WEBVTT - Farr on Impact of FOMC Decision (Audio)

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<v Speaker 1>You're listening to Taking Stock with Kathleen Hay and Pox

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<v Speaker 1>on Bluebird Radio. The Federal Reserve said yesterday that it's

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<v Speaker 1>keeping its benchmark interest rate unchanged, also modestly upgrading the

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<v Speaker 1>central banks longer term economic outlook. That's the conclusion of

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<v Speaker 1>the two day meeting of the Federal Open Market Committee

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<v Speaker 1>of the announced federal funds rate will remain at a

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<v Speaker 1>quarter of a percent to a half a percent. That's

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<v Speaker 1>what the banks charge each other for overnight loans. Here

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<v Speaker 1>to tell us more about the Federal Reserve and your

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<v Speaker 1>investments is Michael Farr. He is the chief executive and

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<v Speaker 1>the founder of far Miller and Washington. He's based in Washington,

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<v Speaker 1>d C. He can be followed on Twitter at Michael Underscore,

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<v Speaker 1>k Underscore, far f A double R and of course Washington,

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<v Speaker 1>d C home to Bloomberg one FM and one oh

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<v Speaker 1>five point seven FM h D two. Michael Farb tell

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<v Speaker 1>us what your reaction is to the fed A Reserving?

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<v Speaker 1>Will they raise interest rates in December by points? Jim,

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<v Speaker 1>thanks for having me very much. It's always great to

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<v Speaker 1>be with you and Kathleen. Um. I don't I can't

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<v Speaker 1>believe the market's reaction today. I mean, I can't, for

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<v Speaker 1>the life of me understand how everyone didn't see this

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<v Speaker 1>non event, no move, nothing done, as we say in

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<v Speaker 1>the business, kind of a move out of the FED coming.

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<v Speaker 1>And yet the market reaction today looks like I guess

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<v Speaker 1>they really weren't expecting it. Stocks are higher, the dollar

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<v Speaker 1>is lower, and bonds are rallying. I mean that that

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<v Speaker 1>really looks like there was something of a surprise in

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<v Speaker 1>this data anyway, or somehow we've inspired the most all

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<v Speaker 1>of the bulls and perhaps the dollar bears to come

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<v Speaker 1>in and make some changes. They threatened, of course, more

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<v Speaker 1>action that they're actually going to go ahead and get

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<v Speaker 1>closer to tightening in December. I don't believe them. I

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<v Speaker 1>wish they would. I'd like to see him moved the sidelines.

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<v Speaker 1>I don't believe them. I think if they're going to

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<v Speaker 1>remain data dependent, they are very worried. I think they're

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<v Speaker 1>chickens at the FED, and I think they're going to

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<v Speaker 1>stay at very least on the sidelines for the foreseeable future.

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<v Speaker 1>And of course now we've got hawks do doves and chickens.

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<v Speaker 1>I like that, But you know, I think that, But

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<v Speaker 1>you know, Michael seems that a couple of things. Number One, Um,

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<v Speaker 1>it wasn't just whether or not the Fed raised the

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<v Speaker 1>rate in yesterday and whether or not to reason December,

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<v Speaker 1>is the fact that they consensus view. Now the dots

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<v Speaker 1>are all over the map, but the dots are clustered

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<v Speaker 1>for around two interest rate increases, only two, not three

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<v Speaker 1>as they had before. Okay, And that seems to be

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<v Speaker 1>underscoring this view that was described very well in a

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<v Speaker 1>trific story on the Bloomberg today that instead of diverging,

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<v Speaker 1>traders are saying, oh, they're still in convergence mode. The

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<v Speaker 1>Fed's not going to make a move, and if they do,

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<v Speaker 1>it's not going to be very much. And the European

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<v Speaker 1>Central Bank and gosh, the Bank in Japan and the

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<v Speaker 1>Bank of England, they're all really easy. So it seems

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<v Speaker 1>that's one of the reasons why you see this this

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<v Speaker 1>move down on the dollar again. Kathleen, I think that

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<v Speaker 1>you're you're right, though I suppose on some level I'm

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<v Speaker 1>pretty disappointed. Markets have been moving for seven or eight

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<v Speaker 1>years now on every utterance out of the Federal Reserve.

