1: it by twenty four hours. You bade an adjusted meaning
Speaker 1: you know, adjustable how much thing to be moved. And
Speaker 1: it turned out, at least for the observations over seven years,
Speaker 1: that they had about four percent average um alpha between
Speaker 1: the overweights and equal underweights. So I published that as
Speaker 1: a bar four So in other words, the stocks they
Speaker 1: liked did four percent they didn't like, And then how
Speaker 1: did it do versus so that basic indexing, Yeah, well
Speaker 1: that was kind of a new market neutral, right, So
Speaker 1: like you overweight longs and your short equal on the weights,
Speaker 1: and then and then I had a quant model that
Speaker 1: you know, the long top pointel beat the bottom by
Speaker 1: nine percent, so I sort of said, look, I think
Speaker 1: quantitative stuff probably you know, is a little bit better
Speaker 1: than fundamental stock. But then the when the last bar
Speaker 1: was thirteen percent, which was if you only bought the
Speaker 1: overweight rated stocks at the model light and you only
Speaker 1: sort of shorted the equal underweights and the model didn't like,
Speaker 1: you get thirteens. The whole point of this was a
Speaker 1: combination of something quantitative and maybe unemotional, combined with the
Speaker 1: fundamentals would be superior to either discipline alone. And actually
Speaker 1: i've spent most of my life since then, you know,
Speaker 1: the last twelve years in that sort of combination sphere.
Speaker 1: So I think I'm trying to defend it by saying, look,
Speaker 1: I think there's some value in it, for sure, but
Speaker 1: there's not value in changing the recommendation after it's happened.
Speaker 1: My own personal opinion on Netflix, And I'm not a
Speaker 1: fundamental analyst there, but I did write about it bury
Speaker 1: it's interesting. Um, I've had two learning lessons of that.
Speaker 1: This one applied to one. When things change, you have
Speaker 1: to admit it, and this one I think has both
Speaker 1: macro and micro changes. I think the macro would be,
Speaker 1: you know, everyone bought too many streaming services during COVID,
Speaker 1: and maybe it doesn't need they're out of their house again, right,
Speaker 1: and so it's reopening and and And the micro is
Speaker 1: they've got to think about pricing and maybe charging people
Speaker 1: to or not charging the inverse for advertisements. So that's
Speaker 1: kind of a business model change. And the other thing
Speaker 1: so maybe you have to say to yourself, well, it's
Speaker 1: not exactly the same fundamentally. Maybe you know, sometimes I
Speaker 1: guess i'd answer your question by saying, sometimes the stocks
Speaker 1: down twenty five but the fundamentals are worse than right
Speaker 1: that maybe not in this case, but I'm saying in aggregate.
Speaker 1: And the second learning lesson I've had from analyzing a
Speaker 1: lot of behavior on the short selling it and running
Speaker 1: my own fund is you make more money shorting stocks
Speaker 1: down from highs than you do add highs. So it's
Speaker 1: very tough to short stock add a high because you're
Speaker 1: fighting positive price momentum. Right, So when the stocks down
Speaker 1: and then you short it, I guarantee you make more
Speaker 1: money shorting stocks down twenty from highs than you do
Speaker 1: at high So it's not necessarily true that Netflix isn't
Speaker 1: a short here um, But I'm not a fundamental an else,
Speaker 1: and in that in that case, I'm not convinced that
Speaker 1: it isn't worse. It's still trades in a hundred times
Speaker 1: forward free cash flow. It's got a high correlation to
Speaker 1: low quality and work from home. It's got a high
Speaker 1: correlation to negative correlation to inflation. So I don't have growth.
Speaker 1: You know stocks like that are gonna work, so you
Speaker 1: know I don't. I don't know the fundamentals. And one
Speaker 1: of one of my favorite things about having you who
Speaker 1: is an independent research shop instead of a cell side analyst.
Speaker 1: I'm not getting a phone call tomorrow from the PR
Speaker 1: person begging me to take everything Adam said out about Netflix.
Speaker 1: Can't he can't talk about you can talk. You'd go anywhere.
Speaker 1: You could talk about anything that's right without friction. So
Speaker 1: that leads to another question. How freeing is that that
Speaker 1: you can actually say what's on your mind and you're
Speaker 1: not thinking about what Obviously legal is important, but sometimes
Speaker 1: compliance gets a little over enthusiastic, and PR even more stuff.
Speaker 1: I would say, you know, I should look this up.
Speaker 1: So this this is an exaggeration, but I would say
Speaker 1: I would say maybe ten years ago when I worked
Speaker 1: at Morgan Stanley, Um, I think there was fifty thousand
Speaker 1: employees and ten thousand legal and compliance in ten thousand
Speaker 1: and I t so that those are some but that's
Speaker 1: something like that. So look, these are amazing firms, and
Speaker 1: morganize an incredible firm with great people and a lot
Speaker 1: of whom are closest. But what I'd say is that
Speaker 1: there's positive and negative. The big firms have bigness disease,
Speaker 1: and the taxes on your time become substantial. Right, you know,
Speaker 1: you need a bunch of videos to money laundering and
Speaker 1: a bunch of you know, every firm has this, you
Speaker 1: know that you know, compliance stuff. You've got a bunch
Speaker 1: of three sixty feedback M D and E D promotion,
Speaker 1: the E S G diversity and include the number of
Speaker 1: things you have to do just time taxes, time taxes.
Speaker 1: It's a huge tax. And so for me, you know,
Speaker 1: it's very freeing. We're not a broken deal or our
Speaker 1: whole job is to write you know, interesting research that
Speaker 1: makes people think. We sell data. We you know, create baskets.
Speaker 1: We do a lot of outsource sort of chief chief
Speaker 1: risk officer or work where people we signed onto sculture agreements.
Speaker 1: People send us their portfolios and we we kind of
Speaker 1: analyze them and try to give them some interesting thoughts
Speaker 1: about it that aren't in you know, axioma or you know,
Speaker 1: things they can get from other other vendors. So, um,
Speaker 1: it's really freeing. It's it's really freeing. But you know,
Speaker 1: you know you don't have the resources. Um, you don't
Speaker 1: get the first class to uh, you know, you know
Speaker 1: Beijing either, So there's some positive negatives. Wit you're flying commercial,
Speaker 1: Come on, I always always fly commercial, man, So let's
Speaker 1: talk semis they've been driving everything from the shortage of
Speaker 1: automobiles to inflation. Give us the broad overview from your perspective. Yeah, well,
Speaker 1: you know, one of the things that is tricky when
Speaker 1: your investor barri is you know what what a cyclical
Speaker 1: and what's structural, and you know you can confuse yourself
Speaker 1: when something sicklal when you think it isn't, and when
Speaker 1: the periodicity changes, and those kind of things. So uh love,
Speaker 1: I love all this math talking amplitude. Pity, I'm so excited.
Speaker 1: I'm back back in college. You know. I think what
Speaker 1: you said is right though, that there are kind of
Speaker 1: an important barometer um for a lot of broader issues.
Speaker 1: The two things that I'm tracking right now really carefully
Speaker 1: are a concept called book to bill, which is sort
Speaker 1: of how much revenue did you ship out versus what
Speaker 1: is your order flow look like? And is the order
Speaker 1: high order flow higher than you shipped out? Book to
Speaker 1: bill ratio generally that's still above one for most semi
Speaker 1: conductor companies, meaning future demand looks a little bit better
Speaker 1: than trailing demand. But that book to bill ratio has
Speaker 1: come down from maybe one point one five to one
Speaker 1: point eight to one point oh six so down due
Speaker 1: to the supply as we finally get you know, supply
Speaker 1: catching up, you know, post covid um. So you I
Speaker 1: think when that if you think about it, it's a
Speaker 1: weird way to think about it, but there's probably one
Speaker 1: second where production equals consumption and then you're either about
Speaker 1: to start overproducing consumption or you know you're about to
Speaker 1: start underproducing. So I think will get to equilibrium in
Speaker 1: the second half of this year in really most parts
Speaker 1: of the semi conductors. Wow, that's that would be a
Speaker 1: huge huge windfall fort by cars. Yeah, I think that's right.
Speaker 1: And I think the second thing that's important related to
Speaker 1: this is backlog. So you know, one of the things
Speaker 1: that I think Bernstein was good about and is making
Speaker 1: you think like you're the CEO as an analyst, so
Speaker 1: think like your CEO, you know, stepping you know, kind
Speaker 1: of stepping to the thought process that you're running the company.
Speaker 1: So if you're the CEO of any industrial company, auto
Speaker 1: home appliance, any real business, you've had trouble selling product
Speaker 1: in the last eighteen months because you couldn't get the
Speaker 1: supplies you need. So you go to your procurement officer
Speaker 1: and you say, yo, how about stop bottlenecking my final revenue.
Speaker 1: So what does that person do. It calls a semi
Speaker 1: conductor supply chain. It says, I want two million eighteen
Speaker 1: months from now, I want two million twelve months from now,
Speaker 1: and by the way, I want to hundred million twenty
Speaker 1: four months from now. And you start piling on the
Speaker 1: backlog so that they know, hey, I'm gonna be there,
Speaker 1: gonna be there for a while, ramp it up, right,
Speaker 1: And so that has some interesting contagion in the economy,
Speaker 1: right because these guys start planning their back law back um,
Speaker 1: you know, their capacity as if that backlog is going
Speaker 1: to be there. One of the very weird parts about
Speaker 1: the semi connector industry that I don't think everyone understands
Speaker 1: is there's zero penalty for backlog cancelation. So you and yeah,
Speaker 1: you and I can if we want to go to
Speaker 1: Noboot for sushi, we we're gonna pay twenty five bucks
Speaker 1: if we cancel our reservation. But somehow I can order
Speaker 1: two million of silicon and have zero penalty. It's very strange, right,
Speaker 1: So if you get any whiff that backlog's got air
Speaker 1: in it, meaning you know, when we get production going consumption.
