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