Speaker 1: You're listening to Taking Stock with Kathleen Hay and Pox
Speaker 1: on Bluebird Radio. The Federal Reserve said yesterday that it's
Speaker 1: keeping its benchmark interest rate unchanged, also modestly upgrading the
Speaker 1: central banks longer term economic outlook. That's the conclusion of
Speaker 1: the two day meeting of the Federal Open Market Committee
Speaker 1: of the announced federal funds rate will remain at a
Speaker 1: quarter of a percent to a half a percent. That's
Speaker 1: what the banks charge each other for overnight loans. Here
Speaker 1: to tell us more about the Federal Reserve and your
Speaker 1: investments is Michael Farr. He is the chief executive and
Speaker 1: the founder of far Miller and Washington. He's based in Washington,
Speaker 1: d C. He can be followed on Twitter at Michael Underscore,
Speaker 1: k Underscore, far f A double R and of course Washington,
Speaker 1: d C home to Bloomberg one FM and one oh
Speaker 1: five point seven FM h D two. Michael Farb tell
Speaker 1: us what your reaction is to the fed A Reserving?
Speaker 1: Will they raise interest rates in December by points? Jim,
Speaker 1: thanks for having me very much. It's always great to
Speaker 1: be with you and Kathleen. Um. I don't I can't
Speaker 1: believe the market's reaction today. I mean, I can't, for
Speaker 1: the life of me understand how everyone didn't see this
Speaker 1: non event, no move, nothing done, as we say in
Speaker 1: the business, kind of a move out of the FED coming.
Speaker 1: And yet the market reaction today looks like I guess
Speaker 1: they really weren't expecting it. Stocks are higher, the dollar
Speaker 1: is lower, and bonds are rallying. I mean that that
Speaker 1: really looks like there was something of a surprise in
Speaker 1: this data anyway, or somehow we've inspired the most all
Speaker 1: of the bulls and perhaps the dollar bears to come
Speaker 1: in and make some changes. They threatened, of course, more
Speaker 1: action that they're actually going to go ahead and get
Speaker 1: closer to tightening in December. I don't believe them. I
Speaker 1: wish they would. I'd like to see him moved the sidelines.
Speaker 1: I don't believe them. I think if they're going to
Speaker 1: remain data dependent, they are very worried. I think they're
Speaker 1: chickens at the FED, and I think they're going to
Speaker 1: stay at very least on the sidelines for the foreseeable future.
Speaker 1: And of course now we've got hawks do doves and chickens.
Speaker 1: I like that, But you know, I think that, But
Speaker 1: you know, Michael seems that a couple of things. Number One, Um,
Speaker 1: it wasn't just whether or not the Fed raised the
Speaker 1: rate in yesterday and whether or not to reason December,
Speaker 1: is the fact that they consensus view. Now the dots
Speaker 1: are all over the map, but the dots are clustered
Speaker 1: for around two interest rate increases, only two, not three
Speaker 1: as they had before. Okay, And that seems to be
Speaker 1: underscoring this view that was described very well in a
Speaker 1: trific story on the Bloomberg today that instead of diverging,
Speaker 1: traders are saying, oh, they're still in convergence mode. The
Speaker 1: Fed's not going to make a move, and if they do,
Speaker 1: it's not going to be very much. And the European
Speaker 1: Central Bank and gosh, the Bank in Japan and the
Speaker 1: Bank of England, they're all really easy. So it seems
Speaker 1: that's one of the reasons why you see this this
Speaker 1: move down on the dollar again. Kathleen, I think that
Speaker 1: you're you're right, though I suppose on some level I'm
Speaker 1: pretty disappointed. Markets have been moving for seven or eight
Speaker 1: years now on every utterance out of the Federal Reserve.
Speaker 1: The Fed is going to tighten and markets go down,
Speaker 1: and the Feed's gonna ease and markets go up, and
Speaker 1: the FED is going to maintain low rates for longer
Speaker 1: and markets go up. You know, I'm kind of one
Speaker 1: of these old fundamental investors who likes to look at
Speaker 1: balance sheets and income statements and understand businesses and barriers
Speaker 1: to entry and what really creates value. And a lot
Speaker 1: of that hasn't mattered the last few years. Most of
Speaker 1: market gains have been driven by pe multiple expansion, a
Speaker 1: little bit in terms of earnings increases, and a lot
Speaker 1: of terms of really the easy money effect um optimism on,
Speaker 1: you know, free money forever out of investors. I think
Speaker 1: it's created moral hazard. I think it's creating bubbles in
Speaker 1: certain places. But I think the message that wall streets
Speaker 1: getting is They're not going to change anything soon. So
Speaker 1: I'm going to stay in and swim, and the punch
Speaker 1: bowl stays full and so party on. Guys. Well, Michael,
Speaker 1: you know, you sound so last century with this idea
Speaker 1: of you know, actually looking at a balance sheet or
Speaker 1: you know, some kind of defensible business model or even
Speaker 1: some kind of innovation. You know, I feel for you there,
Speaker 1: you know, but you've got to get with the modern worlds. Here,
Speaker 1: let me appreciate it. Martaine said that I do. I
Speaker 1: was God rest his soul was said, I was kind
Speaker 1: of stupid for thinking that moral hazard still existed sooner
Speaker 1: or later. And you know, it's been a lot later
Speaker 1: than I and a lot of others thought. Others thought, um,
Speaker 1: sooner or later. Fundamental valuations matter and balance sheets matter. Again,
Speaker 1: there is a disruptor in our future, and you better
Speaker 1: have a seat when the music stops. Okay, So, having
Speaker 1: said that, would you be willing to take let's say,
Speaker 1: three percent dividend from a bank like JP Morgan or
Speaker 1: another financial institution in order to just kind of wait
Speaker 1: and maybe see when that moment comes. Yes, absolutely I would.