Speaker 1: Probably you're gonna call some of them like, you know what,
Speaker 1: I probably only good for a hundred million eighteen months
Speaker 1: from now. I don't need to twound a million. But
Speaker 1: there's zero zero, zero penalty, right, and so I think, um,
Speaker 1: that's a key. That's why I think backlog book to
Speaker 1: bill are really important to watch. And if you get
Speaker 1: any whiff that some of the backlog is is not real,
Speaker 1: I think that causes fear. Now we've seen semis come
Speaker 1: in a lot here because I think people know they're
Speaker 1: over earning and they can see, you know where we
Speaker 1: are six months from now, um, and so now I
Speaker 1: think you're at the point where you're gonna pick winner
Speaker 1: some losers. In a little bit more, as you can imagine,
Speaker 1: some of semi conductor business does not have perishable pricing.
Speaker 1: So the cancelation, yeah, they have inventorium, but they don't
Speaker 1: have to cut the prices. So the Texas instruments and
Speaker 1: all the devices of the world, their products really are imperishable.
Speaker 1: Whereas you know some of the microprocesses that Intel an
Speaker 1: m D make, or graphic processes that that n Video
Speaker 1: an m D make, or you know obviously Micron with
Speaker 1: memory like that stuff super perishable, right, so they make
Speaker 1: excess the pricing comes out a lot, so you'll start
Speaker 1: getting a little you know, discriminating between winners and losers,
Speaker 1: a little bit more in that sector. But I think
Speaker 1: the broad tenter of your question, barriers backlog and book
Speaker 1: to bill are are are probably you know, in the
Speaker 1: top ten interesting more macro barometers for people to focus on.
Speaker 1: So from a macro perspective, one of the most interesting
Speaker 1: questions that comes up over and over again is why
Speaker 1: does it seem to take so long to reopen a
Speaker 1: semiconductor fab after a prolonged shutdown? You know, it's a
Speaker 1: number of issues, but you um may have excess capacity
Speaker 1: and a factory, but you may take you several weeks
Speaker 1: to start building it and ramping it up. UM. You know,
Speaker 1: you may have tools that are idled, you may have
Speaker 1: tools that are not assembled yet, right, so you're you
Speaker 1: can't really turn on a dime your production as rapidly
Speaker 1: as people think. UM it is is a lot more
Speaker 1: automated now than it used to be, though in terms
Speaker 1: of UM you know how it works inside a way
Speaker 1: for fabrication people in bunny suits. I've exactly so you know,
Speaker 1: you're you're, you're, you and I are the same vintage.
Speaker 1: So you know, I've been in the bunny suit in
Speaker 1: old factories and you know, if you think about they
Speaker 1: used to talk a lot about yield, and some of
Speaker 1: the yield was just like people's hair getting in the
Speaker 1: stuff or you know, dropping dropping these things on the floor. Um,
Speaker 1: and so that through multiple exactly now it's all you know,
Speaker 1: synopsis and cadence and software and the stuff goes on
Speaker 1: the ceiling on tracks and comes down to the right machine.
Speaker 1: And I don't know if people can mentally imagine a
Speaker 1: fab but away from fabrication facility, but they're like the
Speaker 1: size of a football field and there's ten million dollar
Speaker 1: machines as far as you can see in every direction.
Speaker 1: So it's multiple, multiple billions of dollars, I think. I
Speaker 1: think when I went to it's been many years now
Speaker 1: since I covered Semmis, but when I went to one
Speaker 1: of their state of the art fabs and intel in
Speaker 1: Oregon many years ago, they had a sign up front
Speaker 1: saying they had more steel than two Eiffel towers and
Speaker 1: enough cement to go to Portland, from Portland to Seattle.
Speaker 1: Like they're big facility, So I think it's just not
Speaker 1: as easy to like quickly ramp up a bunch of
Speaker 1: the capacity as people think. So so that raises a
Speaker 1: question that UM a lot of people have been asking,
Speaker 1: which is, how seriously can we reassure manufacturing facilities in
Speaker 1: the US. Is that a real thing or is that
Speaker 1: something that the politicians wave their hands about it. But
Speaker 1: it's so much money and it's so much cheaper overseas,
Speaker 1: it's not going to happen. I think there's a lot
Speaker 1: of things that could change. That deglobalization team I think
Speaker 1: is real. If I think about what's kind of changed
Speaker 1: pre COVID to now, probably the deglobalization team you're talking
Speaker 1: about it is one of the bigger actual changes. You
Speaker 1: don't need a package and test every chip in Taiwan,
Speaker 1: and there's some cheap areas here in the US, and
Speaker 1: I think that's struct really changed. I know Intel's announced
Speaker 1: some massive was an hundred billion CAPEX play over multiple
Speaker 1: years to build some stuff in Arizona and other places.
Speaker 1: So I think we're gonna onshore more than manufacturing UM,
Speaker 1: and I think that part's real. Does the national security
Speaker 1: issue security as well China make are the chips for
Speaker 1: our F twenty two fighters is potentially and I think
Speaker 1: there's a yeah, I think there's also Um, there's been
Speaker 1: diminishing benefits to outsourcing it on the cost front as well.
Speaker 1: Now maybe that doesn't mean, I don't I don't know
Speaker 1: if that means Intel is gonna be a good stock.
Speaker 1: Right just because they're you know, um, you're gonna spend
Speaker 1: all that Capex doesn't mean it'll be So let's let's
Speaker 1: talk about Intel. They've been criticized for lack of innovation,
Speaker 1: for not keeping up with the in videos of the
Speaker 1: world or even with Apple and there M one chips. I,
Speaker 1: by the way, footnote, I got a new iMac in
Speaker 1: December and the old machine is two years old. The
Speaker 1: new one is like six times faster. It's insane. The
Speaker 1: difference between the M one chip and the solid state
Speaker 1: you know, no spending drives nothing. Um. So what happened
Speaker 1: to Intel? How they seem to fall so far behind? Yeah,
Speaker 1: that's a good question. I mean we looked at I
Speaker 1: did a research note recently on UM capital spending in
Speaker 1: R and D. It's in sort of R and D
Speaker 1: intensity and capital spending intensity meaning relative to sales changes
Speaker 1: in that what it means for subsequent returns. And our
Speaker 1: work shows that Intel has been one of the biggest
Speaker 1: destroyers or shareholder value of any company in the last
Speaker 1: twenty years because they spend you know, tens and tens
Speaker 1: of billions on this stuff and that hasn't really made
Speaker 1: their stock go up. So if you think about it,
Speaker 1: has it helped their sales and revenues? Yes, but we
Speaker 1: don't really care. Like we're stock guys like I don't like,
Speaker 1: you know, I want to buy a stock that goes up,
Speaker 1: I don't really care if the revenue goes up in
Speaker 1: the stock doesn't. So the stock has gotten cheaper, um,
Speaker 1: and they've lost shared in major areas. So I I
Speaker 1: think that, um, you know that that it may be
Speaker 1: you know's a fruit list, but it may not be
Speaker 1: a you know, high return on the investment. But maybe
Speaker 1: it's just good for America. And there seems to be
Speaker 1: bipartisan support for that as well. So let's talk about
Speaker 1: a stock whose price has gone up. Probably the hottest
Speaker 1: semi for years now is in video. It tell us
Speaker 1: why their graphics engine is just kicking everybody. But they
Speaker 1: did a lot of stuff, right, I mean, I'm look,
Speaker 1: I dropped coverage semiconductors, you know, a dozen, you know,
Speaker 1: more than fifteen years ago, actually General General seven. So
Speaker 1: now you're up to data sign yeah, you know, and
Speaker 1: it's I'm gonna get the like the danger zone of thinking,
Speaker 1: I know stuff that's no longer relevant. Dunning Krueger presents. Yeah,
Speaker 1: so I can tell you about you know, high school
Speaker 1: in n also, but you know, I think that some
Speaker 1: of us who have been around the block, you know,
Speaker 1: probably missed at least the first half of the video
Speaker 1: because we didn't trust the management team, you know. And
Speaker 1: uh and I think, you know, a combination of lucky
Speaker 1: and brilliant you know, not not all brilliant, but graphics
Speaker 1: and crypto, and they got into a bunch of other
Speaker 1: things that really writes it's been a monster. Now it's
Speaker 1: been reset a lot because the valuation was high, you know,
Speaker 1: And so I think people realize that these businesses back
Speaker 1: to my original comments, yeah, the slope has been upward,
Speaker 1: but they're also over earning at the same time, and
Speaker 1: so that's why the stocks have come in so much.
Speaker 1: I think it's probably still a little bit too early,
Speaker 1: but I think as we get closer to production line
Speaker 1: and consumption and the stocks correct. You know, maybe it's
Speaker 1: time to get in again. And in the world needs semmis.
Speaker 1: You can't reit produce anything without them. So I'm not
Speaker 1: I'm kind of kind of a long term bull, but
Speaker 1: kind of short to medium term. Just feel like this
Speaker 1: correction needs to, you know, happen. So let's start talking
Speaker 1: about you sitting on the investment committee at Morgan Stanley,
Speaker 1: which is about two trillion dollars in client assets. I
Speaker 1: don't know if it was that when you were there.
Speaker 1: I think when I was there it was two. Who
Speaker 1: knows what this each trade thing, it might be three.
