Post-Christmas interview on December 27th, 2023 where I was asked to share my thoughts on inflation and how that will effect Fed decisions.
Let me just cut to the chase. The Fed will not lower rates until they destroy inflation. This is not about economic numbers, it’s about ego. Until we see something close to 2% core inflation for 3-6 months, it’s unclear to me why the Fed would cut and run.
Yes, I get into the whole Arthur Burns versus Paul Volker thing. Enjoy!
I get right into the two big points of this early morning hit.
First off, we have a math problem. When earnings on the SP500 are expected to be under 240 per share, even at a 20 multiple, we are already near the high end of the range. It's going to take several quarters just to prove 240 per share is possible (it's high, but can happen). Then at 10% earnings growth I'm only getting around 5200 on the SP500 at 2025 earnings with a 20 multiple. Don't expect overnight success in 2024.
Second, I keep saying it. The Fed wants inflation dead, really dead, before cutting. Right now they say 75bps of cuts by end of next year. Why does everyone thing it will be much sooner and with larger cuts? If you think that growth will get that depressed that quickly to force the Fed's hand, then tell me how stocks are going much higher than today? In the end, bulls are betting that cutting costs over top line revenue growth and a Fed that buckles is the macro case. I find that very optimistic. Don't count it out, but don't bet the ranch on it.
On December 15th, 2023 I was asked to discuss value stocks with Oliver today. He was generous with time and allowed me to really get into what value means. First is the more common idea of value that has to do with the price of the stock compared to its book value, or Price to Book. You know, mostly sectors that are old economy, slow growers like energy, materials, banks, industrials. Most value ETFs are doing this. This is helpful when you want to get broad exposure to cheaper, lower valuation, more established stocks that pay dividends.
Then you have what I consider true value investing, which is looking for a dollar you can buy for 50 cents. You could say today that Google is an example of mega cap growth stock that some may say is a value stock today. What about Apple back in 2013 when it hit the bricks on slow iPhone sales? A true value stock is a great company that has for some reason fallen out of favor with investors but can turn around.
My point is to always ask the question, is this stock or ETF claiming to be a value investment just a slow growing, mature dividend payer (of which the valuation could be quite high), or is this a great company that has fallen on hard times that can be an outperformer in the future? It’s an important distinction.
Such a fun hit with Kelly Evans. Chewy, GameStop, Dollar General. Each one tells a larger story about the zeitgeist of our time.
The millenial firm that thinks any retail niche can be sold like SAAS. The meme stop with negative growth on about everything but Pokemon cards. The poverty trade Wall Street doesn't get. I even drop a few parting thoughts on Disney - and I'll let you know when I fall back in love with the Mouse.
Chatting it up on the 13F Berkshire released this week.
Bottom line, I'm more interested in what wasn't in the 13F - Japan stocks. You see, a 13F shows the stocks the firm owns inside the US, not international. It's not just the trading houses, or Soga Shosha, that are interesting, it's the valuations, cash flow, decreasing debt, and pure earnings after a 30 year recession that Japan may be getting out of.
Also, when asked what I "liked" in his top 5 holdings, I summed it up from the high level, Apple represents the big US growth sector, BAC the value arena, and OXY the energy/commodity/beat up value arena. Why not buy some index funds instead and make it easy on yourself? Individual stocks take patience and nerves of steel.
Great time chatting about my big looser - Disney. My main thesis that parks had infinite pricing power is no longer the case. So, I'm moving on. If you have a new thesis and want to buy it down here, cheap, losing money in streaming, unclear if Igor will pull it off again, go for it. I have other things I want to do with my money.
Also, we talked about Affirm, which I think is not a commodity as many say, but it's still losing money.
Finally, Instacart is really intersting because they can make something called a profit. Sure, it's really because they are selling ads versus being profitable delivering groceries. But ask yourself, does it really matter? What Instacart ONLY made money selling ads and never made money delivering things?
