Federated's Orlando: Germany, Japan Keeping Lid on Yield(Audio)

gain of four tenths of one percent. Then aztat Compositive Index higher now by fourteen points of three tents of one percent. Town Industrial is up sixty six points, a gain of four tenths of one percent. Ten year of five thirty seconds yield there one point seven oh percent. Gold up seventeen ten, the ounce to twelve sixty four, a gain of one point four percent. Crude oil holding above fifty one dollars of barrel up ninety two cents now again narrow one point nine percent. I'm Charlie Pealoton.

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These portfolio strategies use et s because their expense ratios are low and they're easy to buy and sell. And that's your Bloomberg ETF report. I'm Katherine Cowdery. You're listening to Taking Stock with Kathleen and Pin Fox on Bloomberg Radio. Stocks in the United States move higher today, the S and P five posting a game right now, about a quarter of a percent as it moves perhaps to the all time high. Oil prices pushing higher fifty dollars of barrel,

and the US dollar fell. So what's not to like? Well? Philip Orlando is the chief equity market strategist for Federated Investors. He joins us here at Pershing Inside twenty sixteen conference at the Higher Regency in Orlando, Florida. Philip Orlando, thanks for being Linus, Thanks for having me back. All right. So I was looking at the SMP five hundred, keep reading this, you know, approaching this all time high. Interest rates are low, oil fifty dollars a barrel. What's not

to like about this? Environment. Well, we're very nervous for a number of reasons. Evaluations are stretched. You're trading up at around eighteen times this year's earnings right now. The fundamentals right now aren't particularly good. G d P growth has been decelerating for the last year. We're at eight tenths of one percent in the first quarter. We've been in an earnings recession now for the last year. Revenues and earnings down year of a year, the last four

or five quarters. The labor market is stalled. Inflation, core PC has ticked down the last couple of months. You've got this Briggsit vote coming up, a lot of uncertainty surrounding what the fit is thinking, what they're gonna do. Uh. Yet stocks are up, uh, you know, eighteen percent here over the course of the last couple of months. So uh,

the seasonals aren't particularly great. We don't think the market has really focused on any of the potential instability with this election coming up this year, and there's there's a boatload of stuff to concern ourselves with. So for all those reasons, we're saying, all right, let's let's take some profits here and uh uh and move to the sidelines. That that maybe we could see a five or teen

percent correction over the course of this art. Well, so you are being cautious defensive, What is there anything in particular you would sell? Would you just say lighting up across the board? Would it be like you know? And and do you do you get out of some of your more momentum, more ented stocks, some technology and get into something more defensive. And if so, what so? What we've done in the Federated Global Allocation Fund, I think

is exactly UH captures that strategy. UH sixty forty stocks, bonds, it's sort of a neutral allocation. We're sitting at fifty eight percent right now, where a couple of ticks below neutral. That's the lowest the allocation has been since the Great Recession. Now, to put that in some context, in in March of oh nine, as we were coming out of the Great Recession, stocks training at eleven times earnings, we're probably eight percent stocks.

We're sitting at fifty eight percent now with with multiples at eighteen times earnings. So we've got a little bit more cash than normal, a little bit more bonds than normal, and within the equity allocation, we have shifted towards those

more defensive categories reets, telecoms, utilities, stafles, healthcare. So we're we're looking for the lower beta, higher dividend yielding categories as a means of trying to hide out here, tread some water until we can get some better visibility on what's happening in terms of underlying fundamentals and and this election season. So you mentioned bonds just the wanting. Do

you think we're in a bond bubble? Treasury yields at we're worry about right now and two and a half percent for the thirty year, we focus more on the tens. UH tens are low, no question, But I don't know that domestic economic fundamentals are driving that bus. I think the bigger story here is what are competing yields look like in Japan and Germany. So so our bond guys would say, throw out everything you know about domestic fundamentals.

The only thing that matters is that j G b s are negative and UH and and buns are yielding twenty basis points. And so if you're a global UH fixed income investor and you've got to park money in a developed instrument, your three choices or Japan Germany, in the US and and on the basis of the yield, that's an easy decision. And so those instruments Germany and Japan, I think are keeping a lid on on where our

yields are and where they're going. Well, I just I just have to put that the numbers with that, because the German Bund is now UH and for the rallying today Phil down to zero point zero five three and the Commerce Bunk one of their guys is saying that zero percent is possible. Well, it's so close now, that's an easy bit. And as for Japan, negative zero point one three on their j GP. But of course if you wanted to pick up some bonds in Brazil you

can get more than five. Yeah, but there's risk in Brazil. You know, we're leading people away in handcuffs, you know, it's it's all sorts of stuff there. So again, from from the perspective of quality, UH, Japan, Germany and the US are the only games in town, and with the US at one seventy and the others essentially at zero, that that's an easy decision. And I think that's why our yields are where they are. You can sort of ignore what the underlying fundamentals are in terms of studying

and analyzing the US market. Tell us about the fundamentals, particularly when it comes to manufacturing in the United States, maybe even automobiles, because that has seen a very good sales run. Well, you've seen a great sales run. We redounded about nine million annualized units at the bottom of the cycle. In February of oh nine, we've doubled eighteen million units. Now we have come off that pace over the last six months or so. We're you know, closer

to seventeen and a half million units right now. We're we're fine with the auto market staying in the seventeen eighteen million unit run, right, but we're not gonna double again from here or or go up, you know, buy another nine million units. I think we're gonna go sideways for the next couple of years. And I think the principal reason for that is because there is still a tremendous amount of untapped demand and that the average age of the auto fleet in the United States right now

is probably something in the ten eleven years. Normally that number would be seven or eight years. So so as people feel more comfortable they're going out at the margin and replacing their clunkers with new cars, and that's created

a surge. But we're at a point in the cycle right now and some folks have started to mention this where there's some questions about are we are we sort of giving these hars way, much like we're giving houses way leading up to the bursting of the housing bubble in terms of all tight and subprime auto loans, And so there's some question about the quality of the paper that's now out there at this part in the cycle.

Are we chasing the cats and the dogs? You know with this recovery, You know, as long in the tooth as it is, you don't feel but you are somebody who is not um naturally or inherently bearished cautious. So when I hear you telling me all these reasons you're cautious. You're looking at valuations, are certain of the bed, you're looking at bregit, you're lightning up your portfolio. I take this as a as a pretty serious sign that you are.

This is a this is never not even have been here before, but you're you're taking all these wealth signs. This is this is freaky because we're the idiots that that nine years ago were coming out of the Great Recessions trough. We're the ones that said, you know, the stock market has the potential to double within two years and quadruple or hidden all time rec high within four which was a ridiculous forecast. Um, except that we got it right. Um. So, so our inherent bias is to

look for the silver lining to be positive. And and as we look at the landscape right now, we're seeing a preponderance of negatives out there, and it's hard for us to continue to expect to see the market move up here without some sort of a consolidation until we get some clarity on what some of these issues are. Okay, ten seconds, whence if I'm going to raise the key rate fil Orlando, I feel really good about December. Uh, there may be something ahead of the election, but that's

gonna be a much tougher call. Wow. Okay, Orlando, great to have you here. Thanks for having Meldo in Orlando. Persians inside conference the highatt Region Regency in er Lando. Philor Lando is a chief equity strategist at Federated Investor. Is always great having you up upon the show. I'm Kathleen Hayes along with pim Fox that next movers and Shakers Dave also our stock senator will be back, and then a look at the latest drum the political political

trail Kathleen Hayes pomp Fox, taking Stock, Boomberg Radio. H