1 00:00:00,320 --> 00:00:03,080 Speaker 1: Let's get to our guest, Brian frank ce Io at 2 00:00:03,160 --> 00:00:07,600 Speaker 1: Frank Funds. Brian, it's a pity, but it does seem 3 00:00:07,640 --> 00:00:10,440 Speaker 1: like we're in a good news is bad news paradigm 4 00:00:10,480 --> 00:00:13,960 Speaker 1: here at the moment, at least for some period of time. 5 00:00:14,000 --> 00:00:17,000 Speaker 1: At some point, it's going to flip to worries about 6 00:00:17,040 --> 00:00:19,639 Speaker 1: recession and then we'll be begging for good news. But 7 00:00:19,720 --> 00:00:22,800 Speaker 1: the good news today kind of turned off investors. How 8 00:00:22,800 --> 00:00:26,680 Speaker 1: are you tackling that for the moment. Yeah, I think 9 00:00:26,720 --> 00:00:29,760 Speaker 1: that's exactly right. Um. Everybody's kind of worried that the 10 00:00:29,760 --> 00:00:32,879 Speaker 1: FED is just gonna go too far here, and I 11 00:00:32,920 --> 00:00:35,000 Speaker 1: think the best way to play that is that kind 12 00:00:35,000 --> 00:00:38,080 Speaker 1: of take a step back and look at the fundamentals 13 00:00:38,159 --> 00:00:40,240 Speaker 1: of companies, because that's what we do at the Frank 14 00:00:40,320 --> 00:00:44,760 Speaker 1: Value Fund is UM. I'd rather avoid the cyclical type companies. 15 00:00:45,040 --> 00:00:47,600 Speaker 1: I'd rather avoid the high flyers that really need growth 16 00:00:47,640 --> 00:00:50,360 Speaker 1: because it looks like growth is disappearing here, and just 17 00:00:50,440 --> 00:00:52,720 Speaker 1: find things that are kind of reasonably play priced, have 18 00:00:52,800 --> 00:00:55,400 Speaker 1: strong balance sheets, and can weather the storm, because it 19 00:00:55,480 --> 00:01:00,000 Speaker 1: certainly looks like there's a storm brewing in but everybody 20 00:01:00,040 --> 00:01:01,840 Speaker 1: he knows probably that there is, but they don't know 21 00:01:01,880 --> 00:01:03,720 Speaker 1: what the magnitude is. Is it going to be just 22 00:01:04,080 --> 00:01:05,640 Speaker 1: a light breeze or is it going to be a 23 00:01:05,640 --> 00:01:10,560 Speaker 1: full on hurricane. That's kind of the perplexing thing. Is this, 24 00:01:11,040 --> 00:01:13,399 Speaker 1: you know, I've heard this is the most telegraph procession 25 00:01:13,440 --> 00:01:15,959 Speaker 1: in US history. Everybody's talking about it. We all have 26 00:01:16,040 --> 00:01:19,240 Speaker 1: the leading indicators that look pretty terrible. But the amazing 27 00:01:19,319 --> 00:01:21,920 Speaker 1: thing to me, or the perplexing thing is you look 28 00:01:21,920 --> 00:01:25,039 Speaker 1: at earnings estimates for three and they're not going down. 29 00:01:25,120 --> 00:01:29,080 Speaker 1: They're pretty much flat from two. But in the average 30 00:01:29,080 --> 00:01:33,280 Speaker 1: recession they decline at least fift and in recent recessions 31 00:01:33,319 --> 00:01:37,480 Speaker 1: they've declined anywhere from so I think you should So 32 00:01:37,520 --> 00:01:40,720 Speaker 1: you're saying that's not priced in. Uh, And you know 33 00:01:40,800 --> 00:01:43,000 Speaker 1: the thing about that is that that could be one 34 00:01:43,040 --> 00:01:45,040 Speaker 1: side of it. But the other thing is it could 35 00:01:45,040 --> 00:01:48,360 Speaker 1: be telling is something that um, you know, maybe recession 36 00:01:48,480 --> 