Speaker 1: Let's get to our guest, Brian frank ce Io at
Speaker 1: Frank Funds. Brian, it's a pity, but it does seem
Speaker 1: like we're in a good news is bad news paradigm
Speaker 1: here at the moment, at least for some period of time.
Speaker 1: At some point, it's going to flip to worries about
Speaker 1: recession and then we'll be begging for good news. But
Speaker 1: the good news today kind of turned off investors. How
Speaker 1: are you tackling that for the moment. Yeah, I think
Speaker 1: that's exactly right. Um. Everybody's kind of worried that the
Speaker 1: FED is just gonna go too far here, and I
Speaker 1: think the best way to play that is that kind
Speaker 1: of take a step back and look at the fundamentals
Speaker 1: of companies, because that's what we do at the Frank
Speaker 1: Value Fund is UM. I'd rather avoid the cyclical type companies.
Speaker 1: I'd rather avoid the high flyers that really need growth
Speaker 1: because it looks like growth is disappearing here, and just
Speaker 1: find things that are kind of reasonably play priced, have
Speaker 1: strong balance sheets, and can weather the storm, because it
Speaker 1: certainly looks like there's a storm brewing in but everybody
Speaker 1: he knows probably that there is, but they don't know
Speaker 1: what the magnitude is. Is it going to be just
Speaker 1: a light breeze or is it going to be a
Speaker 1: full on hurricane. That's kind of the perplexing thing. Is this,
Speaker 1: you know, I've heard this is the most telegraph procession
Speaker 1: in US history. Everybody's talking about it. We all have
Speaker 1: the leading indicators that look pretty terrible. But the amazing
Speaker 1: thing to me, or the perplexing thing is you look
Speaker 1: at earnings estimates for three and they're not going down.
Speaker 1: They're pretty much flat from two. But in the average
Speaker 1: recession they decline at least fift and in recent recessions
Speaker 1: they've declined anywhere from so I think you should So
Speaker 1: you're saying that's not priced in. Uh, And you know
Speaker 1: the thing about that is that that could be one
Speaker 1: side of it. But the other thing is it could
Speaker 1: be telling is something that um, you know, maybe recession
Speaker 1: isn't coming. It is the bond market wrong about recession
Speaker 1: being inevitable. I try not to bet against the market
Speaker 1: and try not to bet against the collective intelligence. Um,
Speaker 1: I don't think the bond markets wrong. You look at
Speaker 1: the two year and the two years actually yielding less
Speaker 1: than the Fed funds rate that doesn't happen very often,
Speaker 1: and that's a clear indication that people really want protection,
Speaker 1: they really want to own government securities, and they don't
Speaker 1: think the Fed's gonna get to where the FED wants
Speaker 1: to get to because growth is going to be pretty
Speaker 1: weak next year. Well this is it isn't it? A
Speaker 1: But why? Uh? Do you think that these earnings estimates
Speaker 1: in essence perhaps optimistic or yeah, or realistic ultimately, Um,
Speaker 1: I think analysts reflect the best of human nature and
Speaker 1: that they're perpetually optimistic. Um. And unfortunately, you know, going
Speaker 1: into times of recession, they tend to be overly optimistic.
Speaker 1: So you will see earnings come down. You'll see reports
Speaker 1: like Micron today. Micron actually burned cash on the quarter,
Speaker 1: so it went from a profitable growth company to an
Speaker 1: unprofitable growth company. So yeah, it's it's a process, and
Speaker 1: that that's why bear markets tend to have these bear
Speaker 1: market rallies. But then once we get an earning season
Speaker 1: and we start to see some more bad news, um,
Speaker 1: you'll see those estimates come down. We always like to
Speaker 1: ask guests, um, what's the market missing? I think the
Speaker 1: markets actually missing how employment plays into valuations, which is
Speaker 1: something I've written about a few times. Um, most people
Speaker 1: who are employed have a four oh one K and
Speaker 1: that four oh one k is invested in, you know,
Speaker 1: a passive index. So now that we're starting to see
Speaker 1: those tech jobs go away, UM, those are high paying
Speaker 1: white collar jobs, and that's a lot of four o
Speaker 1: K contributions that aren't going to happen next year. So
Speaker 1: I think that's actually a big support of the market
Speaker 1: because the passive firms own over of every large cap Now, UM,
Speaker 1: if that goes away, you could see a gap between
Speaker 1: where passive wants to buy these equities and we're active
Speaker 1: actually will bid for them. So actually, you know, you
Speaker 1: can look at it this way, when when the in
Speaker 1: the era of free money, which we're leaving behind, we
Speaker 1: were looking for asset depreciation in a way, and now
Speaker 1: we're looking for I suppose with that asset appreciation we
Speaker 1: people who struggle to find yield. But now you're just
Speaker 1: looking at the moment for solidity and a good yield picture.
Speaker 1: Would you not say, oh, certainly, I definitely agree with that. UM.
Speaker 1: And that's that's kind of the scary thing though about
Speaker 1: fair markets is when the FED starts cutting UM, the liquidity,
Speaker 1: people cheer, and you know, you tend to get a
Speaker 1: short term rally in the markets. But if people are afraid,
Speaker 1: and if growth is going away, and maybe there are
Speaker 1: some you know, worse things happening on the macro horizon, UM,
Speaker 1: people prefer a safe asset almost at any price. So
Speaker 1: right now you're getting over four for the safest asset
Speaker 1: in the world, which your government bonds from the US UM.
