WEBVTT - Brian Frank on the Markets (Radio)

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<v Speaker 1>Let's get to our guest, Brian frank ce Io at

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<v Speaker 1>Frank Funds. Brian, it's a pity, but it does seem

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<v Speaker 1>like we're in a good news is bad news paradigm

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<v Speaker 1>here at the moment, at least for some period of time.

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<v Speaker 1>At some point, it's going to flip to worries about

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<v Speaker 1>recession and then we'll be begging for good news. But

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<v Speaker 1>the good news today kind of turned off investors. How

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<v Speaker 1>are you tackling that for the moment. Yeah, I think

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<v Speaker 1>that's exactly right. Um. Everybody's kind of worried that the

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<v Speaker 1>FED is just gonna go too far here, and I

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<v Speaker 1>think the best way to play that is that kind

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<v Speaker 1>of take a step back and look at the fundamentals

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<v Speaker 1>of companies, because that's what we do at the Frank

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<v Speaker 1>Value Fund is UM. I'd rather avoid the cyclical type companies.

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<v Speaker 1>I'd rather avoid the high flyers that really need growth

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<v Speaker 1>because it looks like growth is disappearing here, and just

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<v Speaker 1>find things that are kind of reasonably play priced, have

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<v Speaker 1>strong balance sheets, and can weather the storm, because it

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<v Speaker 1>certainly looks like there's a storm brewing in but everybody

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<v Speaker 1>he knows probably that there is, but they don't know

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<v Speaker 1>what the magnitude is. Is it going to be just

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<v Speaker 1>a light breeze or is it going to be a

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<v Speaker 1>full on hurricane. That's kind of the perplexing thing. Is this,

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<v Speaker 1>you know, I've heard this is the most telegraph procession

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<v Speaker 1>in US history. Everybody's talking about it. We all have

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<v Speaker 1>the leading indicators that look pretty terrible. But the amazing

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<v Speaker 1>thing to me, or the perplexing thing is you look

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<v Speaker 1>at earnings estimates for three and they're not going down.

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<v Speaker 1>They're pretty much flat from two. But in the average

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<v Speaker 1>recession they decline at least fift and in recent recessions

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<v Speaker 1>they've declined anywhere from so I think you should So

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<v Speaker 1>you're saying that's not priced in. Uh, And you know

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<v Speaker 1>the thing about that is that that could be one

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<v Speaker 1>side of it. But the other thing is it could

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<v Speaker 1>be telling is something that um, you know, maybe recession

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<v Speaker 1>isn't coming. It is the bond market wrong about recession

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<v Speaker 1>being inevitable. I try not to bet against the market

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<v Speaker 1>and try not to bet against the collective intelligence. Um,

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<v Speaker 1>I don't think the bond markets wrong. You look at

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<v Speaker 1>the two year and the two years actually yielding less

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<v Speaker 1>than the Fed funds rate that doesn't happen very often,

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<v Speaker 1>and that's a clear indication that people really want protection,

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<v Speaker 1>they really want to own government securities, and they don't

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<v Speaker 1>think the Fed's gonna get to where the FED wants

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<v Speaker 1>to get to because growth is going to be pretty

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<v Speaker 1>weak next year. Well this is it isn't it? A

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<v Speaker 1>But why? Uh? Do you think that these earnings estimates

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<v Speaker 1>in essence perhaps optimistic or yeah, or realistic ultimately, Um,

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<v Speaker 1>I think analysts reflect the best of human nature and

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<v Speaker 1>that they're perpetually optimistic. Um. And unfortunately, you know, going

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<v Speaker 1>into times of recession, they tend to be overly optimistic.