00:01:51,920 Speaker 1: isn't coming. It is the bond market wrong about recession 37 00:01:51,960 --> 00:01:56,160 Speaker 1: being inevitable. I try not to bet against the market 38 00:01:55,960 --> 00:01:58,720 Speaker 1: and try not to bet against the collective intelligence. Um, 39 00:01:58,880 --> 00:02:01,040 Speaker 1: I don't think the bond markets wrong. You look at 40 00:02:01,040 --> 00:02:03,640 Speaker 1: the two year and the two years actually yielding less 41 00:02:03,640 --> 00:02:06,240 Speaker 1: than the Fed funds rate that doesn't happen very often, 42 00:02:06,520 --> 00:02:10,280 Speaker 1: and that's a clear indication that people really want protection, 43 00:02:10,720 --> 00:02:13,880 Speaker 1: they really want to own government securities, and they don't 44 00:02:13,880 --> 00:02:16,400 Speaker 1: think the Fed's gonna get to where the FED wants 45 00:02:16,400 --> 00:02:18,320 Speaker 1: to get to because growth is going to be pretty 46 00:02:18,360 --> 00:02:21,040 Speaker 1: weak next year. Well this is it isn't it? A 47 00:02:21,160 --> 00:02:24,080 Speaker 1: But why? Uh? Do you think that these earnings estimates 48 00:02:24,080 --> 00:02:30,000 Speaker 1: in essence perhaps optimistic or yeah, or realistic ultimately, Um, 49 00:02:30,320 --> 00:02:33,000 Speaker 1: I think analysts reflect the best of human nature and 50 00:02:33,040 --> 00:02:37,200 Speaker 1: that they're perpetually optimistic. Um. And unfortunately, you know, going 51 00:02:37,280 --> 00:02:40,720 Speaker 1: into times of recession, they tend to be overly optimistic. 52 00:02:40,840 --> 00:02:43,920 Speaker 1: So you will see earnings come down. You'll see reports 53 00:02:43,960 --> 00:02:46,960 Speaker 1: like Micron today. Micron actually burned cash on the quarter, 54 00:02:47,120 --> 00:02:49,560 Speaker 1: so it went from a profitable growth company to an 55 00:02:49,639 --> 00:02:53,120 Speaker 1: unprofitable growth company. So yeah, it's it's a process, and 56 00:02:53,160 --> 00:02:55,280 Speaker 1: that that's why bear markets tend to have these bear 57 00:02:55,400 --> 00:02:58,200 Speaker 1: market rallies. But then once we get an earning season 58 00:02:58,240 --> 00:03:00,320 Speaker 1: and we start to see some more bad news, um, 59 00:03:00,400 --> 00:03:03,840 Speaker 1: you'll see those estimates come down. We always like to 60 00:03:03,880 --> 00:03:09,320 Speaker 1: ask guests, um, what's the market missing? I think the 61 00:03:09,360 --> 00:03:15,160 Speaker 1: markets actually missing how employment plays into valuations, which is 62 00:03:15,200 --> 00:03:18,760 Speaker 1: something I've written about a few times. Um, most people 63 00:03:18,760 --> 00:03:21,360 Speaker 1: who are employed have a four oh one K and 64 00:03:21,440 --> 00:03:23,840 Speaker 1: that four oh one k is invested in, you know, 65 00:03:23,880 --> 00:03:27,320 Speaker 1: a passive index. So now that we're starting to see 66 00:03:27,480 --> 00:03:30,560 Speaker 1: those tech jobs go away, UM, those are high paying 67 00:03:30,600 --> 00:03:33,760 Speaker 1: white collar jobs, and that's a lot of four o 68 00:03:34,160 --> 00:03:37,040 Speaker 1: K contributions that aren't going to happen next year. So 69 00:03:37,200 --> 00:03:40,200 Speaker 1: I think that's actually a big support of the market 70 00:03:40,280 --> 00:03:45,720 Speaker 1: because the passive firms own over of