Speaker 1: Even if that goes down to three percent, I don't
Speaker 1: think it's going to change people going back into these unprofitable,
Speaker 1: high flying tech issues, especially while there's weakness in the economy. Okay,
Speaker 1: give us a contrarian call that you like that maybe
Speaker 1: some people are not thinking about, but might be a
Speaker 1: way for them to make money given these turbulent times.
Speaker 1: I think the contrarian call is to stockpick around the
Speaker 1: cyclical companies UM. And to get even more contrarian, we
Speaker 1: like one of the cyclical areas, which is actually energy.
Speaker 1: So UM. Although energy is the best performing sector this year, UM,
Speaker 1: I would argue it's the only sector that's actually priced
Speaker 1: for a recession. UM. You know, they had the windfall
Speaker 1: earnings this year, so we already knew earnings were going
Speaker 1: to come down next year. But these companies have extremely
Speaker 1: strong balance sheets now, so they can weather any kind
Speaker 1: of economic weakness. And I still think there's very tight
Speaker 1: supply out there, so we do get demand instruction in
Speaker 1: a recession. But the contrarian call would be there's also
Speaker 1: not enough supply out there. So if there's some other
Speaker 1: supply shock next year, such as Russia amassing more troops
Speaker 1: than making another offensive. UM in February, we're hearing there
Speaker 1: could be an upward shock in energy. Not to mention
Speaker 1: China reopening as I just started on your program, UM
Speaker 1: reducing all the travel restrictions, there could be a lot
Speaker 1: more usage. As you say, if you know, if we
Speaker 1: go into recession, then certainly energy demand would be lower, right,
Speaker 1: So wouldn't that kind of hurt that? Bet? Oh, energy
Speaker 1: demand definitely, we would be lower. However, I'm arguing that UM,
Speaker 1: those stocks are priced for it already, So you you
Speaker 1: have single digit pees still in some energy stocks that
Speaker 1: that's usually discounts a lot of pain for you. You know,
Speaker 1: whereas you're buying Apple at over twenty five times earnings UM,
Speaker 1: that's a consumer discretionary company, and those tends to decline
Speaker 1: in recessions as well, So it's really a valuation call. Yeah,
Speaker 1: I mean you look at Apple, it's what at the end,
Speaker 1: but thirties a lot more affordable. You could argue you
Speaker 1: made quite a few calls actually at the beginning of July,
Speaker 1: the middle of July in fact, and Apple was one
Speaker 1: of them. We had others like Autism and Broadcam, Chewy,
Speaker 1: Coca Cola, h and R Block, lockeed Martin. How much
Speaker 1: of of these are you still sticking with. We've actually
Speaker 1: reduced a lot of our exposure to the blue chip
Speaker 1: SMP five companies, partially because of that passive thing. You know,
Speaker 1: if if the white collar for owing case stopped buying, um,
Speaker 1: there's not a lot of air underneath those stocks. But
Speaker 1: also we just kind of wanted to get away from
Speaker 1: the cyclical companies. UM. So we still own one of
Speaker 1: the Coca Cola distributors because people still drink Coca Cola.
Speaker 1: During intercession, you know, they cut cut back on bigger
Speaker 1: ticket items and luxury items. So I would definitely go
Speaker 1: with more consumer staples, stay away from consumer discretionary, and
Speaker 1: just be very careful out there. It's it really is
Speaker 1: a stock pickers environment, which we're happy about. But okay,
Speaker 1: there's not so many stock pickers anymore. Let's ask you
Speaker 1: a little bit about what this show focuses on a show.
Speaker 1: We can start with China. We had the State Council
Speaker 1: and the PBOC vowing yet again to boost growth. I
Speaker 1: say yet again because we've seen so many calls for
Speaker 1: this and it's been very very slow, very targeted, very incremental. Uh.
Speaker 1: Do you like the reopening story and are you finding
Speaker 1: ways to play it? We do like the reopening story, um,
Speaker 1: but we it's just it's very difficult to actually get
Speaker 1: good information on China's I'm sure you know, um. But
Speaker 1: the way that we're watching it really is through energy consumption.
Speaker 1: So I think it will be slow, um, and it'll
Speaker 1: be gradual, but we will start to see more barrels
Speaker 1: of oil going to China, and Russia might not be
Speaker 1: able to supply those barrels either. So it's going to
Speaker 1: be some big tug of war next year between demand
Speaker 1: destruction perhaps and developed economies that are going through recession.
Speaker 1: But China really coming off a very low base of
Speaker 1: being in total lockdown, and of course we have the
Speaker 1: geopolitical headwinds to do we know absolutely absolutely, and I
Speaker 1: it's strange to me that um the energy markets don't
Speaker 1: price in a potential large decline in the largest producer
Speaker 1: of oil, which is Russia, so UM it could is
Speaker 1: shocked there as well. All right, Brian, Uh, it's an
Speaker 1: interesting call the thoughts that you've shared with us today.
Speaker 1: I would say that you're pretty bearish yet opportunistic. You're
Speaker 1: looking for ways to to guide us through the next
Speaker 1: six to twelve months. So thanks very much for taking
Speaker 1: out the time to be with us in Happy holidays
Speaker 1: to you, Brian, Frank ce Io at Frank Funds