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<v Speaker 1>The Fed is going to tighten and markets go down,

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<v Speaker 1>and the Feed's gonna ease and markets go up, and

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<v Speaker 1>the FED is going to maintain low rates for longer

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<v Speaker 1>and markets go up. You know, I'm kind of one

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<v Speaker 1>of these old fundamental investors who likes to look at

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<v Speaker 1>balance sheets and income statements and understand businesses and barriers

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<v Speaker 1>to entry and what really creates value. And a lot

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<v Speaker 1>of that hasn't mattered the last few years. Most of

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<v Speaker 1>market gains have been driven by pe multiple expansion, a

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<v Speaker 1>little bit in terms of earnings increases, and a lot

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<v Speaker 1>of terms of really the easy money effect um optimism on,

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<v Speaker 1>you know, free money forever out of investors. I think

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<v Speaker 1>it's created moral hazard. I think it's creating bubbles in

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<v Speaker 1>certain places. But I think the message that wall streets

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<v Speaker 1>getting is They're not going to change anything soon. So

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<v Speaker 1>I'm going to stay in and swim, and the punch

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<v Speaker 1>bowl stays full and so party on. Guys. Well, Michael,

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<v Speaker 1>you know, you sound so last century with this idea

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<v Speaker 1>of you know, actually looking at a balance sheet or

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<v Speaker 1>you know, some kind of defensible business model or even

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<v Speaker 1>some kind of innovation. You know, I feel for you there,

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<v Speaker 1>you know, but you've got to get with the modern worlds. Here,

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<v Speaker 1>let me appreciate it. Martaine said that I do. I

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<v Speaker 1>was God rest his soul was said, I was kind

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<v Speaker 1>of stupid for thinking that moral hazard still existed sooner

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<v Speaker 1>or later. And you know, it's been a lot later

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<v Speaker 1>than I and a lot of others thought. Others thought, um,

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<v Speaker 1>sooner or later. Fundamental valuations matter and balance sheets matter. Again,

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<v Speaker 1>there is a disruptor in our future, and you better

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<v Speaker 1>have a seat when the music stops. Okay, So, having

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<v Speaker 1>said that, would you be willing to take let's say,

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<v Speaker 1>three percent dividend from a bank like JP Morgan or

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<v Speaker 1>another financial institution in order to just kind of wait

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<v Speaker 1>and maybe see when that moment comes. Yes, absolutely I would.

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<v Speaker 1>I think it makes a great deal of sense. If

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<v Speaker 1>you look at the banks that are trading at book

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<v Speaker 1>value and some of them write at tangible book value.

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<v Speaker 1>With the two and a half to three percent dividend,

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<v Speaker 1>I think that those banks at some one they're cheap,

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<v Speaker 1>but uh, they will benefit as interest rates go up.

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<v Speaker 1>It's a hard environment from to make money. It's a

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<v Speaker 1>new world for banks post dot frank, but at a

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<v Speaker 1>certain valuation they I think they're very compelling. A three

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<v Speaker 1>percent dividend makes sense, and the time to buy stuff

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<v Speaker 1>is when everybody else hates it. I don't know anybody

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<v Speaker 1>who's out there jumping into banks. I like them. Okay,

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<v Speaker 1>so what what and who are you avoiding and why? Well,

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<v Speaker 1>I think you have to avoid the stuff that has

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<v Speaker 1>run the most and the most recently. So if you

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<v Speaker 1>take a look at a lot of the yield stocks,

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<v Speaker 1>a lot of the utilities, certainly the pipeline LPs and

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<v Speaker 1>energy LPs, a lot of them already rolled over and

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<v Speaker 1>it's way late in that trade. Uh, utilities and some

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<v Speaker 1>of the reach they were great trades for the first

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<v Speaker 1>six months of the year. I think you're going to

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<v Speaker 1>see a return, and you've already started to see people

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<v Speaker 1>voting and moving with their wallets to the more fundamentally

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<v Speaker 1>sound balance sheets that have real growth, that are not

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<v Speaker 1>over levered, and that do have some dividends. So I

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<v Speaker 1>think valuations are beginning to matter again. If the FED

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<v Speaker 1>actually says that they're going to stay away for longer

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<v Speaker 1>and people begin to believe it, then I think the

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<v Speaker 1>risk trade comes back in and watch out for the

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<v Speaker 1>fang stocks again. But but for now, we seem to

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<v Speaker 1>be enamored of fundamentals. I've always been enamored of fundamentals

