Let's talk about how you invest or what we're seeing right now, given what's
going on, the CPI. Given all the uncertainties about
inflation and for that matter, geopolitics, how do you make investment
decisions in this climate? So I think you still have to stick with
the longer term trajectory. You know, kind of where you see the most
opportunities longer term. I think that there is still a real case
to be made for switching from the kind of new economy back to the old economy
areas like industrials, energy, financials.
A lot of these areas still have very, very good valuations.
I think on the more growth side of the market, I think you want to be more
selective. So we obviously saw things like
communication services. A lot of the tech companies really
rallied pretty fiercely over the last couple of days.
I think you still want to be careful there.
So we like tech. We like things like software, we like
things like semi's, which looked pretty washed out on earnings sentiment.
But we'd be a little bit more cautious with some of the Internet related names
to draw a football analogy that sounds like running off tackle three yards
instead of throwing a long ball that you're not really betting on a lot of
big growth in the near term. I think so.
I think so. And you know, what we see when we look
at different economic forecasts is the price we're likely to pay for a short,
shallow recession is subpar economic growth that follows.
So think of something like half a percent, 1 percent.
That is an environment in which valuation will matter.
So what do you think of that? I mean, is this a time to really dial it
back? Some what are you interested in is
investment opportunity? Well, toward the latter part of this
week, we've gotten more defensively positioned.
I do think that we have a smaller recession next year and I do believe it
hits profits. Profits will be flat at best, probably
down 5 percent. I think Lori's down a little bit more
than that in her estimates of the S&P at 18, 19 times forward earnings.
And you know, even though it's still, in our view, a short and shallow recession
ahead, I think there's going to be more frequent recessions than we've been
accustomed to in the past 20, 30 years during the 20 20s.
And also, inflation will be forced again.
I love these clips. The 1994 after that midterm election, I
mean, that's one when Clinton pivoted. And it's also what the Republicans had
strong messaging and and policy suggestions in
a long period of economic growth and declining inflation for that decade and
25 years after that. So I'm just not sure we saw the signs of
that happening today. So what stocks do you like, dude?
What are we looking for? I focus on industries and then my
portfolio managers pick the stocks and various strategies.
I'm most overweight. Health care, both big biotech and
pharmaceuticals and and big banks. Then we're we're dabbling in a few other
areas, like your air space, defense and oil services.
We were overweight but also underweight. A lot of things that we think are going
to be weighed on by the goods and the manufacturing recession that we see
ahead. Materials, much of industrials still
cautious on semiconductors and all of everything, consumer,
consumer, discretionary, auto retailing knows of both brick and mortar and even
Internet retailing. How does it match up with you for
general semiconductors? You have a different view on
semiconductors. So I think what's semiconductors, what
we're seeing is that basically nobody's taking earnings revisions of earnings
estimates up right now. And historically, when nobody's taking
earnings revisions up or earnings estimates off, it's usually pretty good
12 month forward signal in the market. Now, it doesn't mean they're going to
turn around a day. We have seen some of the price action
improve there a bit lately, but it's really a longer term kind of contrarian
type call. I would say that I think Dave and I are
mostly on the same page on a lot of stuff.
You know, we like the banks. I think we both still like small caps at
this point in time. And, you know, I I'm probably, you know,
a little more cautious on the defensive areas of the market.
I think things like staples and utilities still very expensive.
You've had some room left in health care valuations, but that's starting to creep
up as well. So I'm really not as enthusiastic about
health care as maybe David is. I'm still overweight, but I'm getting a
little concerned about it. I mean, frankly, just because coming
into this reporting season, we were getting close to a peak valuation on
that sector as well. And now we've knocked it down a peg or
two that there were some rough earnings with the sector.
But I think we have to tread cautiously on the defensive.
I like small caps. I like banks because they are typically
areas that do well coming out of a recession.
You've got really cheap valuations. In the case of small caps, we've got a
bucket of work showing that they're pricing in a recession already in
financials. I think it's more of an earnings
resiliency thesis, more of a domestic play.
But I think it's probably time, in my estimation, to start looking for some of
those recovery trades. To what extent have the projections of
earnings taking into account inflation? Because that really is a margin pressure
issue, isn't it? Well, so well, our modelling is shown on
inflation that if we you know, if you sort of think about how they play into
an earnings model, for example, I see see positive correlations with revenues.
So the inflationary backdrop has really been goosing revenues and S&P 500
companies. We find that when inflation comes down,
it doesn't really help margins all that much.
But bringing inflation down is going to pull revenues down.
Wages are actually the more important factor within margin.
So one of the reasons why we've been so cautious on earnings next year as a
whole is because we are baking in that moderation and.
And it's going to pull the revenues down, it's not going to help the margins
as much. But I do think a lot of people who cover
stocks don't understand the revenue dynamic and don't appreciate that the
impact on margins isn't going to be as big as they think.
Where are you on earnings going forward? What are you projecting?
My estimate for next year is to 20, and I expect this year to finish up at about
223 to 24. Thanks to energy, sooner down but still
down slightly. The average recession we're expecting
smaller than average causes a 15 to 20 percent decline in profits.
But usually more than half of that decline in profits is from financials
and energy. Energy is smaller than it's been in the
past, although it's growing every day. And we think banks will be fine because
we're not expecting credit costs to surge.
Well, our banks really benefited from increased rates.
They are they are simply and it's been one of the bigger areas that we've seen
in terms of upward revisions. And so when you think about why the
earnings estimates haven't collapsed as much as we might have otherwise expected
at the broader level, it's financials, it's also energy.
Until recently, you've actually seeing that positive revisions in energy.
Are you concerned at all, David, about possible cracks in the system overall?
We've seen some certainly saw the UK, the vegetable ends.
Sure. And there's some rumblings back.
NYSE. Are you worried about that?
Well, I can't say that I've been able to point out a systemic risk that's really
keeping me up at night. Frankly, I'm more concerned about
geopolitical issues of RTX than the systemic risk.
I don't think so. What do you make of that?
I make a lot of just too much speculation.
And I don't think it's systemic. But I do think it is something that has
strong and will continue to sting many people involved with that.
Now's not a great time to be speculative and the dollar will lose from, you know,
for Americans of dollars doing just fine.
And I want to be, you know, too enthusiastic about finding alternatives
right now. Have you been interested in
cryptocurrency at all or. I try to avoid it at all costs.
You? Well, look, I think that you know, I
think Dave and I both lived through a lot of these cycles.
And it just I sense I'll tell you what I sense this time around, very different
from the dot.com bubble. But there was a lot of skepticism in our
community about crypto. You know, I find that, you know, you had
sort of certain pockets of the hedge fund community that were true believers.
But I think most of the people that I talked to have been pretty skeptical,
didn't really understand necessarily what the point of it was kind of solving
a problem that didn't exist. And I think, you know, I've always sort
of believe when you don't understand it, you want to avoid it.