every large cap Now, UM, 71 00:03:45,760 --> 00:03:48,120 Speaker 1: if that goes away, you could see a gap between 72 00:03:48,160 --> 00:03:51,040 Speaker 1: where passive wants to buy these equities and we're active 73 00:03:51,080 --> 00:03:54,680 Speaker 1: actually will bid for them. So actually, you know, you 74 00:03:54,680 --> 00:03:56,600 Speaker 1: can look at it this way, when when the in 75 00:03:56,640 --> 00:03:59,120 Speaker 1: the era of free money, which we're leaving behind, we 76 00:03:59,120 --> 00:04:02,360 Speaker 1: were looking for asset depreciation in a way, and now 77 00:04:02,400 --> 00:04:06,160 Speaker 1: we're looking for I suppose with that asset appreciation we 78 00:04:06,360 --> 00:04:09,000 Speaker 1: people who struggle to find yield. But now you're just 79 00:04:09,040 --> 00:04:13,440 Speaker 1: looking at the moment for solidity and a good yield picture. 80 00:04:13,640 --> 00:04:17,760 Speaker 1: Would you not say, oh, certainly, I definitely agree with that. UM. 81 00:04:17,800 --> 00:04:19,839 Speaker 1: And that's that's kind of the scary thing though about 82 00:04:19,839 --> 00:04:24,120 Speaker 1: fair markets is when the FED starts cutting UM, the liquidity, 83 00:04:24,200 --> 00:04:26,120 Speaker 1: people cheer, and you know, you tend to get a 84 00:04:26,160 --> 00:04:29,640 Speaker 1: short term rally in the markets. But if people are afraid, 85 00:04:30,160 --> 00:04:32,280 Speaker 1: and if growth is going away, and maybe there are 86 00:04:32,320 --> 00:04:36,039 Speaker 1: some you know, worse things happening on the macro horizon, UM, 87 00:04:36,080 --> 00:04:39,280 Speaker 1: people prefer a safe asset almost at any price. So 88 00:04:39,400 --> 00:04:41,920 Speaker 1: right now you're getting over four for the safest asset 89 00:04:41,920 --> 00:04:45,119 Speaker 1: in the world, which your government bonds from the US UM. 90 00:04:45,200 --> 00:04:47,080 Speaker 1: Even if that goes down to three percent, I don't 91 00:04:47,080 --> 00:04:50,760 Speaker 1: think it's going to change people going back into these unprofitable, 92 00:04:50,839 --> 00:04:55,559 Speaker 1: high flying tech issues, especially while there's weakness in the economy. Okay, 93 00:04:55,600 --> 00:04:58,719 Speaker 1: give us a contrarian call that you like that maybe 94 00:04:58,720 --> 00:05:00,880 Speaker 1: some people are not thinking about, but might be a 95 00:05:00,880 --> 00:05:04,400 Speaker 1: way for them to make money given these turbulent times. 96 00:05:05,880 --> 00:05:10,039 Speaker 1: I think the contrarian call is to stockpick around the 97 00:05:10,120 --> 00:05:14,800 Speaker 1: cyclical companies UM. And to get even more contrarian, we 98 00:05:15,000 --> 00:05:17,960 Speaker 1: like one of the cyclical areas, which is actually energy. 99 00:05:18,080 --> 00:05:22,599 Speaker 1: So UM. Although energy is the best performing sector this year, UM, 100 00:05:22,640 --> 00:05:25,279 Speaker 1: I would argue it's the only sector that's actually priced 101 00:05:25,279 --> 00:05:27,720 Speaker 1: for a recession. UM. You know, they had the windfall 102 00:05:27,800 --> 00:05:29,919 Speaker 1: earnings this year, so we already knew earnings were going 103 00:05:29,960 --> 00:05:33,560 Speaker 1: to come down next year. But these companies have extremely 104 00:05:33,560 --> 00:05:36,240 Speaker 1: strong balance sheets now, so