Speaker 1: I think it makes a great deal of sense. If
Speaker 1: you look at the banks that are trading at book
Speaker 1: value and some of them write at tangible book value.
Speaker 1: With the two and a half to three percent dividend,
Speaker 1: I think that those banks at some one they're cheap,
Speaker 1: but uh, they will benefit as interest rates go up.
Speaker 1: It's a hard environment from to make money. It's a
Speaker 1: new world for banks post dot frank, but at a
Speaker 1: certain valuation they I think they're very compelling. A three
Speaker 1: percent dividend makes sense, and the time to buy stuff
Speaker 1: is when everybody else hates it. I don't know anybody
Speaker 1: who's out there jumping into banks. I like them. Okay,
Speaker 1: so what what and who are you avoiding and why? Well,
Speaker 1: I think you have to avoid the stuff that has
Speaker 1: run the most and the most recently. So if you
Speaker 1: take a look at a lot of the yield stocks,
Speaker 1: a lot of the utilities, certainly the pipeline LPs and
Speaker 1: energy LPs, a lot of them already rolled over and
Speaker 1: it's way late in that trade. Uh, utilities and some
Speaker 1: of the reach they were great trades for the first
Speaker 1: six months of the year. I think you're going to
Speaker 1: see a return, and you've already started to see people
Speaker 1: voting and moving with their wallets to the more fundamentally
Speaker 1: sound balance sheets that have real growth, that are not
Speaker 1: over levered, and that do have some dividends. So I
Speaker 1: think valuations are beginning to matter again. If the FED
Speaker 1: actually says that they're going to stay away for longer
Speaker 1: and people begin to believe it, then I think the
Speaker 1: risk trade comes back in and watch out for the
Speaker 1: fang stocks again. But but for now, we seem to
Speaker 1: be enamored of fundamentals. I've always been enamored of fundamentals
Speaker 1: as some days it works, some days it doesn't. But
Speaker 1: I sleep very well at night, all right, So in
Speaker 1: the context of sleeping well at night, I'm just going
Speaker 1: to offer up your list the B B and T
Speaker 1: bank as well. They pay more than three percent JP
Speaker 1: more than two point eight percent. You also a side
Speaker 1: P n C and Goldman Sacks. Maybe just talk about
Speaker 1: in the context of what you describe as this rotation
Speaker 1: out of those high yielders. Maybe at one point Utilities
Speaker 1: Telecommon reads right, Well, I would own those companies, and
Speaker 1: I'm still probably below a market weight, meaning that my
Speaker 1: allocation to those banking stocks will be below as you
Speaker 1: look at a financial allocation within the S and P
Speaker 1: five hundred. But I think that they fit a nice
Speaker 1: place within a portfolio that has probably some consumer staples,
Speaker 1: some healthcare, and some technology, but the technology again with
Speaker 1: some stolid balance sheets. So these are these are on
Speaker 1: the banking side um names that have basically gotten beaten
Speaker 1: up as a group as there's a they really haven't
Speaker 1: with these low rates been able to make much money
Speaker 1: and earn much on deposits at all. Uh, Just any
Speaker 1: incremental rate increase helps these guys a lot. I might
Speaker 1: be early, but I get paid to wait. And you know,
Speaker 1: as you said, Tim, as a stogy guy, UH like me,
Speaker 1: that's not a bad idea to let somebody pay me
Speaker 1: three percent when the ten year treasury is paying what
Speaker 1: one point six? So, Michael, how are you factoring into
Speaker 1: the the election into the Market's Hillary Clinton leading pretty
Speaker 1: handily in some of the latest polls out today, Presidential
Speaker 1: debates coming, but Donald Trump is giving it all he's got.
Speaker 1: There's still time left. How how is this outcome of
Speaker 1: the election going to effect or not affect the stock market?
Speaker 1: You know, it's such a thorny question, Kathleen, whenever you
Speaker 1: talk politics, and in Washington we talk politics, uh much
Speaker 1: more easily than other places around the country. But um,
Speaker 1: this is not a political comment. Markets have been pricing
Speaker 1: in a Clinton victory. That's where the numbers have shown,
Speaker 1: and markets have gone ahead and said we're going to
Speaker 1: place our investments basically in line with a uh Secretary
Speaker 1: Clinton outcome as victor. When she stumbled and became ill
Speaker 1: uh week and a half ago or so, markets really
Speaker 1: fell to that. It's not so much an anti Mr
Speaker 1: Trump sort of a comment. In my opinion. It's much
Speaker 1: more of a oh my, we haven't considered what we're
Speaker 1: We're going to have to put our money for a
Speaker 1: Trump victory. So I think that you will certainly, uh
Speaker 1: see a fair amount of frenzy and fraud in the
Speaker 1: markets coming into the election. But Wall Street wants to
Speaker 1: know how to price what it can expect um and
Speaker 1: right now they continue to price a Secretary Clinton victory.
Speaker 1: Will see if that if that pans out, But a
Speaker 1: little volatility is expected. And by the way, markets are high,
Speaker 1: markets are, you know, still at a near all time high.
Speaker 1: Markets will come down at some point. That's not a
Speaker 1: reason for panic. It will be an opportunity to do
Speaker 1: some buying. But don't start worrying. I'm talking to so
Speaker 1: many clients who think, where should we get out of this? Now?
Speaker 1: You don't, all right, Michael Farr, thank you so very
Speaker 1: much for joining us from far Miller Washington in Washington,
Speaker 1: d C. Market closed with a stock switor Dave Wilson
Speaker 1: coming up on Kathleen Hayes along with pim Fox. This
Speaker 1: is Bloomberg. Yeah,