WEBVTT - Kavar's Ciocca Favors 'Self-Indulgent' Consumer Staples (Audio)

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<v Speaker 1>Global business news twenty four hours a day at Bloomberg

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<v Speaker 1>dot com, the radio, plus mobile laps and on your radio.

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<v Speaker 1>This is a Bloomberg Business Flash from Bloomberg World Headquarters.

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<v Speaker 1>I'm Charlie tell at thirteen minutes to go. Ahead of

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<v Speaker 1>the close on this Monday, stocks are surging. S and

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<v Speaker 1>P five hundred index, up the most in four weeks.

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<v Speaker 1>Half of the latest polls showed the UK campaign to

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<v Speaker 1>remain in the European Union is gaining ground. Aat of

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<v Speaker 1>Thursday's referendum, the S and P five hundred index now

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<v Speaker 1>hired by fifteen points to two thousand and eighty six,

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<v Speaker 1>up seven tenths of one percent, as stack up forty

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<v Speaker 1>four points, a gain of nine tenths of one percent.

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<v Speaker 1>The now also up nine tenths of one percent, climbing

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<v Speaker 1>a hundred and sixty three points to seventeen thousand, eight

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<v Speaker 1>hundred thirty seven, the tenure down seventeen thirty seconds, the

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<v Speaker 1>old one point six six percent, gold down to fifty

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<v Speaker 1>the ounce to twelve ninety two, a dropped there of

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<v Speaker 1>two tens of one percent, and crude oil of a

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<v Speaker 1>dollar twenty three of Meryl, a gain of two point

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<v Speaker 1>six percent. I'm Charlie Pellock. That's a Bloomberg business flash.

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<v Speaker 1>This is taking stock with Kathleen Hayes and Gin Flox

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<v Speaker 1>on Bloomberg Radio. To invest it in the SMP five

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<v Speaker 1>hundred at the beginning of the year. You have a

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<v Speaker 1>whopping two percent gain. Is that enough for your investments?

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<v Speaker 1>Let's find out from Doug Cioca. He's the chief investment

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<v Speaker 1>officer and partner of Cavar Capital Partners. He's based in Leawood, Kansas,

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<v Speaker 1>helping to manage more than four hundred and fifty million

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<v Speaker 1>dollars of customer assets, and he can be followed on

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<v Speaker 1>Twitter at Doug Cioca ce I O double C A

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<v Speaker 1>R Right, Doug Ciocca. When someone calls you and says, gee,

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<v Speaker 1>you know, I invested in an SMP five hundred fund.

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<v Speaker 1>It's up two percent. I can't live on two percent?

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<v Speaker 1>What do you tell them he had a good afternoon

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<v Speaker 1>and thanks for having me on. I think that it's

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<v Speaker 1>a great question, because challenges persist to get back in

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<v Speaker 1>line with those um kind of expected return levels that

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<v Speaker 1>market historians have told us. We're pretty easy to obtain,

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<v Speaker 1>and we don't have a client with a hundred and

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<v Speaker 1>twenty year time horizon. But I guess if you did

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<v Speaker 1>go back that far, you'd expect about nine and a

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<v Speaker 1>half percent return in the SMP annually. The interesting thing

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<v Speaker 1>is to him, just contextually, is the last sixteen years

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<v Speaker 1>is going back to the turn of the millennium. UH,

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<v Speaker 1>the SNP had average just above four percent per year.

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<v Speaker 1>So maybe it's an indication that the mean reversion tendencies

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<v Speaker 1>to get back on that nine and a half percent

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<v Speaker 1>path are strong, or maybe it's giving us an indication

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<v Speaker 1>that those types of returned to this point just aren't

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<v Speaker 1>going to be available in the market. Interesting, isn't it, Doug,

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<v Speaker 1>How you keep people keep waiting? You know, every so

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<v Speaker 1>often the fact keeps waiting to raise rates, and the

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<v Speaker 1>economy starts picking up and they think they can and

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<v Speaker 1>then something happens, right European deck crisis, Greeks going to default.

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<v Speaker 1>Now it's the Brexit vote, And I wanted for the

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<v Speaker 1>markets to what extent. This is the same kind of

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<v Speaker 1>condition where it's not just about company needs bottom line

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<v Speaker 1>and top line and earnings. It's not just about even

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<v Speaker 1>the strength of US economy or global economy. It's also

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<v Speaker 1>about these global macro events that keep hitting the world

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<v Speaker 1>and therefore hitting the markets. I think that's a great observation, Kathleen.