they can weather any kind 105 00:05:36,279 --> 00:05:39,880 Speaker 1: of economic weakness. And I still think there's very tight 106 00:05:39,920 --> 00:05:42,920 Speaker 1: supply out there, so we do get demand instruction in 107 00:05:42,920 --> 00:05:46,240 Speaker 1: a recession. But the contrarian call would be there's also 108 00:05:46,320 --> 00:05:48,960 Speaker 1: not enough supply out there. So if there's some other 109 00:05:49,080 --> 00:05:53,000 Speaker 1: supply shock next year, such as Russia amassing more troops 110 00:05:53,000 --> 00:05:57,080 Speaker 1: than making another offensive. UM in February, we're hearing there 111 00:05:57,320 --> 00:06:00,600 Speaker 1: could be an upward shock in energy. Not to mention 112 00:06:00,680 --> 00:06:04,240 Speaker 1: China reopening as I just started on your program, UM 113 00:06:04,240 --> 00:06:06,560 Speaker 1: reducing all the travel restrictions, there could be a lot 114 00:06:06,600 --> 00:06:10,040 Speaker 1: more usage. As you say, if you know, if we 115 00:06:10,120 --> 00:06:13,600 Speaker 1: go into recession, then certainly energy demand would be lower, right, 116 00:06:13,640 --> 00:06:17,440 Speaker 1: So wouldn't that kind of hurt that? Bet? Oh, energy 117 00:06:17,480 --> 00:06:21,160 Speaker 1: demand definitely, we would be lower. However, I'm arguing that UM, 118 00:06:21,160 --> 00:06:23,479 Speaker 1: those stocks are priced for it already, So you you 119 00:06:23,560 --> 00:06:27,800 Speaker 1: have single digit pees still in some energy stocks that 120 00:06:28,000 --> 00:06:30,560 Speaker 1: that's usually discounts a lot of pain for you. You know, 121 00:06:30,600 --> 00:06:34,120 Speaker 1: whereas you're buying Apple at over twenty five times earnings UM, 122 00:06:34,200 --> 00:06:37,440 Speaker 1: that's a consumer discretionary company, and those tends to decline 123 00:06:37,440 --> 00:06:41,080 Speaker 1: in recessions as well, So it's really a valuation call. Yeah, 124 00:06:41,120 --> 00:06:44,480 Speaker 1: I mean you look at Apple, it's what at the end, 125 00:06:44,560 --> 00:06:47,240 Speaker 1: but thirties a lot more affordable. You could argue you 126 00:06:47,279 --> 00:06:49,919 Speaker 1: made quite a few calls actually at the beginning of July, 127 00:06:50,360 --> 00:06:53,200 Speaker 1: the middle of July in fact, and Apple was one 128 00:06:53,200 --> 00:06:55,960 Speaker 1: of them. We had others like Autism and Broadcam, Chewy, 129 00:06:56,080 --> 00:06:59,640 Speaker 1: Coca Cola, h and R Block, lockeed Martin. How much 130 00:06:59,680 --> 00:07:03,800 Speaker 1: of of these are you still sticking with. We've actually 131 00:07:03,839 --> 00:07:06,680 Speaker 1: reduced a lot of our exposure to the blue chip 132 00:07:06,960 --> 00:07:10,400 Speaker 1: SMP five companies, partially because of that passive thing. You know, 133 00:07:10,440 --> 00:07:13,760 Speaker 1: if if the white collar for owing case stopped buying, um, 134 00:07:13,800 --> 00:07:16,240 Speaker 1: there's not a lot of air underneath those stocks. But 135 00:07:16,320 --> 00:07:18,200 Speaker 1: also we just kind of wanted to get away from 136 00:07:18,280 --> 00:07:21,520 Speaker 1: the cyclical companies. UM. So we still own one of 137 00:07:21,560 --> 00:07:24,880 Speaker 1: the Coca Cola distributors because people still drink Coca Cola. 138 00:07:25,000 --> 00:07:28,080 Speaker 1: During