Speaker 1: I have no idea what that's a lot of would
Speaker 1: tell us what it's like to be responsible for that
Speaker 1: much money. Um, look, there was a seven person committee.
Speaker 1: Everyone on there was hey one seven. There's still a
Speaker 1: lot of money. Yeah, yeah, I don't know how much
Speaker 1: of that, you know, I felt responsible for. I was
Speaker 1: the you, I was the equity guy that were bond experts,
Speaker 1: that were for you know, international experts and you know,
Speaker 1: alternatives experts. But know, fortunately I was there during a
Speaker 1: period where you know, it's right up. Yeah, I just
Speaker 1: said and said look, you know, you guys can own
Speaker 1: whatever you think makes sense. But I'll take twenty of
Speaker 1: US growth stocks and I'll meet you in five years,
Speaker 1: And basically that works. So um, I don't I can
Speaker 1: look back and say I generally gave good investment advice
Speaker 1: because I just felt like we were in by the
Speaker 1: dip mode. You know, it was pretty clear that US
Speaker 1: equities looked better than the other asset classes. Look, I
Speaker 1: generally think that stillbury, which is that you know, I'm
Speaker 1: getting to to an percent net buy back puss dividend.
Speaker 1: I get, you know, some organic ornings growth of a
Speaker 1: few percent. So I think the US equity market looks
Speaker 1: like a six percent total return AUTORITHM. That look yeah normal,
Speaker 1: And that looks a lot better than most of these
Speaker 1: other things. And I never really understood the case for owning.
Speaker 1: I mean, I got a little bit in trouble back
Speaker 1: in the day went Morgan Salley when I would say
Speaker 1: stuff like Europe is great for vacation, but not for stocks, uh,
Speaker 1: you know, which has by the way, turned out to
Speaker 1: be exactly acade. Yeah, and we had two year period
Speaker 1: where it hasn't be good for vacation, But I think
Speaker 1: it will be again this summer. But I think generally
Speaker 1: that's been right, So I don't you know, um, I
Speaker 1: felt like it's important to um hit on the importance
Speaker 1: of your equities, but I don't really know, you know, today,
Speaker 1: I think the problem would be different and more complex.
Speaker 1: I think, you know, recently you've seen the news fidelities
Speaker 1: say they're gonna offer crypto for retirement plans, and there's
Speaker 1: other you know, there's other kind of diversifying things happening,
Speaker 1: and I think alternatives. People have a different view now
Speaker 1: than they did five six years ago, meaning you know,
Speaker 1: maybe people now realize that some of private equity was
Speaker 1: a levered uh rates call, and you know, so the
Speaker 1: private markets have been a little bit more richie value
Speaker 1: before they become public. You know, it's been some evolution
Speaker 1: in the last five six years since I've been doing that.
Speaker 1: But um you know, generally, I think I felt responsible
Speaker 1: for making clear that US equities had a pretty important
Speaker 1: and big place in the portfolio. And I think, is
Speaker 1: you know better than me, much better than me, how
Speaker 1: rich you are to start out with really impacts the
Speaker 1: proper allocation. Of course, the question is that you're trying
Speaker 1: to create wealth and preserve wealth, and that makes it
Speaker 1: different huge. So I want to get a sense of
Speaker 1: what it's like to be on a committee positible not
Speaker 1: for two or three billion dollars, but for seven trillion dollars.
Speaker 1: Is it all thirty thousand foot macro view or does
Speaker 1: it get more granular? Did you dig into sectors stocks? How?
Speaker 1: How how specific does that committee get? I think for me,
Speaker 1: I've always been more about the industries of sectors, the
Speaker 1: microstructure of the market. And it was hard for me
Speaker 1: because I had to get had to get higher level because,
Speaker 1: as you're pointing out correctly, UM, people are just trying
Speaker 1: to get the mix of equities and bonds correct, their
Speaker 1: mix of you know, us versus non us correct. UM.
Speaker 1: I don't remember how much of that money is qualified
Speaker 1: for alternatives, but you know that stuff obviously has a
Speaker 1: bit of a different flavor to it, so it was
Speaker 1: pretty high level stuff. UM. I'm not an economist, so UM,
Speaker 1: I didn't really UM get into you know that, UM,
Speaker 1: there are definitely some other fixing in come people who
Speaker 1: focused on that. So I think generally, you know, at
Speaker 1: least in the last decade, most people thought race were
Speaker 1: going to back up and they've been wrong until the
Speaker 1: last six or nine months, so you know they get there.
Speaker 1: There was sort of pretty easy to like equities over ponds. Yeah,
Speaker 1: it's very least. So let's talk a little bit about trivariate. Yeah,
Speaker 1: starting with I love the name, tell us what it
Speaker 1: means and now you can't. Yeah, it's totally a self
Speaker 1: serving name. Um. So look, I was a number one
Speaker 1: ranked then also have a PHC and statistics, and then
Speaker 1: I did strategy. So I feel like the three buckets
Speaker 1: of investing, the three variables investing UM, you know, quant fundamental,
Speaker 1: and macro. So when I started a hedge fund, UM,
Speaker 1: I called a Triviria Capital, just thinking that, you know,
Speaker 1: I'll go tell allocators that I'm kind of considering quantitative
Speaker 1: things and macro things and fundamental things as part of
Speaker 1: my investment discipline. And we ran money a Trivita Capital
Speaker 1: for a while. It closed down and converted into a
Speaker 1: research firm UM in the middle of two thousand one,
Speaker 1: and just kept the name. I had a fancy logo
Speaker 1: that looks amazing, so I didn't want to repay for
Speaker 1: a new logo. But uh, yeah, I know, it's just
Speaker 1: I think we're we're approaching equities from the lens of
Speaker 1: you know, systematic or quantitative um, some fundamental work and
Speaker 1: then and then macro. Macro is more about where are
Speaker 1: we and what to do about it? Meaning where we
Speaker 1: where do we think we can pick stocks better or worse?
Speaker 1: Where should we be able to generate more alpha? Which
Speaker 1: parts of the market, you know, should we be able
Speaker 1: to do that right now? Based on the conditions that exist.
Speaker 1: So it's we're not doing macro from the standpoint of
Speaker 1: forecasting rates or dour oil, but more recognizing where we
Speaker 1: are and saying, okay, in this regime, we ought to
Speaker 1: be able to pick winners from loses very well within
Speaker 1: the industrial sector, but maybe not so well in general
Speaker 1: bowls or things like that. So it's we're looking at
Speaker 1: those three lenses to try to help, you know, people
Speaker 1: who care about equities make money. So so let's talk
Speaker 1: about the concept of outsourced chief risk officer. Tell us
Speaker 1: a little bit about what you do in helping firms
Speaker 1: manage their risk profiles. So when I left Morgan Stanley,
Speaker 1: I left the cell side. I went to work at
Speaker 1: a large hedge fund, and part of my role there
Speaker 1: was to be much more analytically rigorous around risk management
Speaker 1: UM and then also diagnosed trades to look for patterns
Speaker 1: of behavior and the like. So I brought that sort
Speaker 1: of risk framework into running my own hedge fund and
Speaker 1: we have UM use that infrastructure now in the research
Speaker 1: role to help firm. So I think we signed down
Speaker 1: a little twentysothing nondisclosure agreements where firms they send us
Speaker 1: their portfolio, we put it through our framework, and I
Speaker 1: think they view me as sort of like an outsourced
Speaker 1: cheap risk officer where we'll talk to them through things
Speaker 1: that are not things they can get from the standard
Speaker 1: risk vendors, So things like UM, you know, idisyncratic risk,
Speaker 1: and maybe they differ for your lungs versus your shorts. UM.
Speaker 1: You know, so you your bottom stock picker, but your
Speaker 1: your lungs are pretty macro and your shorts are pretty
Speaker 1: company specific or you know, as you know, as you know,
Speaker 1: very like if risk didn't change, anyone could do risk management.
Speaker 1: So most people know their growth value that are large small,
Speaker 1: they're you know, So we have, like you know, in
Speaker 1: the last two or three years, think about what's what's changed,
Speaker 1: and we created a work from home basket and reopening basket,
Speaker 1: and we look at every stocks correlation to low quality
Speaker 1: work from home like Netflix or a high quality reopening
Speaker 1: or whatever, and we kind of see, are you off
Speaker 1: sides on your long short book on on those things,
Speaker 1: or even on the long versus the index, or if
Speaker 1: you're yeah, stuff like that, yeah yeah, or you can
Speaker 1: see if they're off sides because they may not really lies.
Speaker 1: They have UM that bet on as much as they
Speaker 1: do UM, meaning they're unaware of the correlations. Yeah, maybe
Speaker 1: unaware the correlations, may be unaware that they've got where
Speaker 1: the real risks are. So what happens when you run
Speaker 1: a fund is, let's say you decide, all right, I'm
Speaker 1: a little bit nervous about my tech exposure a few
Speaker 1: months ago. Uh yeah, they're expensive and more worried racer
Speaker 1: can rise, so I'm gonna sell it, so I think
Speaker 1: it practice. What happens is the c I O goes
Speaker 1: to some of the analysts for PMS and said, Yo,
Speaker 1: give me your at least two or three favorite tech names.
Speaker 1: I'm gonna I'm gonna trim those out right, and you
Speaker 1: trim them out, you sell five pips to tech and okay, great,
Speaker 1: I'm proactive. I got the call right, but it may
Speaker 1: not be that those names you trimmed with the risky ones, right.