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<v Speaker 1>So you will see earnings come down. You'll see reports

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<v Speaker 1>like Micron today. Micron actually burned cash on the quarter,

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<v Speaker 1>so it went from a profitable growth company to an

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<v Speaker 1>unprofitable growth company. So yeah, it's it's a process, and

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<v Speaker 1>that that's why bear markets tend to have these bear

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<v Speaker 1>market rallies. But then once we get an earning season

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<v Speaker 1>and we start to see some more bad news, um,

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<v Speaker 1>you'll see those estimates come down. We always like to

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<v Speaker 1>ask guests, um, what's the market missing? I think the

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<v Speaker 1>markets actually missing how employment plays into valuations, which is

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<v Speaker 1>something I've written about a few times. Um, most people

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<v Speaker 1>who are employed have a four oh one K and

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<v Speaker 1>that four oh one k is invested in, you know,

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<v Speaker 1>a passive index. So now that we're starting to see

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<v Speaker 1>those tech jobs go away, UM, those are high paying

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<v Speaker 1>white collar jobs, and that's a lot of four o

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<v Speaker 1>K contributions that aren't going to happen next year. So

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<v Speaker 1>I think that's actually a big support of the market

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<v Speaker 1>because the passive firms own over of every large cap Now, UM,

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<v Speaker 1>if that goes away, you could see a gap between

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<v Speaker 1>where passive wants to buy these equities and we're active

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<v Speaker 1>actually will bid for them. So actually, you know, you

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<v Speaker 1>can look at it this way, when when the in

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<v Speaker 1>the era of free money, which we're leaving behind, we

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<v Speaker 1>were looking for asset depreciation in a way, and now

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<v Speaker 1>we're looking for I suppose with that asset appreciation we

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<v Speaker 1>people who struggle to find yield. But now you're just

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<v Speaker 1>looking at the moment for solidity and a good yield picture.

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<v Speaker 1>Would you not say, oh, certainly, I definitely agree with that. UM.

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<v Speaker 1>And that's that's kind of the scary thing though about

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<v Speaker 1>fair markets is when the FED starts cutting UM, the liquidity,

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<v Speaker 1>people cheer, and you know, you tend to get a

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<v Speaker 1>short term rally in the markets. But if people are afraid,

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<v Speaker 1>and if growth is going away, and maybe there are

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<v Speaker 1>some you know, worse things happening on the macro horizon, UM,

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<v Speaker 1>people prefer a safe asset almost at any price. So

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<v Speaker 1>right now you're getting over four for the safest asset

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<v Speaker 1>in the world, which your government bonds from the US UM.

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<v Speaker 1>Even if that goes down to three percent, I don't

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<v Speaker 1>think it's going to change people going back into these unprofitable,

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<v Speaker 1>high flying tech issues, especially while there's weakness in the economy. Okay,

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<v Speaker 1>give us a contrarian call that you like that maybe

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<v Speaker 1>some people are not thinking about, but might be a

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<v Speaker 1>way for them to make money given these turbulent times.

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<v Speaker 1>I think the contrarian call is to stockpick around the

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<v Speaker 1>cyclical companies UM. And to get even more contrarian, we

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<v Speaker 1>like one of the cyclical areas, which is actually energy.

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<v Speaker 1>So UM. Although energy is the best performing sector this year, UM,

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<v Speaker 1>I would argue it's the only sector that's actually priced

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<v Speaker 1>for a recession. UM. You know, they had the windfall

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<v Speaker 1>earnings this year, so we already knew earnings were going

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<v Speaker 1>to come down next year. But these companies have extremely

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<v Speaker 1>strong balance sheets now, so they can weather any kind

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<v Speaker 1>of economic weakness. And I still think there's very tight

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<v Speaker 1>supply out there, so we do get demand instruction in

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<v Speaker 1>a recession. But the contrarian call would be there's also

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<v Speaker 1>not enough supply out there. So if there's some other

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<v Speaker 1>supply shock next year, such as Russia amassing more troops

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<v Speaker 1>than making another offensive. UM in February, we're hearing there

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<v Speaker 1>could be an upward shock in energy. Not to mention

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<v Speaker 1>China reopening as I just started on your program, UM

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<v Speaker 1>reducing all the travel restrictions, there could be a lot

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<v Speaker 1>more usage. As you say, if you know, if we

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<v Speaker 1>go into recession, then certainly energy demand would be lower, right,