Overall these stocks represent core ideas in markets - that streaming has killed the easy profits of cable and the system won't get fixed anytime soon, that the consumer may not be as strong next year as today, and that firms in the gig economy need to figure out how to stop losing money. How you play that or not is up to you.
I'm still thinking about my Friday interview with Maria Bartiromo - we talked about Apple's inevitable slowdown and reliance on services, but the real story is that iPhone sales will continue to be important - why? You may see 25% margins on iPhones and 70% margins on services - but what people don't get is that Apple has it's own hedge fund in Nevada that invests the float between sales and paying vendors. Yes, they get a 60 day float! For those value players that just can't understand why these firms keep printing money, it's the structure of these firms that has never existed before.
Then it's just some obvious stuff on jobs data - forget stressing about the numbers and focus on wage growth.
Kelly Evans asked me to come on and break down the biggest names in tech announcing earnings after the bell. It's a bit of a continuation of our chat a few weeks ago when I was in studio.
MSFT is straightforward. Hype around AI and Copilot aside, most of the revenues come from Cloud services with a fat 70% margin. That is the driver.
GOOGL has a similar issue that ads are how the firm makes it's money. I love YouTube, but it's only 10% of the business. Some analysts are talking up their own third tier cloud service, but it just started to turn a profit.
V - Visa is all about the macro environment. Sure, they are a great firm that prints money, but if we get a slowdown with the consumer and the actually spend less, investors may question why a firm that is growing at 10% a year is worth 30 times earnings. I would rather buy great companies at a good price.
Time will tell. You can also just buy a low cost tax efficient index fund as and get exposure to these mega cap names. But I love to look at these firms because they tell us about the broader economy. Sometimes, stocks are worth more as macro indicators than specific investments.
What fun to be in person on the awesome sets at CNBC. Tyler and Kelly wanted my take on how trade or position MSFT, LULU, and SCHW.
My take was pretty simple. MSFT has a great opportunity with AI by bolting on what they call Copilot to Office products. I'm just unsure how investors are going to feel about the losses at first.
LULU is just a great company that has the unusual skill of appealing to my teenage daughter, yet it doesn't freak her out that her dad also wears the stuff to the gym. What other clothing brand can do that? The valuation is high, so some caution here.
Then SCHW, who for full disclosure is our primary custodian at my firm, has been hit hard with the duration challenges from rate hikes at their banking arm. This will pass over time, and now that the merger with TD Ameritrade is over, I expect the net new assets that were negative recently will flip to positive.
So, all good firms, but buying individual stocks is difficult, riskier than a simple tax efficient index fund, and should be looked at the dessert, not the main dish. And yes, there is nothing wrong (and a lot of things right) by just keeping things simple and sticking to basic index funds with an appropriate allocation. And if you must dabble, start slow.
I made my return to being on set at CNBC with Power Lunch. The producers were kind enough to give me a few hits during the show and great to see the gang over in Englewood, NJ.
The other guest was a nice guy from a big LA firm. It was his first time on set and I can just imagine what that feels like - I've been there before 15 years ago and he did a great job. We agreed on rates, as in this is a huge buying opportunity for long dated treasuries as well as short. We also agreed that while long term markets look good, all one needs is a single rate hike, a Fed official saying something the news media misquotes, or a day to end in "y" and we could see a proper sell off like early October.
Then I got the question I really wanted - defend the 60/40 mix, as if eating a well balanced meal is ever out of style. But in doing that I was able to showcase exactly how I run my stock and bond mix and my game plan going forward. It's easy to explain when you are the one making the decisions.
Lastly, I do want to state for the record one thing I don't agree with the other guest: private credit. Illiquid, high fees, fully taxable. If you think as a retail investor you are going to get a good deal before all the other massive sovereign wealth funds, hedge funds, insurance firms, pension funds - come on even pension funds get low quality stuff in the grand scheme of things, then you are California dreaming and I'm looking at a long cold winter. But then again, I'm not a favorite of inside my own industry because I'm always trying to cut costs and be more efficient.