Speaker 1: So it's so we think about more from the risk
Speaker 1: standpoint as much as the exposure um. And there's a
Speaker 1: lot of so, you know, a lot of that goes
Speaker 1: in there. So when we do our work, it's a
Speaker 1: lot of you know, every single name's exposure to UH size, substance, style,
Speaker 1: dollar rates, spreads, oil momentum, beta, a lot more than
Speaker 1: just beta. This ownership. You know, we look at filing
Speaker 1: data from sixty hedge funds that we track to do
Speaker 1: deep fundamental researcher. We say, does anybody here have high
Speaker 1: conviction in the name? Do they own three percent or
Speaker 1: more of their assets in the name. How does it
Speaker 1: differrom the broader population of funds? Is there a good
Speaker 1: and bad crowd? And going on? I mean it's a
Speaker 1: very you know, kind of differentiated system to try to
Speaker 1: really help people understand, you know, what the true risk
Speaker 1: of their portfolio. We we take the portfolio and we say,
Speaker 1: how did this act in the last ten downturns of
Speaker 1: ten percent or more? Where's a different today versus you
Speaker 1: know that, so maybe you have names that you think
Speaker 1: are defensive. You own Oracle and your own Walmart. You
Speaker 1: think you're defensive, but they get much more correlated in
Speaker 1: the downturns, and they look like in a steady state
Speaker 1: or all those kind of things that try to help
Speaker 1: people think through the risk of their portfolio. So you know,
Speaker 1: I think we're good at that. We do a lot
Speaker 1: of like hedge baskets. So you've got a big, long position,
Speaker 1: you want to take out some of the you know,
Speaker 1: kind of macro risk of it, so we can create
Speaker 1: a basket to help you hedge it. So we do
Speaker 1: a lot of that kind of risk work to help
Speaker 1: funds think through um and And I think for us
Speaker 1: it's great because I think people say, all right, well,
Speaker 1: I can you know, I can hire hire trivarian and
Speaker 1: um they can you know, help me once a quarter
Speaker 1: think through the stuff or a big inflections and I
Speaker 1: don't need uh um, you know, build a team here
Speaker 1: to do do that same thing. Really interesting. So it's
Speaker 1: I was gonna ask, you know, I know, back in
Speaker 1: the days when you were Morgan Stanley, you were traveling
Speaker 1: more than half the year and I I was away
Speaker 1: for two days and I'm completely disoriented and it takes
Speaker 1: a while to get my feet onto me. Again. I'm curious,
Speaker 1: if you find now that you're not doing that sort
Speaker 1: of travel, do you have the time to step back
Speaker 1: and think deep thoughts and really organize how you're looking
Speaker 1: at the world, not from airports and hotels. How does
Speaker 1: that affect how you think? So? Yeah, Probably the smartest
Speaker 1: person that ever worked with was a guy named Marty Leebowitz,
Speaker 1: who Marty's an amazing human being is early to mid eighties,
Speaker 1: is the most published person in the history of financial journals.
Speaker 1: Um you know, worked I think with Mr Bloomberg and
Speaker 1: at Solomon back in the day, and so just a
Speaker 1: very connected and brilliant guy. And I think his wife
Speaker 1: is a brain scientist. And we went to dinner together
Speaker 1: with our wives, and I told his wife at dinner
Speaker 1: that I spend five to ten minutes a day thinking.
Speaker 1: This is when I worked at Morgan Stanley. And she
Speaker 1: almost started crying about depressed of a level of thinking
Speaker 1: I was able to do. And so all the thinking
Speaker 1: I had to do was five thirty in the morning
Speaker 1: to seven in the morning and then seven at night
Speaker 1: on and on the weekends, which was fine, but it
Speaker 1: wasn't you know, it's system and it's an amazing firm,
Speaker 1: but traveling everywhere and and you know, getting fat, and
Speaker 1: you know, just you know all that stuff. So, um,
Speaker 1: I think it's freeing from the standpoint of you know,
Speaker 1: A lot of that was just you know, you're flying
Speaker 1: to conferences all around the world and and um, it's
Speaker 1: a lot of airpoint time. I'm traveling some now, but
Speaker 1: it's definitely more like one week a month, you know,
Speaker 1: five six, um, you know, days of year to see
Speaker 1: you know, clients and potential clients. And I find that
Speaker 1: great because you want the human connection. Obviously, I'm glad
Speaker 1: the world's reopening such that people are doing in person meetings. Um,
Speaker 1: so you want to you want to do meetings to
Speaker 1: talk to investors. What you don't want to do is
Speaker 1: you know, fly to Jakarta for one one hour speech
Speaker 1: on US equities if I turn on my back or whatever. Yeah.
Speaker 1: So I think I think the answer to your question is, um,
Speaker 1: you know, I'm thinking more, I'm talking to investors more often,
Speaker 1: and I'm doing less you know, kind of push meeting
Speaker 1: presentation of my you know, my material. So a lot
Speaker 1: of those conferences Barry were sector conferences. We got a
Speaker 1: Team T conference in San Francisco. The first thing of
Speaker 1: the conference will be I talk about US equities, my
Speaker 1: view of tech, and the Ansel picture ideas, and then
Speaker 1: I move on right, so there's no push like that.
Speaker 1: Now all right about tech because there's a big sell
Speaker 1: off and I want to evaluate what signals and stocks
Speaker 1: work after the sell off. For you know, it's it's
Speaker 1: margin expansion and cash flow. Or I'll look at fang
Speaker 1: am as a as a risk factor and say, you know,
Speaker 1: should you really deviate from that or where should you?
Speaker 1: So we'll do it where it's timely and relevant, not
Speaker 1: just because there's a conference every March in Timbuctoo. But
Speaker 1: it's fascinating that your job essentially is to think at
Speaker 1: both places. But you could be the smartest guy in
Speaker 1: the world if you're constantly running. You don't have Yeah
Speaker 1: at a moment, yeah, you know, but they look in fairness,
Speaker 1: I had like nine people in New York and five
Speaker 1: people in India and my team when I was in
Speaker 1: Morgan Stanley, and we we do not you know, we're
Speaker 1: not doing that now. It's not it's not for lack
Speaker 1: of brain power. It's you as my own personal time.
Speaker 1: There's my own personal segmentation. But the team had a
Speaker 1: lot of smart people working hard, Moore examly and you know,
Speaker 1: we've got we've got you know, you know, five total
Speaker 1: people at Triburiant. So we're keeping it tight and um
Speaker 1: and and and that's because the gating factor is my
Speaker 1: time and I want to be you know, um involved
Speaker 1: in what we're writing and doing. So, Yeah, so let's
Speaker 1: talk a little bit about what's going on in the
Speaker 1: market today. Everything more or less seem to have peaked
Speaker 1: back in October of one, and people are freaking out
Speaker 1: about how this market is a bear and how terrible
Speaker 1: it is. What do we eight nine from from the
Speaker 1: peak that that's barely a draught down? What's going on
Speaker 1: in US equities today? Yeah, I think that the sentiment
Speaker 1: feels worse because a lot of people over index toward
Speaker 1: growth in the previous few years, and a lot of
Speaker 1: the growth stocks are down forty six if you're in
Speaker 1: biotech or software. So I think the headline number is
Speaker 1: probably less painful than some of the underlying carnage. And
Speaker 1: I think that explains that disconnect between your high level
Speaker 1: point and sentiment. Generally, I think I would describe the
Speaker 1: last six months as huge change in the perception about
Speaker 1: interest rates into a growth scare, and then we got
Speaker 1: a war. So that's probably the the the cocktail that
Speaker 1: that sort of caused the reset. UM. My own personal opinion,
Speaker 1: UM is that the perception about rates has gotten too
Speaker 1: hawkish and that they're unlikely to raise rates um as
Speaker 1: much as as is now in the price UM. But
Speaker 1: you know, I don't. I don't know that for sure.
Speaker 1: But I only say that because as we talked about
Speaker 1: semiconductors and other parts of the market, it's unclear to
Speaker 1: me that raising rates will um expedite any of the
Speaker 1: supply demand and balances. And cause, you know, if you
Speaker 1: have a wheat shortage, I don't think you want to
Speaker 1: crush demand for wheat to the point you get equilibrium.
Speaker 1: I think you're just gonna have to lift live with wheat.
Speaker 1: I see gaining share from something else, right, So UM,
Speaker 1: I'm not sure the FED. I've taken the view of
Speaker 1: the fete of the smart ones, and so therefore they're
Speaker 1: not going to purposely create a recession. That seems to
Speaker 1: becoming more and more of a consensus, and I thought
Speaker 1: it was an outlier view. Hey, the FED wants to
Speaker 1: get off zero and sort of normalize rates, But do
Speaker 1: we really think they're going to tighten until there's a
Speaker 1: recession in order to fight inflation? That is not um
Speaker 1: interest rate based. And I know you're not an economist,
Speaker 1: neither of mine. It seems a lot. It seems illogically
Speaker 1: they do that. So I mean, how how is raising
Speaker 1: rates going to affect we shortage is semi consummate, temparate
Speaker 1: labor problems that you can't clean hotels, all those things.
Speaker 1: So I don't think it will. And I think they'll
Speaker 1: realize that and move a little bit more gingerly on
Speaker 1: the path and and so the longer maybe the path
Speaker 1: will be you know, lasts longer, which is which is fine.
Speaker 1: I think the consumers are good shape. We did a
Speaker 1: lot of research on that this year. Um. I think
Speaker 1: the Ernie souseholds are strong. Yeah, the earning season in April.
Speaker 1: If you really look at bank earnings and the comments
Speaker 1: from them, master Trust credit card data thirty data linquencies
Speaker 1: went down. Nine linquencies are at an all time low.