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<v Speaker 1>It speaks to the sort of global flattening that's taken

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<v Speaker 1>place in the general level of interconnectivity, particularly in the

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<v Speaker 1>financial system. And if you think about Brexit specifically, right,

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<v Speaker 1>it's largely a function of social unrest, function of economic discontentedness,

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<v Speaker 1>anti established an uprising by generally a neglected class of citizens.

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<v Speaker 1>And to me that sounds real similar to the fervor

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<v Speaker 1>the enthusiasms rounding candidates like Donald Trump Ernie Sanders. Right

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<v Speaker 1>here in the US, it's almost to somewhat of an

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<v Speaker 1>indication of an absence of leadership. I mean there's no vision,

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<v Speaker 1>no articulation, no feeling of broad representation, inclusion, and there's

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<v Speaker 1>a heightened susceptibility of fracture. Therefore, in any union, I mean,

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<v Speaker 1>the Brits are at a very credit cull cultural inflection point,

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<v Speaker 1>much as we are here in the United States. And

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<v Speaker 1>I don't know if the if the leadership breakdown should

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<v Speaker 1>necessitates spanning more global Uh considerations, is that David Cameron,

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<v Speaker 1>is that is that the US Congress, is that Parliament

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<v Speaker 1>at Brussels at the power base of the EU. But

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<v Speaker 1>I think one of the things that gets lost in this,

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<v Speaker 1>and certainly none of it is fairly to be characterized

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<v Speaker 1>as noise. But what we end up having to focus

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<v Speaker 1>on invariably is that there's a general misunderstanding that sound

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<v Speaker 1>economic growth has a way of nursing all of these

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<v Speaker 1>other social ills. So, however, we can get back on

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<v Speaker 1>the path to understand what's in the collective goodwill of

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<v Speaker 1>a strong economy should go a long way into providing

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<v Speaker 1>some sort of a uh, supporting savs. So to speak

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<v Speaker 1>to some of these issues that you're that you've just referenced, Doug.

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<v Speaker 1>You know, it's always easy from the cheap seats to

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<v Speaker 1>say what you should have done. And I was looking

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<v Speaker 1>at the Philadelphia Gold and Silver Index up more than

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<v Speaker 1>one year to date, looking at the all it off,

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<v Speaker 1>the Utility Index up nearly sixteen year today. What area

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<v Speaker 1>of the investment world should you be putting your money

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<v Speaker 1>to work in right now? Yeah? And gold is always

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<v Speaker 1>difficult to him. I mean, certainly gold had done so

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<v Speaker 1>well for so long when none of the preconditions we've

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<v Speaker 1>all learned and an educated the thing need to prevail

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<v Speaker 1>for them to do well, right, the golden really well

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<v Speaker 1>and low inflationary environments. Gold did really well even in

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<v Speaker 1>the absence of adequate supply for some of its industrial uses.

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<v Speaker 1>Gold certainly and utilities certainly this year have done well

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<v Speaker 1>because they have been the manifestation of people's identification of

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<v Speaker 1>fear and capital preservation and yield in the absence of

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<v Speaker 1>a normalized bond market. But when we spend time with

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<v Speaker 1>clients and trying to navigate some of these global market

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<v Speaker 1>cross winds, right, we are looking for ways to reinforce

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<v Speaker 1>balance in their portfolios and to revisit a theme that

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<v Speaker 1>I shared a few months back using a baseball context. Think,

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<v Speaker 1>we think you just need to try to hit singles here, right,

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<v Speaker 1>The set up in this ball park of a market

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<v Speaker 1>is not conducive to taking big home run type swings.

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<v Speaker 1>If you think of the source of stock market returns,

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<v Speaker 1>corporate profits, inflation, dividends, and multiple expansion, maybe you get

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<v Speaker 1>to four to five on average and developed markets, and

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<v Speaker 1>we think you can emphasize certain areas that can prove

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<v Speaker 1>upon those prospects. So I am promised I will answer

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<v Speaker 1>your question and you can alter that lineup of companies

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<v Speaker 1>that straddle the line between economically sensitive and interest rate

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<v Speaker 1>sensitive sectors. So our firm is partial to what we

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<v Speaker 1>call self indulgent consumer stable stocks, right, alcohol, tobacco, salty snack,

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<v Speaker 1>fast food, caffeine, etcetera. And we're also very very strong

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<v Speaker 1>believers in healthcare stocks. And both these sectors have consistent

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<v Speaker 1>organic growth components that are attributable to demographics and human nature.

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<v Speaker 1>And yet they are at best unexcited in their composition.

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<v Speaker 1>But when you have four years now before thousand and

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<v Speaker 1>sixteam were value underperformed growth, when malaise is kind of

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<v Speaker 1>a nice way to characterize the global growth outlook, and

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<v Speaker 1>when multiple expansion is not an input into the expected

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<v Speaker 1>turn calculation, we think those are pretty nice tail once

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<v Speaker 1>to those sectors. Well, I don't think it's so boring

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<v Speaker 1>to like things like self indulgent consumers, staple socks, all tobacco,

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<v Speaker 1>salty snack, fast food, caffeine. Hey, what's boring about that?

