Ciocca on Relationship Between D.C. and Wall Street (Audio)

NESNAK all trading down. We have got the SMP five hundred index down three tenths of one percent, looking like an up week though for the SMP five hundred index, the SMP dropping six points now to forty down in dust Reels down seventy also a drop of four tenths of one percent, naz stank is down three, a drop there of one tenth of one percent, Tenure up one thirty second yield one point six nine percent, Gold down five seventy, the out oh eight a drop of four

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a three year high that was reached in July. The gold rally has stumbled after the medal posted his best first half in almost four decades. There's increasing caution over interest rates and the rising dollar. Gold has given up its second half price game. That's your Bloomberg etfy for I'm Catherine Cowdery. You're listening to Taking Stock with Kathleen Hayes and Pim Fox on Bloomberg Radio. The Election and

your investments. Doug Sioca is the chief executive officer and partner of Cavart Capital Partners, helping to manage nearly half a billion dollars. He's based in Leawood, Kansas. He can be followed on Twitter at Doug Cioca. CEE I O C c A. Alright, Doug Sioco, what is the relationship between presidential elections and market cycles? Ay, Pim, Good afternoon,

Thanks for having me on. I think that, um, there are myriad correlations or correllaries that are drawn between the election and the markets, and I think the implications for the investor are probably more intense than they are for the markets. Right, This is a much more emotional than it is an economic consideration. Elections themselves by virtue of the design our binary events, but the influence of their outcome.

I mean it's very very progressive. So people are are are considering what there's got to be another erosion of confidence in this market, which has been thin to begin with because the margin of victory of this election it could be historically small. Then we look at congressional alignment and is that the prospect of persistent gridlock. Then we're finally experiencing something that we should have expected in an election year. All along is an elevation of market volatility.

So the confluence of rising rates and this ambiguous presidential election results, I think that is what's making a current environment somewhat combustible. But again, a lot of this is very short term in nature, and a long term implications that we are trying to share in preach to our clients have a lot of the performance is gonna have a lot more to do with the state of the economy, the evaluation of equity markets, the current cost of capital. That is going to have anything to do with the

next occupant of the Oval office. All right, So having said that, where are you suggesting that investors put their money? Yeah, I mean, if you think of the world right within which we have opportunities to invest, you can characterize it by kind of three uh traits. You've got slow growth, you've got flat yield curves and flat I guess it would be an implication of a positive component of a yield curve, which is not the case all around the world, but it is. It is steepening just to hang on there.

But when you talk about the yield curve, right, I mean, haven't we seen a steepening in the yield curve for US treasuries a little bit? And I think it's very you know, watch just this week, right, we saw and and absolute sell off on a long end, and we saw a little bit of a rally and the short end. And this was on Lal bernard Brainer's comments on Monday and the CPI this morning that came out. We've seen a little bit of back up on the long end and we've seen a little tightening on the short end.

Is it it raises the prospect of UM at least maybe consideration of putting September back on the table, which we think is very unlikely. But historically, speaking of him, we're talking about pretty flat curves because we do have even though may see a little bit of thought into the winter, we have a frozen said if they do anything, I think it will be in the title of being symbolic than it is impactful if it's a quarter, and it's even of a point that takes place going into

the your end, but slow growth flat curve. Frozen said, we think expected returns higher away from the US than in the US, and we're thinking about places for capital that have more of an economic than an interst rate

sensitivity to that, such so healthcare stocks. Some they're just talking global healthcare then correct, absolutely, absolutely, and again but if you think about companies that sell products or offer services that have very high any elasticity of demand, that will always tend towards healthcare, particularly now in evaluations, become more attractive given the political punching bag that that sector is.

Could that be an example like Johnson and Johnson, and they just announced today the purchase of Abbot's eye surgery unit more than four and a quarter billion dollars, which is we absolutely think that the healthcare sector has is kind of that that proverbial coiled spring of consolidation that awaits in whether they need some clearance because of the legislative clouds they were still coming off of the anti

inversion regime, that Feiser was whacked down with. We've got the EpiPen public relations in pricing tobacco, we've got Martin Scarelli that's still in people's vernacular. And healthcare has been absolutely underspult and not every case undeservedly so. But I think when J and J who after making that today stock is very stable, we're seeing a rally and Abbot because that unlocking of value in a depressed sector is

an invariability for profit seeking opportunists. Well, I our irony of ironies that you know, the Abbot eye surgery unit, Abbot Labs Medical Optics, it was it was at one point owned by Allergan. UM. Turn your attention now to all right, so we talked about healthcare, global healthcare. What else outside the United States? Consumer staples con staples sectors? UM. You know you and I have spoken in the past

about our company's pension for the proverbial sin stocks. Right, Companies that sell self indulgent products, be they tobacco or alcohol, fast food, caffeine, things of that nature that it in have the high elasticity of demand that could be beneficiaries of strange currency meanderings. But they're seeing elevation of their cash flows. One of the things that's been fascinating over the last eighteen months has been the success of these

low volatility ets. Right. I'm sure you've spoken to people in your program about boy, this is a comforting spot and an otherwise ambiguous market. Low volvo val and lo val has a connotation of high free cash FI, which is high dividends, which backs into those sectors that I

just mentioned. Internationally, it has not been the case. And internationally, if you have low valve, because you've got brand franchises that have this kind of values, they are bound to attract some capital, particularly when you get a little more extraction of the benefits of monetary policy, which are far more in their infancy overseas than they are here. And what we learned from Mario drag You last week is he may not take it beyond that that that Kanzie endpoint, right.

They may actually eliminate that super account dative, super accommodative monetary policy before it does more harm than good. Would Starbucks fall into this category you mentioned caffeine and it's global and I understand they're going to be opening four stores in China this year Like that would be a

great example. Absolutely. What about looking for dividends, I think that's critical, right, And again, the only thing that that leaves its um less desirable is it's been so popular because the yield curve has been so weak for so long that that income starved investors have taken a little more more risk and move money exactly otherwise would be allocated to fixed income. But I think dividends have to

be critical as evidence of financial security of companies. The best thing you want to do if you're looking for dividend paying companies here or overseas is be sure they are not lever dividends that have payout ratio that are not sustainable. So we're screening for that with activity, So we can look for balance and we can look for focus.

And focus is a kind of atan of active management that we think is this market and the investor sort of traverses this tight rope between Washington and Wall Street between economic ambiguity and interest rate ambiguity. You need to have the balance and you also have that focus. That would be active management with high free cashal investments. Hey, Doug,

all right, so we did healthcare. You talked about the dividend aspect of investing as well as giving your thoughts on you know, the the global nature, what about investing in UH defense stocks and that they certainly are global, they're globally and again I mean that that would have to fit a quant screen that for US is not often identified companies in that sector as attractive. So I I do think that if you were going to play that based on the outcome of the election would be difficult.

If you go back to win Obama one in two thousand and eight, right, there were search sectors that the world was assuming was gonna We're going to perform terribly. Just the opposite has happened to gun company like Stewant Servant. Ruger is a great example. Got it all right, Thanks very much, We gotta run. Doug Sioca is the chief executive officer and partner of Cavar Capital Partners based in Leewood, Kansas. This is Bloomberg