Speaker 1: Retail sales, consumer confidence, wages, um jobs, everything looks fairly
Speaker 1: good for the consumer. So I'm not saying it couldn't
Speaker 1: slow material in six months with higher you know, oil
Speaker 1: at the pump in the light. But I still see
Speaker 1: the US consumer in pretty good shape. And so underneath that,
Speaker 1: for me, like what I focus on is all right,
Speaker 1: what's what's like along and what's a short? Wow? Like
Speaker 1: growth staples are incredibly expensive and you know, yet you know,
Speaker 1: like the value discretionary stocks look cheap, and so maybe
Speaker 1: I can long sull and short the others or you know.
Speaker 1: So I'm I think there's a lot, like I'm excited
Speaker 1: about the long short opportunity within the equity market um
Speaker 1: independent of what the FED does here. But I just
Speaker 1: if you ask me, like what what I think is
Speaker 1: like where there's the most excess capacity in the financial industry,
Speaker 1: In an industry with massive excess capacity and every single
Speaker 1: area of it, I would say the number of people
Speaker 1: who watched the head and memorize everything they do and
Speaker 1: have no idea what they're actually gonna do and are
Speaker 1: never right. It's that that's where the excess capacity exists.
Speaker 1: Short FED watchers, Oh my god, I would short short
Speaker 1: hockey rinks of FED hockey rinks of FED watchers. I'm
Speaker 1: with you on that. So so let's talk about a
Speaker 1: couple of sectors. Oil and gas been a huge out performer.
Speaker 1: Does this continue? Where? What do you look at? How
Speaker 1: do you evaluate oil and gas when you have the
Speaker 1: wild card of the war and the big booming reopening
Speaker 1: fortunately for us, you know, and and I'm not you know,
Speaker 1: I'm not like trying to break my own arm and
Speaker 1: pounding myself on the back, but we had That's been
Speaker 1: our biggest you know, call since we started the firm
Speaker 1: a year ago, is to be over with energy. Yeah,
Speaker 1: and that's why I asked you that. Thanks man, I
Speaker 1: mean I can I can only hit THEES pitch. Um
Speaker 1: you start start spinning it with me, and I'll be
Speaker 1: in trouble now, you know. For me, Look, I think
Speaker 1: it's really hard to forecast oil. So what I would
Speaker 1: back up and say what attracted me to it was
Speaker 1: what I call a triple crown of quand upward earnings revisions,
Speaker 1: positive price momentum, cheap evaluation versus history. So I have
Speaker 1: those three. You start digging in and you say, okay, well, um,
Speaker 1: let's go talk about it with investors, right, And investors
Speaker 1: gave me two sources of pushback. Right, one is, um, hey,
Speaker 1: they don't say this way, but hey, Adam, like the
Speaker 1: specter of US gathering assets under this thing called e
Speaker 1: s G is far too great for us to you
Speaker 1: know risk you know, yeah, the bigger firms, I think
Speaker 1: that's the case. And then um, and there's a few
Speaker 1: of those that that that might be the case for.
Speaker 1: And then the second group. You know, I'm gonna say
Speaker 1: it's more in the Hey, Adam, the terminal value of
Speaker 1: oil is zero. And that's the part where I really
Speaker 1: start getting on, you know, kind of unfamiliar with material
Speaker 1: science and plastics. People don't. There's an old joke about
Speaker 1: the Saudi prince who said to the American oil company,
Speaker 1: I can't believe you guys burn the stuff. Yeah, totally.
Speaker 1: So I'm smiling because, you know, as I pushed the thesis,
Speaker 1: I think a lot of people just say, look, look,
Speaker 1: I don't disagree that. As you get I think peak
Speaker 1: oil demand from the experts, it looks like two something
Speaker 1: plus or minus. Right, sixteen of new vehicle sales are
Speaker 1: either electrical or hybrid. The installed basis eight percent cars
Speaker 1: are born and then they die. There's no in between.
Speaker 1: States so you can't. It's a lot of new car sales.
Speaker 1: You need to get the installed base twelve years or whatever. Right,
Speaker 1: So I don't see any way pico al demand isn't
Speaker 1: in you know, in the in the next ten years. Okay.
Speaker 1: And and remember you know where we live in our
Speaker 1: cozy um you know lives here, but five million Indians
Speaker 1: still deficating the street and three billion people don't have
Speaker 1: air conditioning, and like it's not like when it's hot
Speaker 1: out you um, and you've had experienced air conditioning, you
Speaker 1: decide for the sake of humankind, I'm not gonna see
Speaker 1: my place like. So that's the demand is gonna be
Speaker 1: longer tailed than people think. As you know, toists are good,
Speaker 1: and a C is good, and wife is good, electricity
Speaker 1: is good, and so like oil consumption, like the people
Speaker 1: have been the most protesting, you know, the terminal value
Speaker 1: of zero argument or people who like fly private and
Speaker 1: have nineteen houses like their own oil footprints massive. So
Speaker 1: I just I don't understand where that disconnect is. And
Speaker 1: I'm sure maybe there's like a pharmaceutical like patent cliff,
Speaker 1: where I pay lower multiples for oil as I get
Speaker 1: five years away from that peak or whatever. I get
Speaker 1: how stocks work, but it seems awfully early if there's
Speaker 1: e NPS free cash full yield to get too negative.
Speaker 1: So I started getting aware it's sentiments negative, UM, you know,
Speaker 1: and that bullsh really bullish. And if you look at
Speaker 1: how a lot of funds work. We did a note
Speaker 1: last year in June twenty one, UM called E s
Speaker 1: G E t F s H forty uh nine percent
Speaker 1: q q q xps sp X two percent E s G.
Speaker 1: So the the idea was, these things are closet triple
Speaker 1: ques now that energy is beaten the cues by plus.
Speaker 1: In the last six months, we've heard a lot of
Speaker 1: firms say, well, we're thinking about switching from a sustainability
Speaker 1: level to buy a stock to a change in sustainability score,
Speaker 1: meaning if they're improving on the sustainability from people can
Speaker 1: buy it because you can't handle everyone's cool to buy
Speaker 1: E s G stocks when they're outperforming because they're on
Speaker 1: the queues, but when they lagged by fifty it's less cool, right,
Speaker 1: So I think you could have a flow sting that's
Speaker 1: positive for this group. Also, UM, and I know a
Speaker 1: lot of smart people directly investing in resources and the
Speaker 1: like you throw this Ukraine thing on, I'd say the one,
Speaker 1: the one thing, and and you mentioned it earlier, and
Speaker 1: I agree with it. I can't help but say, you know,
Speaker 1: I don't. I'm talking about markets when there's massive and
Speaker 1: horrible human implications, and I it's almost like you feel
Speaker 1: awful doing that, but you have to mend. You have
Speaker 1: to mentally separate for this and and just say, okay, well,
Speaker 1: sure if we get any announcement of a ceasefire or
Speaker 1: the Ukraine's winning, all its actually go down in a minute, right,
Speaker 1: we get that. But I think I'm more in the
Speaker 1: by the dip mode, believing that demand growth will seat
Speaker 1: supply growth. Sentiment's negative, their cheap upper revisions positive momentum
Speaker 1: than I am. It's the end of the it's the
Speaker 1: end of the day. So I think it's a pretty
Speaker 1: bullish set up for a couple of year of view,
Speaker 1: and it's not just a short term trade. So so
Speaker 1: you mentioned something that I'm kind of fascinated about. There's
Speaker 1: been a lot of pushback on E s G, and
Speaker 1: there's certainly been a lot of pushback on low carbon.
Speaker 1: Here's my beef with the low carbon portfolio. You're gonna
Speaker 1: take the SMP five hundred and you're gonna remove all
Speaker 1: the carbon producers, but you're gonna still invest in all
Speaker 1: the carbon consumers. It's the demand that's leading to these
Speaker 1: people producing carbon. How how does it make rational sense? Well,
Speaker 1: we're not going to buy oil or natural gas or
Speaker 1: cold companies, but we will buy all the companies that
Speaker 1: consume those problems. It's even more than that, I hear you.
Speaker 1: And it's even more than that, which is the solar
Speaker 1: and wind companies consume more energy um than anything else, right,
Speaker 1: I mean the plastics required to make the wind turbines
Speaker 1: and move them around and the producing But that's true
Speaker 1: for any new factory you're jenny, even a coal fire.
Speaker 1: You know, it takes X number years before their net
Speaker 1: energy neutral, Right. I don't know if um if you know,
Speaker 1: it makes sense from the planet's perspective to long solar
Speaker 1: and wind and short energy as a as a you know,
Speaker 1: convestment strategy, investment strategy. I don't think that makes any sense,
Speaker 1: to be honest with you. So there's a fascinating article
Speaker 1: in this week's Business Week about the rise of UM
Speaker 1: wind generation throughout all these supposedly red states. Because when
Speaker 1: you look at Oklahoma, in Texas, and you look in
Speaker 1: the Midwest where there's a ton of natural and fairly
Speaker 1: consistent geothermal movement, the wind and on all this farmland,
Speaker 1: the wind farms are giant money makers for these landowners. Right,
Speaker 1: it's just you know, just out of left. I don't
Speaker 1: know if it is for the people who produced the
Speaker 1: actual turbins and move them there. Though you know, you
Speaker 1: would think g capital who was funding these and ge
Speaker 1: wind power, that should be a giant home run business,
Speaker 1: and yet it doesn't seem to be. Yeah, well I don't.
Speaker 1: I don't. I think the tenor of your question I
Speaker 1: agree with, which is um you know, and it's kind
Speaker 1: of my point to which is I just don't think
Speaker 1: you can destroy demand, right, like you know, like my
Speaker 1: point about air conditioning, or you know, look at the
Speaker 1: entire movement to the Sun Belt that's because of air conditions.