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<v Speaker 1>So wouldn't that kind of hurt that? Bet? Oh, energy

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<v Speaker 1>demand definitely, we would be lower. However, I'm arguing that UM,

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<v Speaker 1>those stocks are priced for it already, So you you

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<v Speaker 1>have single digit pees still in some energy stocks that

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<v Speaker 1>that's usually discounts a lot of pain for you. You know,

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<v Speaker 1>whereas you're buying Apple at over twenty five times earnings UM,

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<v Speaker 1>that's a consumer discretionary company, and those tends to decline

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<v Speaker 1>in recessions as well, So it's really a valuation call. Yeah,

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<v Speaker 1>I mean you look at Apple, it's what at the end,

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<v Speaker 1>but thirties a lot more affordable. You could argue you

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<v Speaker 1>made quite a few calls actually at the beginning of July,

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<v Speaker 1>the middle of July in fact, and Apple was one

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<v Speaker 1>of them. We had others like Autism and Broadcam, Chewy,

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<v Speaker 1>Coca Cola, h and R Block, lockeed Martin. How much

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<v Speaker 1>of of these are you still sticking with. We've actually

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<v Speaker 1>reduced a lot of our exposure to the blue chip

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<v Speaker 1>SMP five companies, partially because of that passive thing. You know,

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<v Speaker 1>if if the white collar for owing case stopped buying, um,

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<v Speaker 1>there's not a lot of air underneath those stocks. But

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<v Speaker 1>also we just kind of wanted to get away from

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<v Speaker 1>the cyclical companies. UM. So we still own one of

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<v Speaker 1>the Coca Cola distributors because people still drink Coca Cola.

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<v Speaker 1>During intercession, you know, they cut cut back on bigger

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<v Speaker 1>ticket items and luxury items. So I would definitely go

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<v Speaker 1>with more consumer staples, stay away from consumer discretionary, and

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<v Speaker 1>just be very careful out there. It's it really is

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<v Speaker 1>a stock pickers environment, which we're happy about. But okay,

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<v Speaker 1>there's not so many stock pickers anymore. Let's ask you

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<v Speaker 1>a little bit about what this show focuses on a show.

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<v Speaker 1>We can start with China. We had the State Council

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<v Speaker 1>and the PBOC vowing yet again to boost growth. I

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<v Speaker 1>say yet again because we've seen so many calls for

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<v Speaker 1>this and it's been very very slow, very targeted, very incremental. Uh.

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<v Speaker 1>Do you like the reopening story and are you finding

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<v Speaker 1>ways to play it? We do like the reopening story, um,

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<v Speaker 1>but we it's just it's very difficult to actually get

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<v Speaker 1>good information on China's I'm sure you know, um. But

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<v Speaker 1>the way that we're watching it really is through energy consumption.

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<v Speaker 1>So I think it will be slow, um, and it'll

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<v Speaker 1>be gradual, but we will start to see more barrels

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<v Speaker 1>of oil going to China, and Russia might not be

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<v Speaker 1>able to supply those barrels either. So it's going to

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<v Speaker 1>be some big tug of war next year between demand

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<v Speaker 1>destruction perhaps and developed economies that are going through recession.

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<v Speaker 1>But China really coming off a very low base of

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<v Speaker 1>being in total lockdown, and of course we have the

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<v Speaker 1>geopolitical headwinds to do we know absolutely absolutely, and I

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<v Speaker 1>it's strange to me that um the energy markets don't

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<v Speaker 1>price in a potential large decline in the largest producer

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<v Speaker 1>of oil, which is Russia, so UM it could is

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<v Speaker 1>shocked there as well. All right, Brian, Uh, it's an

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<v Speaker 1>interesting call the thoughts that you've shared with us today.

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<v Speaker 1>I would say that you're pretty bearish yet opportunistic. You're

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<v Speaker 1>looking for ways to to guide us through the next

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<v Speaker 1>six to twelve months. So thanks very much for taking

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<v Speaker 1>out the time to be with us in Happy holidays

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<v Speaker 1>to you, Brian, Frank ce Io at Frank Funds