Time here nine minutes past the hour. Our guest is Max Wasserman, Founder and senior portfolio manager of Miramar Capital. Max, summarizing your notes, I'd say that you do see value in the market in the form of some individual companies, but at the index level, you don't or may not see value at the moment because of some considerations. So so you need to look beneath the hood and what are you finding. Well, thank you for having me on.
What we're seeing is that with the interest rates going up and the said tightening the money tire supply, it's basically not good for growth stocks. And the index is SMP five hundred is a market gap weighted index, and it's really been a proxy for the last five six years for the NASTACK one hundred. So we see the multiples on the NASDACK and on the SMP is still too high in this environment. But when you look under the hood and you look a little bit more broad based,
we see opportunities in a lot of their is. You can see them in healthcare, we can see them in the aftermarket auto replacement parts. We like in the defense area. We're looking for companies as divid investors that are growing their top line revenue, growing their dividends, and have the ability to sustain in this market environment. Given what do you have just said, what do you see as the biggest risk and how do you hedge against that? Well, I think we don't. We don't hedge. We're long only
in our stock portfolio. But how you would defend yourself is basically lowering the beta in the portfolio. Not to be too technical, but when you have the high growth stocks, or what we call the higher risk companies, you've got to lower that exposure. So what we've done is we've basically lowered our exposure to the NASDAC and in the bond market, we shortened our duration because we're not fighting
with the FET. The FET has told us that they're raising interest rates and they're going to continue, so we're going to take them at their word. Now, with the extraordinary shock that we've seen, how easy is it to find companies that are either steady with their dividend or raising their dividend and not fear that because of this huge dislocation, that that it could change quickly. Well, I think you've got to always stay on top of these companies and see what they're doing with the payout ratio
and seeing what they're doing, what they're dividend policy. But for example, when you look at the defense companies, they're having a tremendous year. Companies like General Dynamics, Lockheed Martin which we have investments and have a tremendous year so far, and we see their revenue still climbing. Because what people don't realize in the defense industry, for example, it's a political I mean, the demand is there and given the fact there's so few of players and in this environment
where uncertainty, there's just more demand. And as Europe restocked up their their armory, if you will, that's going to bode well for us because we supply a lot of it. When we look at companies like in the auto replacement area, to give an example another way of an investment, like Advance Auto Parts, we're looking at a company that is basically twelve times earnings, has a dividend payout ratio of like paying you about over four percent, and we think
they have plenty of cash on hand. So we like companies with strong cash flow, great balance sheets, and we're not looking for companies that stretch out to meet the dividend. We want plenty of cash on the balance sheets to cover them on the whole nikes. I mean, what assumption to are you making about profitability? In three we talk about companies still dealing with high inflation, markets still dealing
with supply chain issues. What does it all mean for profit Well, I think you're gonna you're gonna have two markets this year. You're gonna have the first quarter. The first half is going to be dealing with the slowing economy, and I think companies and earnings are not going to be a stellar So I think people are and they've
already been dealing with the supply chain issue. They've already been lowering down their earnings estimates and dealing with the cost inflation, and we think that's going to come to fluition in the first half. That's why we think the multiple on the SMP is still too high given the earnings outbum So we think the first half of the
years still gonna be chopping. Given the second half of the year, I think you'll see more clarification what the FET is doing, and as you'll see inflation we think will start coming under control more in the second half. The pressures will ease on the companies, but we think the first quarter is still going to be challenging two companies with earnings, and you're already seeing that a lot of great companies have basically been hit very hard due
to inflation and rising dollar, supply chain issues. So as those ease going into the second half of next year, we think it's gonna be a much better market. But the FETE is still raising interest rates, You're still having some supply chain issues, You're still having some uncertainty. So that's where we think it's going to be chopping for a little while longer. Do do you think the reopening of China could mean an inflation problem is sort of stoked a little further this year and that it may
take longer for central banks to get inflation under control. Well, that's a great question. That's what we've been really debating here. A lot we thought that the FED was going to change your policy in November December of last year. In the fetus, it was transitory and when they did. Now we believe the Fed, we believe that they will not necessarily be cutting interest rates the second half the year, which a lot of market analysts are looking for. We
don't see that happening as quickly. Mediumuggle neutral, but I don't know if they're gonna be cutting interest rates. And with China opening up, that's more inflationary pressure. That's gonna put pressure on oil, that's gonna put demand. Hopefully they clears up supply chain. So we think we have a little ways before the FED were to stop. So if the Feds looking to raise another let's say a hundred basis points, they may do it in increments of fifty
or quarter. But we don't see them doing an about face this summer, like everybody else is predicting. So we think it's as the China opens up, we think that's gonna put more pressure on the FED to stay the course they're on. So, Mike's what's the base case for the US economy. I mean, we're seeing a spike in layoffs at tech companies and bangs. Do you read that as a signal for an impending recession or not? I think the market it's whether or not where we feel it.
But the body markets saying that that the economy is going to be slowing down. But I think what you're gonna see is it's going to be a reevaluation of what the earnings are going to be for the SMP. So right now people are looking for two twenty five and earnings um for next year, and we think it's going to be more like around two hundred. So at two hundred you're looking about still a seventeen multiple. So we think you can see the multiple come down one
or two times. Again, it's a market weighted cap index, so we think it's gonna be very challenging. Yes, we think you could. You could see a recession, but the market, i think is starting to discount that already. I think what concerns us is the fact that everybody keeps thinking this is going to do about face and that the Fed's going to bail everybody out on the second half by cutting interest rates. We're not so convinced that that's going to happen. So we're cautioning people still stay away
from the high risk areas of the market. And we're not convinced that you should be jumping out on the yield curve yet. But we may be getting towards the peak of inflation and the end of of higher rates, and if you look at cyclical companies or if you just look at say financials and energy, they're nowhere near the lows of the year, and they've made some pretty handsome moves here in the past couple of months. Is that suggesting a trend that looks much better to say,
six months out. Yeah. I think energy specifically, as was in such trouble for so many years that people just forget you're on the verge of bankrupts either cutting their dividends.
We still think that's gonna The energy is on a different cycle, we believe right now with the shutdown and production, with the fact that the US energy policy is a little bit all over the place, and the fact that oil demand we think are going to stay with us for a while, we could see energy staying at this oil stand at these prices are to a hundred dollars
a barrel. That could be consistent through the year, regardless um, maybe a slowdown in the US because of trying to comes back on the market that put up up pressure on it. Industrials, we like it. We just like it selectively. Financials. You know, financials has not been the greatest for the banks.
The banks have had a very challenging time and we think maybe next year could be a little bit better for them and evaluation perspective, and again as divid investors, you know, we like the three to four percent eiels we're getting on major banks which have strong balance sheets, so we look financials will be good. We just think the area that's not going to be as strong, the leadership is not going to re emerge as quickly is technology. We think those multiples are still too hot. We're still
reading the leaves. Mix Wassaman, Founder and Senior portfolio manager of Merrimount Capital, We thank you so much for your insights today