Speaker 1: But there's conditioning and there's heart, and there's hundreds of
Speaker 1: millions of people on earth like this. You know. You know,
Speaker 1: it turns out that like a toilet is better than
Speaker 1: non toilet, it turns out that it turns out a
Speaker 1: BMW is better than a rickshaw. And I mean just
Speaker 1: go down the line. So like I don't, I don't.
Speaker 1: So it's gonna take a long time to destroy man
Speaker 1: demand for oil um and so speak oil. It's at
Speaker 1: least ten years from now and maybe yeah, and like
Speaker 1: maybe longer than Facebook US this or they you know
Speaker 1: or whatever you know, because there'll be something else school.
Speaker 1: I'm not you know, I'm not making a fundamental short
Speaker 1: theason on Facebook. I'm just saying, like, you know, two
Speaker 1: people talk about the terminal valley for oil, so I
Speaker 1: won't own the stocks, and like the terminal valley for
Speaker 1: Facebook is probably oil will last longer than Facebook. I
Speaker 1: would bet interesting, really interesting. Uh, last question before we
Speaker 1: get to our favorite questions. We are about to ramp
Speaker 1: up earning season. How does earning season play into the
Speaker 1: sort of research you do? How do your clients look
Speaker 1: at it um and how do you incorporate new data
Speaker 1: from you know, the key companies into your mind? Look,
Speaker 1: it's massive. So what we do is every day, for
Speaker 1: the top three thousand US equities, we download about five
Speaker 1: pieces of information and compute about five more and then
Speaker 1: we store that every day back for twenty plus years.
Speaker 1: So anytime somebody asked us a question. We can empirically
Speaker 1: test the distribution of subsequent returns, so hey, what happens
Speaker 1: when this happens, we go look and study it. So
Speaker 1: earnings is huge for us because we're getting balance sheet,
Speaker 1: income statement, cash flow, you know, ratings, changes in the analysts, downgrades,
Speaker 1: you know, insider buying and selling transactions, holdings, tons of
Speaker 1: stuff that's happening every day. Um, and so it changes
Speaker 1: you know, relative valuations and growth expectations and the like.
Speaker 1: So for us that's huge. Um. It Also, we have
Speaker 1: quantitative models that pretty subsequent stock performance, and the quant
Speaker 1: models use and ingest a lot of this data to
Speaker 1: form the forecast. So you know, my view of systematic
Speaker 1: stuff has always been, um that I romanticize something about
Speaker 1: the report of piano of the company matters to its
Speaker 1: ultimate value for the listeners. I think thirty of all
Speaker 1: money traded is two to five day holding period on
Speaker 1: price and liquidity. So it's yeah, so it's not you know,
Speaker 1: um a ten case and ques being processed. For us,
Speaker 1: that's a big part of what we do. Um. You know,
Speaker 1: it comes stay in cash flow, balance sheet, et cetera.
Speaker 1: It sounds like an inefficiency that a third of the
Speaker 1: market isn't paying attention to the fundamentals. Well, yeah, I
Speaker 1: think it's even more than that. That's just two to
Speaker 1: five day holding period. I think the guys who are
Speaker 1: doing a microsecond and stuff for a decent chunk of
Speaker 1: volume two. So I'm not saying there aren't plenty of
Speaker 1: really successful people that I've just personally never been intellectually
Speaker 1: interested in that. And I think what I've learned so
Speaker 1: far is that you're like going to probably be better
Speaker 1: at something you like doing than you don't, and so
Speaker 1: I just it doesn't really appeal to me to do that.
Speaker 1: I think you can only compete when you have the tech.
Speaker 1: You know, you need billions of dollars of tech to
Speaker 1: be able to compete in the microsecond space. And I
Speaker 1: think two to five holding is just price the adity, right,
Speaker 1: access to borrow, access to risk, and and am any
Speaker 1: other stuff that really isn't about what what we do.
Speaker 1: What we do is try to find big dislocations and
Speaker 1: opportunities like energy or metals or you know, when we
Speaker 1: go into each sector industry, where do we see you know, uh,
Speaker 1: interesting long short opportunities, So that that has to come
Speaker 1: from earning season and the updates there. And I think
Speaker 1: one of the things I've learned is like you don't
Speaker 1: anchor right, like you get like we talked about Netflix,
Speaker 1: like yeah, they told you the business models changing, Like
Speaker 1: that's not nothing. Maybe the stocks down too much, Maybe
Speaker 1: it isn't. I don't know the fundamental I as you know,
Speaker 1: could decide, but what I know is that it changed.
Speaker 1: So let's stay with that again, and let's look at
Speaker 1: technology where there is some dislocations. We're recording this before
Speaker 1: Apple reports, before Microsoft reports, So how do you look
Speaker 1: at the entire sector? Is a uniform or can you
Speaker 1: really segmented winners, losers, riskier valuation? What's the spectrum like
Speaker 1: in that space which has been clearly driving the market
Speaker 1: for the past decade. So look, we're more in the UM,
Speaker 1: you know, kind of maybe bucketing it too much. But
Speaker 1: when you think about earning season, a lot of things happen. Okay,
Speaker 1: did they beat on earnings, did they beat on margins?
Speaker 1: They beat on revenue? Did they guide to a change
Speaker 1: in earnings, margins and revenue? Did the stock T plus
Speaker 1: one tapus three go up or down relative to the
Speaker 1: market relatives to the pair group um? Did the implied
Speaker 1: guidance change because maybe they beat the quarter, didn't change
Speaker 1: the annual guidance, but the implied guidance is different, right,
Speaker 1: So like it's like thirty eight things that happened they report,
Speaker 1: whether you realize it or not. You know, Bloomberg is great,
Speaker 1: you know, here's what happened on revenue versus what the
Speaker 1: consensus they beat or not. But like there's there's eighteen
Speaker 1: things underneath that that happened. What about the cash flow
Speaker 1: versity earnings? Was there a disconnect? Wasn't a cruel? Was
Speaker 1: it capex? Was it inventory? Wasn't intangible? You know, like
Speaker 1: it's it's like an orgasmic amount of data that's coming
Speaker 1: in that you're just trying to figure out what's discounted.
Speaker 1: What isn't so like to me? You know, um, I
Speaker 1: I think that that's where the data will differentiate between
Speaker 1: you know, all the all the big tech companies, um.
Speaker 1: And then you can also pick up all the trends
Speaker 1: that are happening like when a second, So when I
Speaker 1: when I look recently, like transportation data is really rolled over,
Speaker 1: but industrial activity looks high. That's interesting, right, Like I'm
Speaker 1: not paying as much now for truckloads and van loads. Okay,
Speaker 1: so that's new the bank, the bank. Earnings comes in,
Speaker 1: match trust data comes in, you know, consumer behavior comes in,
Speaker 1: consumer demand commentary comes in, and you get the tech. Well,
Speaker 1: there's a lot of M and A happening. It's coming.
Speaker 1: It seems like a lot of kind of five ten
Speaker 1: fifteen billion market cap software companies now look attractive to
Speaker 1: the private markets. And what's Thomas Brabo doing or what's
Speaker 1: these guys who are they buying? And wait a minute,
Speaker 1: now a bunch of companies are below come down a lot.
Speaker 1: What about you know, biotech? Is there anything coming out
Speaker 1: of the pipeline there? Because those are an all time
Speaker 1: low and price to sales and maybe there's innovation on set.
Speaker 1: Like there's a lot of trends that happened in every
Speaker 1: sector during earnings that I think are interesting. Healthcare services,
Speaker 1: the costs are going up? What's going on there? Because
Speaker 1: all I know is um, you know, I I pay
Speaker 1: United Health like seven percent more every single year, no
Speaker 1: matter what happens, right, So like you yeah, yeah, exactly,
Speaker 1: So yeah that the single most gangster company I interact
Speaker 1: with is United Health. Uh. If people don't realize that's
Speaker 1: one of the biggest companies in the plot U n
Speaker 1: H Equity g P on your Bloomberg terminal and shocking yeah,
Speaker 1: bottom left, upper right. And one of my goals in
Speaker 1: life is to own enough UNH stock that it can
Speaker 1: offset the price increases they take on me and my
Speaker 1: employees each year to get the privet hedge because um,
Speaker 1: like door number one is hand what we're gonna raise you.
Speaker 1: You paste twenty grand now and then we won't raise
Speaker 1: everyone in your in your employees for a year. And
Speaker 1: door number two is we're just gonna raise all your employees.
Speaker 1: That's it. There's no three of Like you get a car,
Speaker 1: you get a car. But my point is and that's
Speaker 1: you know, it's kind of joking aside, like you want
Speaker 1: to look for pricing power. Like one of the biggest
Speaker 1: investment de bates right now is which companies are gonna
Speaker 1: have gross margin expansion six months from now, which aren't
Speaker 1: And is the gross s margin expectation achievable or not?
Speaker 1: So you get a lot of data points on where
Speaker 1: are we logistics, labor, you know, wages, where are we
Speaker 1: with um you know, input costs, oil, commodities, et cetera.
Speaker 1: Who's got the pricing power. Who doesn't you know, I
Speaker 1: think another interestinct trending earneys barriers, like you know your
Speaker 1: employee base is a US or non US, because most
Speaker 1: of the companies are telling you, and it's been subtle
Speaker 1: and not written about enough that all the wage issues
Speaker 1: are in the US, right, So maybe that U s
Speaker 1: non you labor mix is gonna matter for your margin profile.