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<v Speaker 1>as some days it works, some days it doesn't. But

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<v Speaker 1>I sleep very well at night, all right, So in

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<v Speaker 1>the context of sleeping well at night, I'm just going

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<v Speaker 1>to offer up your list the B B and T

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<v Speaker 1>bank as well. They pay more than three percent JP

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<v Speaker 1>more than two point eight percent. You also a side

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<v Speaker 1>P n C and Goldman Sacks. Maybe just talk about

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<v Speaker 1>in the context of what you describe as this rotation

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<v Speaker 1>out of those high yielders. Maybe at one point Utilities

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<v Speaker 1>Telecommon reads right, Well, I would own those companies, and

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<v Speaker 1>I'm still probably below a market weight, meaning that my

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<v Speaker 1>allocation to those banking stocks will be below as you

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<v Speaker 1>look at a financial allocation within the S and P

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<v Speaker 1>five hundred. But I think that they fit a nice

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<v Speaker 1>place within a portfolio that has probably some consumer staples,

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<v Speaker 1>some healthcare, and some technology, but the technology again with

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<v Speaker 1>some stolid balance sheets. So these are these are on

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<v Speaker 1>the banking side um names that have basically gotten beaten

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<v Speaker 1>up as a group as there's a they really haven't

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<v Speaker 1>with these low rates been able to make much money

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<v Speaker 1>and earn much on deposits at all. Uh, Just any

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<v Speaker 1>incremental rate increase helps these guys a lot. I might

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<v Speaker 1>be early, but I get paid to wait. And you know,

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<v Speaker 1>as you said, Tim, as a stogy guy, UH like me,

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<v Speaker 1>that's not a bad idea to let somebody pay me

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<v Speaker 1>three percent when the ten year treasury is paying what

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<v Speaker 1>one point six? So, Michael, how are you factoring into

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<v Speaker 1>the the election into the Market's Hillary Clinton leading pretty

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<v Speaker 1>handily in some of the latest polls out today, Presidential

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<v Speaker 1>debates coming, but Donald Trump is giving it all he's got.

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<v Speaker 1>There's still time left. How how is this outcome of

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<v Speaker 1>the election going to effect or not affect the stock market?

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<v Speaker 1>You know, it's such a thorny question, Kathleen, whenever you

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<v Speaker 1>talk politics, and in Washington we talk politics, uh much

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<v Speaker 1>more easily than other places around the country. But um,

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<v Speaker 1>this is not a political comment. Markets have been pricing

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<v Speaker 1>in a Clinton victory. That's where the numbers have shown,

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<v Speaker 1>and markets have gone ahead and said we're going to

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<v Speaker 1>place our investments basically in line with a uh Secretary

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<v Speaker 1>Clinton outcome as victor. When she stumbled and became ill

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<v Speaker 1>uh week and a half ago or so, markets really

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<v Speaker 1>fell to that. It's not so much an anti Mr

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<v Speaker 1>Trump sort of a comment. In my opinion. It's much

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<v Speaker 1>more of a oh my, we haven't considered what we're

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<v Speaker 1>We're going to have to put our money for a

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<v Speaker 1>Trump victory. So I think that you will certainly, uh

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<v Speaker 1>see a fair amount of frenzy and fraud in the

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<v Speaker 1>markets coming into the election. But Wall Street wants to

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<v Speaker 1>know how to price what it can expect um and

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<v Speaker 1>right now they continue to price a Secretary Clinton victory.

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<v Speaker 1>Will see if that if that pans out, But a

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<v Speaker 1>little volatility is expected. And by the way, markets are high,

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<v Speaker 1>markets are, you know, still at a near all time high.

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<v Speaker 1>Markets will come down at some point. That's not a

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<v Speaker 1>reason for panic. It will be an opportunity to do

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<v Speaker 1>some buying. But don't start worrying. I'm talking to so

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<v Speaker 1>many clients who think, where should we get out of this? Now?

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<v Speaker 1>You don't, all right, Michael Farr, thank you so very

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<v Speaker 1>much for joining us from far Miller Washington in Washington,

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<v Speaker 1>d C. Market closed with a stock switor Dave Wilson

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<v Speaker 1>coming up on Kathleen Hayes along with pim Fox. This

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<v Speaker 1>is Bloomberg. Yeah,