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<v Speaker 1>Probably not our personalities if we partaken in indulging in them.

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<v Speaker 1>So those things you're partial to, we are. Yeah, we

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<v Speaker 1>we don't see the market offering a lot of double

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<v Speaker 1>digit returns in spite of the two areas that that

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<v Speaker 1>that pimages quoted with the current macro backdrop, and we

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<v Speaker 1>even think still think there's some value in sixth income markets,

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<v Speaker 1>specifically in municipal bond markets just would of course the

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<v Speaker 1>appropriate for individual non qualified investors. But if you think

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<v Speaker 1>about and this is again that sort of bifurcation and

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<v Speaker 1>income inequality and just general disparity among developed economies both

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<v Speaker 1>here over in in the EU, but they can state

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<v Speaker 1>of the stock excuse me, the state of the housing

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<v Speaker 1>market in the US very strong. I mean think about this.

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<v Speaker 1>Mortgage payments and total debt services a percentage of income

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<v Speaker 1>continue to drop in now stabilizing, they are stabilizing below

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<v Speaker 1>the two thousand seven levels. And then you have this

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<v Speaker 1>is a fascinating fact and two thousand and six team,

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<v Speaker 1>the US government collected one point for a trillion dollars

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<v Speaker 1>of tax receipts the first half of two thousand and

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<v Speaker 1>sixteen in their fistical year. So the consumer who's participated

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<v Speaker 1>these self adulgent um consumer staples, the homeowner, the taxpayer

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<v Speaker 1>are generally in good shape. The bonds issued by the

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<v Speaker 1>municipalities where these consumers and homeowners and tax payer ars

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<v Speaker 1>live can make for generally attractive opportunities also in this market. Well,

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<v Speaker 1>you just got talking about just not to finished talking

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<v Speaker 1>though about the angst that people feel in the in

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<v Speaker 1>the political environment. So if we can just put the

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<v Speaker 1>sort of feeling part of it aside, I mean, what

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<v Speaker 1>about buying a sector that has been beaten up, like

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<v Speaker 1>the energy business? Yeah, and and and and it had

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<v Speaker 1>been beaten up, I guess, but I think it's the

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<v Speaker 1>top or top one or two performing sectors now given

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<v Speaker 1>the recovery and commodities, and think back to because kath

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<v Speaker 1>Lean was characterizing initially, you have a commodity market that

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<v Speaker 1>was defined or driven by this fear of a Chinese

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<v Speaker 1>hard landing, and all prices correlated so negatively. Granted it

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<v Speaker 1>was exacerbated by the strength of the dollar and the

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<v Speaker 1>expectation of higher Fed UH than the FED raising rates,

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<v Speaker 1>but the primary function that drove those prices down was

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<v Speaker 1>again more angst in fear that a market, an economy

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<v Speaker 1>that's the second there large to the world, was only

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<v Speaker 1>going to grow at six and a half to seven.

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<v Speaker 1>So I think maybe the emotional parsing that can be

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<v Speaker 1>done to have more of a fundamental focus on some

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<v Speaker 1>of the economic underpinnings is what always needs to take

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<v Speaker 1>place and tends to endure over a long period of

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<v Speaker 1>time and investing. But in the short term, don't you

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<v Speaker 1>think we'll always be ripped around, whipped around by some

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<v Speaker 1>of the emotional components of the investor psyche. Well, it

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<v Speaker 1>may be whipped around by it, but the idea is

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<v Speaker 1>that if you're a pro, you want to stay away

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<v Speaker 1>from the emotion. Absolutely, absolutely, and that's one of the

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<v Speaker 1>things that drives us back to those two sectors. We

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<v Speaker 1>like because human behavior patterns are a heck of a

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<v Speaker 1>lot easier to predict than market patterns, and the consistency

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<v Speaker 1>with with cash flow is allocated to those sectors to

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<v Speaker 1>us is very sensible, and the enduring growth of cash

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<v Speaker 1>flow capability that grows to dimdends and the stability of

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<v Speaker 1>the stock prices are all things that attracted us to them.

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<v Speaker 1>That's okay, thank you so much for joining us. Fascinating.

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<v Speaker 1>He likes every thing from indulgent consumer, stable stocks, communities.

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<v Speaker 1>The CEO and partner of Kavar Capital. I'm Kathleen Hayes,

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<v Speaker 1>pim Fox, Taking Stock, Bloomberg Radio,