Speaker 1: And so to me, there's just you know, so many
Speaker 1: things during earnings that are um kind of trends that
Speaker 1: you can pick up on. And there'll be at least
Speaker 1: ten or twelve things that happened and you know, kind
Speaker 1: of mid April through mid May that update you on
Speaker 1: and increase your decrease, increase your confidence on estimme achievability
Speaker 1: broadly and then within each industry going forward. So like
Speaker 1: when I give investiment mice of a lot of it
Speaker 1: is about relative estimate achievabilities six months from now. So
Speaker 1: I think energy, you know, okay, that's somewhat easier. Like
Speaker 1: the correlation between the change in the oil price and
Speaker 1: the change and the earnings of the income of the
Speaker 1: energy sector's point eight. So like it's it's well goes higher,
Speaker 1: Like they're gonna make more money. But there's more subtle
Speaker 1: things like we've been a little bit cautious on industrial
Speaker 1: machinery and capital goods because the estimates hockey stick. In
Speaker 1: the second half of the year, we saw the most
Speaker 1: downward visions of any sector in the marketing industrials and QUA,
Speaker 1: but the stocks didn't really underperform that much. So there
Speaker 1: seems to be this disconnect. You know, transportation is rolling over,
Speaker 1: so I'm trying to figure out, like, why do I
Speaker 1: have really high increminal margin expectations embedded in the industrial
Speaker 1: sector stocks, yet you know there's a bit of a
Speaker 1: slowdown and Martins have already recovered. So to me, those
Speaker 1: are the kind of dislocations that you get you should
Speaker 1: if you're being into actually honest, can increase or decrease
Speaker 1: conviction on during earnings. So you mentioned intangibles um your
Speaker 1: old shop, Morgan Stanley has a division called Counterpoint. Michael
Speaker 1: Mobison's the had a research there. He did a really
Speaker 1: interesting piece on intangibles and essentially technology holdings and how
Speaker 1: much much of the investment community has undervalued intangibles like
Speaker 1: software algorithms, brands go down the list, copyright patents, whatever,
Speaker 1: and that everybody has been looking at tech as overvalued
Speaker 1: for a decade. The market seems to have disagreed with
Speaker 1: that assessment. How do you view intangibles in that space? Yeah,
Speaker 1: so that's that's an interesting question. Um. I'll answer it
Speaker 1: purely quantitatively, UM, which is um identifying longs and identifying
Speaker 1: shorts use different signals. If I think about what people
Speaker 1: have been asking me the most in the last year,
Speaker 1: people will often say, hey, you know, Barry, They'll say,
Speaker 1: I want to buy compounders. I want to business that compounds.
Speaker 1: So we did a lot of research, and we do
Speaker 1: a lot of kind of frameworks like this at Trey Verry,
Speaker 1: where we'll say, okay, well, what is a compounder. Let's
Speaker 1: look at businesses with consistent gross margin expansion, consistent net
Speaker 1: income expansion, consistent earnings growth, consistent upward revisions, consistent price momentum.
Speaker 1: We'll take a bunch of signals and say which is
Speaker 1: associated with the best subsequent stock performance. And the answer
Speaker 1: was gross margin expansion. Okay, So we offer a screen
Speaker 1: and people can buy a basket of compounders that have
Speaker 1: consistent gross margin expansion and forecast a gross margin expansion
Speaker 1: going forward. Seems really important in this regime because of
Speaker 1: inflation and what we talked about. But on the short side,
Speaker 1: it isn't margin contraction. The question people were asking me
Speaker 1: last year was the inverse of compounder, was I want
Speaker 1: a short of melting ice cube. That seems to be
Speaker 1: the cool Wall Street phrase with short melting ice cubes, right,
Speaker 1: I want to long compounders and short melting ice cubes.
Speaker 1: So we didn't know what what the heck is a
Speaker 1: melting ice cube? And is interesting? Is the the thing
Speaker 1: that um mattered the most. The two things that matter
Speaker 1: the most were accruals, which would be disconnects me and
Speaker 1: anuras in cash flow, which were driven by cappex inventory
Speaker 1: or intangibles I'm getting to your intangible questions or bad
Speaker 1: price momentum, meaning actually the stock was just simply bad
Speaker 1: versus this industry peers. So the short ideas were businesses
Speaker 1: with the biggest intangible accruals in the last three quarters
Speaker 1: that also relatively underperformed their peers. That if you plotted
Speaker 1: that line versus the SMP, it materially lagged, and if
Speaker 1: you added on share loss and margic attraction, it didn't
Speaker 1: even help. So I think the fundamental analysts need to
Speaker 1: focus on this issue of whether the intangibles capex in
Speaker 1: inventory are obviously big, but the intangibles are are positive
Speaker 1: or not. My suspicion from Mobison's work is that there's
Speaker 1: some alpha spread in that group. Yeah, and um, I
Speaker 1: haven't seen I haven't seen that work, but I know
Speaker 1: he's an incredibly smart guy. So, um, but I'd say,
Speaker 1: I think when I'm looking for short ideas, I would
Speaker 1: start with do they have a higher cruel and as
Speaker 1: a stock acted bad? So you're describing hot stocks that
Speaker 1: have rolled over? Yeah, in some ways. In some ways, um,
Speaker 1: either hot that have rolled over, or they had a
Speaker 1: business model change where they had to increase your cap bacs,
Speaker 1: they built inventory and advance of recovery. They did a
Speaker 1: deal and it's uncertain about what the intangibles they acquired are.
Speaker 1: Something like that really fascinating, all right, So let's jump
Speaker 1: to our favorite questions that we ask all of our guests. Okay,
Speaker 1: starting with and we talked about Netflix before. Hey, we're
Speaker 1: past two years. Everybody's been streaming all sorts of stuff.
Speaker 1: Tell us what's been keeping you entertained? Oh boy, yeah,
Speaker 1: I'm I'm probably you know, um in in the bottom,
Speaker 1: you know, decile of culturally savvy people that you'll interview.
Speaker 1: I actually watched the David Rubinstein Show on Bloomberg. I
Speaker 1: like that show that counts. I think it's amazing. I
Speaker 1: think I think he's I think he's amazing. I think
Speaker 1: that show is incredible. We leave, um, we leave our
Speaker 1: TV on on Bloomberg TV in our office, and you
Speaker 1: know when that comes unbelievable guests. Yeah, smart quass and
Speaker 1: his perspective is so unique because he's walked in their shoes.
Speaker 1: He he's running multiviillion company. Not a lot of interviewers
Speaker 1: bring that ask great questions. So I I like, I
Speaker 1: like that. In terms of podcasts, you know, obviously yours
Speaker 1: is incredible. But yeah, but but but I think the
Speaker 1: truth is I'm not I'm more of a hodgepodge of
Speaker 1: people refer me stuff. You know. I I interviewed the
Speaker 1: freaking Omics guys before. I like them, so once in
Speaker 1: a while something that they said I think is interesting
Speaker 1: Jubnor Levitt, Yeah, so interesting guy. So it makes But
Speaker 1: I'm not really a consistent guy, and I'm definitely not
Speaker 1: a streamer. But I am. Um, if I look at
Speaker 1: the Parker Household. We probably paid twelve different streaming services.
Speaker 1: So I'm i'm I'm a I'm a revenue source, but
Speaker 1: I'm a high return on revenue for those that's research.
Speaker 1: So you gotta you can you Yeah, we gotta start
Speaker 1: cutting something. Yeah, exactly. So apparently lots of other folks
Speaker 1: have thought the same thing, and we've seen that reflected
Speaker 1: and yeah, yeah, exactly. Tell us about your mentors who
Speaker 1: helped shape your career. Yeah, so if Bernstein again, I
Speaker 1: think all of them came from Bernstein originally, honestly, so
Speaker 1: some of the original animals there, So people who followed
Speaker 1: Bernstein in the nineties and the early two thousands would
Speaker 1: know some of the minds there. But there's there's so
Speaker 1: many of them. But you know, um, people that I
Speaker 1: keep in touch with still, some of whom are still
Speaker 1: working on you know, on the streets. So um, you know,
Speaker 1: so i'd say, you know, probably Marty Leebertz, said Morgan Stanley,
Speaker 1: and then Lisa Shalott and Mark Mayer and Jonathan Gray
Speaker 1: and who's deceased but was probably the greatest analyst of
Speaker 1: all time. And yeah, existing animals there as well. So
Speaker 1: there's just so many mentors. I have people who taught
Speaker 1: me that it's effort, it's enthusiasm, it's creativity, you know, um,
Speaker 1: and it's a combination of analytics and communication. And you know,
Speaker 1: I can't imagine a more interesting job than you know,
Speaker 1: somebody told me once you always want to be talking
Speaker 1: to people in their thirties because they're not They're not
Speaker 1: so young that they're annoying to talk to, and they're
Speaker 1: not so old that technolog gen cool stuff has passed
Speaker 1: them by. And I think about the job job I
Speaker 1: have now I'm in I'm in my early fifties, and
Speaker 1: I think, yeah, I want to do this for the
Speaker 1: next thirty years. Like I want to write interesting research
Speaker 1: and I want to talk the smart, cool people about it,
Speaker 1: and a lot of them are in their thirties and forties,
Speaker 1: and that'll be that'll be an amazing place to spend
Speaker 1: the rest of my life doing so. It's and I
Speaker 1: tell you, it's you know my shop. You know the
Speaker 1: guys in my office. It like I am sort of
Speaker 1: between the Gen X and the boomers. I have a
Speaker 1: foot in each camp. And the millennials and the generation
Speaker 1: the gen wise they're absolutely cutting edge hip. They know
Speaker 1: everything that's going on, and I just want to avoid
Speaker 1: that whole okay boomer sort of thing, right, And uh,
Speaker 1: it's absolutely true. You know, sometimes experiences anti correlated with success, right,
Speaker 1: Like you sit there, like I mentioned that in video before,
Speaker 1: Like I admit, like I meant, I would have missed
Speaker 1: the first half of the video's appreciation because I was
Speaker 1: I was encumbered by irrelevant knowledge. Right, experts are experts
Speaker 1: in the way the world used to be, right, and
Speaker 1: so I think, you know, I I see that all
Speaker 1: the time because a lot of people were negative on
Speaker 1: the stock market are using Schilder p A or some
Speaker 1: Grantham view or stuff. You know, something that that was
Speaker 1: made sense cape and that made sense in the eighties,
Speaker 1: right when eight of the ten biggest equities were energy
Speaker 1: and and you know, capital intensity was higher. And now
Speaker 1: you look at it, you're like, wait a minute, of
Speaker 1: all companies don't even have any inventory dollars. Capital intensities
Speaker 1: an all time low for small one microcap Like I
Speaker 1: fang m is the it matters not not you know, um,
Speaker 1: you know mobile or whatever. So it's like a totally
Speaker 1: different business. So like to say, we're gonna mean we
Speaker 1: were back to something from foty years ago. Just you're
Speaker 1: encumbered by knowledge that's not relevant. And I think the
Speaker 1: thirties and forties crew is kind of right optimization on
Speaker 1: the curve. And so I want to be like hanging
Speaker 1: out with those people, and and what better job than
Speaker 1: it would be to do what I'm doing? If I remember,
Speaker 1: was an Adam Smith books talking about the new Adam Smith,
Speaker 1: not the original one, about all these funds that would
Speaker 1: hire young guns as traders because the guys who had
Speaker 1: the capital and the experience knew they couldn't buy the
Speaker 1: stuff the young guns were buying and would missed the opportunity.