intercession, you know, they cut cut back on bigger 139 00:07:28,080 --> 00:07:31,120 Speaker 1: ticket items and luxury items. So I would definitely go 140 00:07:31,160 --> 00:07:34,400 Speaker 1: with more consumer staples, stay away from consumer discretionary, and 141 00:07:34,520 --> 00:07:36,800 Speaker 1: just be very careful out there. It's it really is 142 00:07:36,800 --> 00:07:39,800 Speaker 1: a stock pickers environment, which we're happy about. But okay, 143 00:07:40,400 --> 00:07:43,160 Speaker 1: there's not so many stock pickers anymore. Let's ask you 144 00:07:43,160 --> 00:07:46,320 Speaker 1: a little bit about what this show focuses on a show. 145 00:07:46,360 --> 00:07:48,840 Speaker 1: We can start with China. We had the State Council 146 00:07:48,880 --> 00:07:52,000 Speaker 1: and the PBOC vowing yet again to boost growth. I 147 00:07:52,040 --> 00:07:54,400 Speaker 1: say yet again because we've seen so many calls for 148 00:07:54,440 --> 00:08:00,000 Speaker 1: this and it's been very very slow, very targeted, very incremental. Uh. 149 00:08:00,120 --> 00:08:03,440 Speaker 1: Do you like the reopening story and are you finding 150 00:08:03,440 --> 00:08:08,440 Speaker 1: ways to play it? We do like the reopening story, um, 151 00:08:08,680 --> 00:08:13,080 Speaker 1: but we it's just it's very difficult to actually get 152 00:08:13,120 --> 00:08:16,280 Speaker 1: good information on China's I'm sure you know, um. But 153 00:08:16,360 --> 00:08:19,160 Speaker 1: the way that we're watching it really is through energy consumption. 154 00:08:19,320 --> 00:08:23,440 Speaker 1: So I think it will be slow, um, and it'll 155 00:08:23,480 --> 00:08:26,320 Speaker 1: be gradual, but we will start to see more barrels 156 00:08:26,320 --> 00:08:28,960 Speaker 1: of oil going to China, and Russia might not be 157 00:08:29,000 --> 00:08:31,600 Speaker 1: able to supply those barrels either. So it's going to 158 00:08:31,640 --> 00:08:34,360 Speaker 1: be some big tug of war next year between demand 159 00:08:34,400 --> 00:08:37,320 Speaker 1: destruction perhaps and developed economies that are going through recession. 160 00:08:37,640 --> 00:08:40,240 Speaker 1: But China really coming off a very low base of 161 00:08:40,280 --> 00:08:43,440 Speaker 1: being in total lockdown, and of course we have the 162 00:08:43,480 --> 00:08:48,400 Speaker 1: geopolitical headwinds to do we know absolutely absolutely, and I 163 00:08:48,640 --> 00:08:51,920 Speaker 1: it's strange to me that um the energy markets don't 164 00:08:51,960 --> 00:08:56,240 Speaker 1: price in a potential large decline in the largest producer 165 00:08:56,240 --> 00:09:00,160 Speaker 1: of oil, which is Russia, so UM it could is 166 00:09:00,160 --> 00:09:03,679 Speaker 1: shocked there as well. All right, Brian, Uh, it's an 167 00:09:03,679 --> 00:09:06,720 Speaker 1: interesting call the thoughts that you've shared with us today. 168 00:09:06,760 --> 00:09:11,600 Speaker 1: I would say that you're pretty bearish yet opportunistic. You're 169 00:09:11,640 --> 00:09:14,920 Speaker 1: looking for ways to to guide us through the next 170 00:09:15,240 --> 00:09:17,640 Speaker 1: six to twelve months. So thanks very much for taking 171 00:09:17,640 --> 00:09:19,600 Speaker 1: out the time to be with us in Happy holidays 172 00:09:19,640 --> 00:09:22,640 Speaker 1: to you, Brian, Frank ce Io at Frank Funds