Speaker 1: But you need some adult supervision overseeing them. I don't
Speaker 1: remember I was the money game or one of the places.
Speaker 1: But that's why risk management and alpha generation are different, right,
Speaker 1: Like the c I o's job and often is just
Speaker 1: some risk management, like you know, what can I tolerate?
Speaker 1: What have I experienced before? Maybe some of these guys
Speaker 1: don't haven't seen a cycle, you know, maybe they haven't
Speaker 1: seen rates go up or stuff like that, so I
Speaker 1: need to have, you know, some maybe maybe they don't
Speaker 1: realize that, you know, following a financial crisis, you don't
Speaker 1: short highly shorted stocks because they get squeezed or whatever
Speaker 1: like stuff that you know, some of us were writing
Speaker 1: about way before January one, because we knew that that
Speaker 1: was a risk, because we saw I saw that after
Speaker 1: the financial crisis, right, So I think that that. But
Speaker 1: you don't want to be um, you know, the the
Speaker 1: intractable guy who doesn't adapt, and I think these guys help.
Speaker 1: You're absolutely absolutely right on that. Let's talk about books.
Speaker 1: What are some of your favorites? What are you reading
Speaker 1: right now? Right now, I've got two books on the
Speaker 1: night stand. I've got um Maria Vanovitch's book, you know,
Speaker 1: Lessons from the Edge. So she was the US ambassador
Speaker 1: of the Ukraine, had incredibly interesting career. Her books, I'm
Speaker 1: only about halfway through, but it's crazy. Her life is crazy,
Speaker 1: um and obviously her I haven't gotten to the part
Speaker 1: of the book where the Trump induced exit happens yet,
Speaker 1: but incredible experience. You know, I always wondered what these
Speaker 1: foreign policy people do. So yeah, she's incredible. And then
Speaker 1: somebody gave me the all In book by Billy Jean King,
Speaker 1: and I'm definitely gonna read it. Um. You know, she's
Speaker 1: had an incredibly interesting life. Also, so I've got a
Speaker 1: stack and I rolled through. I am one of those
Speaker 1: people who, um, you know, probably needs to sleep a
Speaker 1: little bit more and so, um, I try to read
Speaker 1: to uh, you know, um get a little melotonin. Yeah,
Speaker 1: kind of. By the way, if you if you like
Speaker 1: the Billy Jean King book, someone recommended the Andre Agassi
Speaker 1: book called Open and It's absolutely fast. Yeah. Yeah, I
Speaker 1: read one of his originally years ago, but I didn't
Speaker 1: even know he had another one out. It's his um,
Speaker 1: it's really his life style. By um. What sort of
Speaker 1: advice would you give to a recent college grad who
Speaker 1: was interested in a career in investment finance becoming an analyst?
Speaker 1: What advice would you give them? Yeah, I guess the
Speaker 1: two things would be, you know, you know, assuming that
Speaker 1: they weren't born on you know, third base, or that
Speaker 1: they had to like organically earn it. I'd say one
Speaker 1: would be, Um, you need to differentiate your skill base,
Speaker 1: and the best way to do this through a computer
Speaker 1: science So you need to program all of the work
Speaker 1: we do. Barry is in Python, all of it. You know.
Speaker 1: You mentioned that you have some cool iMac that works,
Speaker 1: but I don't care because all of our we only
Speaker 1: use dummy terminals. All the competent storage is on a jore,
Speaker 1: like we don't really care. Um your ability, like the
Speaker 1: days of like you know, reading k's and like writing
Speaker 1: up a paragraph. Um, I don't want to say they're over,
Speaker 1: but like you can process information much more quickly with code.
Speaker 1: So like I think you need to have computer science
Speaker 1: skills now, and I would encourage people to, you know,
Speaker 1: get some skills and Python or are or you know, um,
Speaker 1: you know kind of database work because that's I think
Speaker 1: a growth industry, and um, you know, analytics and data
Speaker 1: are being you know, important considerations in every major industry.
Speaker 1: And and and I think in Wall Street in particular,
Speaker 1: so one computer science and two Like I've always been
Speaker 1: and people ask me all the time, what should I
Speaker 1: do with my career? What advice do you have? And
Speaker 1: you know, I look, I always encourage people to get
Speaker 1: more education because I think you can prove, um demographically
Speaker 1: that the distribution of people who get more education have
Speaker 1: more wealth right over time. And I think it's probably
Speaker 1: more differentiating. I know that if I didn't have a
Speaker 1: PhD in statistics, I wouldn't have gotten the jobs that
Speaker 1: I had at burned seeing the promotion and market stay
Speaker 1: on the etcetera. And so for me it's been huge.
Speaker 1: And my dad has a PhD from M I T.
Speaker 1: And he kind of told me, Adam, like, you get
Speaker 1: the pH d and then the bear cases you're you know,
Speaker 1: you're one of the most popular professors at the University
Speaker 1: of Michigan or something like, you know, so like that's
Speaker 1: the bearcase. And that's a pretty darn good bearcase. So
Speaker 1: I encourage the young guys every time get more education statistics,
Speaker 1: data science, computer science, something that is a differentiating skill
Speaker 1: because you know, just being like a basic NBA it
Speaker 1: was like, I like pick stocks and I can read
Speaker 1: k's and cues like I don't. I think that's just
Speaker 1: the differentiating of a skill. Um and and so I
Speaker 1: think if you can process information and and then you'll
Speaker 1: there's a bit of a you know, um and I
Speaker 1: should looking up at how many people get a PC
Speaker 1: and statistics every year in the country. There's a couple hundred,
Speaker 1: a few hundreds. So it's not I it's much more.
Speaker 1: I mean every major department has a few each year, right,
Speaker 1: So I don't do the math if there's a hundred
Speaker 1: real departments is a fut year. It's not if only
Speaker 1: I had access to a status stiffic. Yeah you do, well,
Speaker 1: we'll sell you our research it you'll problem And our
Speaker 1: final question, what do you know about the world of
Speaker 1: investing today that you wish you knew thirty or so
Speaker 1: years ago when you were first getting started? Yeah? Oh man, um,
Speaker 1: so much right because I published two pieces of research
Speaker 1: for eighteen years and we've started study and learned a lot.
Speaker 1: But I guess holistically, i'd say it's a very competitive
Speaker 1: business with a lot of incredibly smart people, and it's
Speaker 1: very humbling. So this idea that you know, you're used
Speaker 1: to being smarter than people because you've got to in
Speaker 1: math in high school and you're the smartest kid in
Speaker 1: your class. Like everybody is smart and everybody works hard,
Speaker 1: and so um, you have to have a you know,
Speaker 1: a differentiated, um, you know, way of thinking about the world.
Speaker 1: I think so, you know, I could have picked an
Speaker 1: easier industry to compete in for sure, to say the
Speaker 1: very least, and thank you for being so generous with
Speaker 1: your time. This really has been a lot of fun.
Speaker 1: We have been speaking with Adam Parker. He is the
Speaker 1: founder and CEO of tri Variant Research. If you enjoy
Speaker 1: this conversation, we'll be sure to check out any of
Speaker 1: the previous four hundred or so we've done over the
Speaker 1: past eight years. You can find them wherever you get
Speaker 1: your podcasts. We love your feedback and suggestions. Write us
Speaker 1: at m IB podcast at Bloomberg dot net. You can
Speaker 1: follow me on Twitter at rid Holts. Sign up for
Speaker 1: my daily reads at Ridlts dot com. I would be
Speaker 1: remiss if I did not thank the crack team that
Speaker 1: helps us put these conversations together each week. Mohammed Rumaui
Speaker 1: is my audio engineer, Paris Walden is my producer. Sean
Speaker 1: Russo is my director of research. I'm Barry Results. You've
Speaker 1: been listening to Masters and Business on Bloomberg Radio.