Kavar's Ciocca Favors 'Self-Indulgent' Consumer Staples (Audio)

remain in the European Union is gaining ground. Aat of Thursday's referendum, the S and P five hundred index now hired by fifteen points to two thousand and eighty six, up seven tenths of one percent, as stack up forty four points, a gain of nine tenths of one percent.

The now also up nine tenths of one percent, climbing a hundred and sixty three points to seventeen thousand, eight hundred thirty seven, the tenure down seventeen thirty seconds, the old one point six six percent, gold down to fifty the ounce to twelve ninety two, a dropped there of two tens of one percent, and crude oil of a dollar twenty three of Meryl, a gain of two point six percent. I'm Charlie Pellock. That's a Bloomberg business flash. This is taking stock with Kathleen Hayes and Gin Flox

on Bloomberg Radio. To invest it in the SMP five hundred at the beginning of the year. You have a whopping two percent gain. Is that enough for your investments? Let's find out from Doug Cioca. He's the chief investment officer and partner of Cavar Capital Partners. He's based in Leawood, Kansas, helping to manage more than four hundred and fifty million dollars of customer assets, and he can be followed on Twitter at Doug Cioca ce I O double C A

R Right, Doug Ciocca. When someone calls you and says, gee, you know, I invested in an SMP five hundred fund. It's up two percent. I can't live on two percent? What do you tell them he had a good afternoon and thanks for having me on. I think that it's a great question, because challenges persist to get back in line with those um kind of expected return levels that market historians have told us. We're pretty easy to obtain, and we don't have a client with a hundred and

twenty year time horizon. But I guess if you did go back that far, you'd expect about nine and a half percent return in the SMP annually. The interesting thing is to him, just contextually, is the last sixteen years is going back to the turn of the millennium. UH, the SNP had average just above four percent per year.

So maybe it's an indication that the mean reversion tendencies to get back on that nine and a half percent path are strong, or maybe it's giving us an indication that those types of returned to this point just aren't going to be available in the market. Interesting, isn't it, Doug,

How you keep people keep waiting? You know, every so often the fact keeps waiting to raise rates, and the economy starts picking up and they think they can and then something happens, right European deck crisis, Greeks going to default. Now it's the Brexit vote, And I wanted for the markets to what extent. This is the same kind of condition where it's not just about company needs bottom line and top line and earnings. It's not just about even

the strength of US economy or global economy. It's also about these global macro events that keep hitting the world and therefore hitting the markets. I think that's a great observation, Kathleen. It speaks to the sort of global flattening that's taken place in the general level of interconnectivity, particularly in the

financial system. And if you think about Brexit specifically, right, it's largely a function of social unrest, function of economic discontentedness, anti established an uprising by generally a neglected class of citizens. And to me that sounds real similar to the fervor the enthusiasms rounding candidates like Donald Trump Ernie Sanders. Right here in the US, it's almost to somewhat of an

indication of an absence of leadership. I mean there's no vision, no articulation, no feeling of broad representation, inclusion, and there's a heightened susceptibility of fracture. Therefore, in any union, I mean, the Brits are at a very credit cull cultural inflection point,

much as we are here in the United States. And I don't know if the if the leadership breakdown should necessitates spanning more global Uh considerations, is that David Cameron, is that is that the US Congress, is that Parliament at Brussels at the power base of the EU. But I think one of the things that gets lost in this, and certainly none of it is fairly to be characterized

as noise. But what we end up having to focus on invariably is that there's a general misunderstanding that sound economic growth has a way of nursing all of these other social ills. So, however, we can get back on the path to understand what's in the collective goodwill of a strong economy should go a long way into providing some sort of a uh, supporting savs. So to speak to some of these issues that you're that you've just referenced, Doug. You know, it's always easy from the cheap seats to

say what you should have done. And I was looking at the Philadelphia Gold and Silver Index up more than one year to date, looking at the all it off, the Utility Index up nearly sixteen year today. What area of the investment world should you be putting your money to work in right now? Yeah? And gold is always

difficult to him. I mean, certainly gold had done so well for so long when none of the preconditions we've all learned and an educated the thing need to prevail for them to do well, right, the golden really well and low inflationary environments. Gold did really well even in the absence of adequate supply for some of its industrial uses.

Gold certainly and utilities certainly this year have done well because they have been the manifestation of people's identification of fear and capital preservation and yield in the absence of a normalized bond market. But when we spend time with clients and trying to navigate some of these global market cross winds, right, we are looking for ways to reinforce balance in their portfolios and to revisit a theme that

I shared a few months back using a baseball context. Think, we think you just need to try to hit singles here, right, The set up in this ball park of a market is not conducive to taking big home run type swings. If you think of the source of stock market returns, corporate profits, inflation, dividends, and multiple expansion, maybe you get to four to five on average and developed markets, and we think you can emphasize certain areas that can prove

upon those prospects. So I am promised I will answer your question and you can alter that lineup of companies that straddle the line between economically sensitive and interest rate sensitive sectors. So our firm is partial to what we call self indulgent consumer stable stocks, right, alcohol, tobacco, salty snack, fast food, caffeine, etcetera. And we're also very very strong

believers in healthcare stocks. And both these sectors have consistent organic growth components that are attributable to demographics and human nature. And yet they are at best unexcited in their composition.

But when you have four years now before thousand and sixteam were value underperformed growth, when malaise is kind of a nice way to characterize the global growth outlook, and when multiple expansion is not an input into the expected turn calculation, we think those are pretty nice tail once to those sectors. Well, I don't think it's so boring to like things like self indulgent consumers, staple socks, all tobacco, salty snack, fast food, caffeine. Hey, what's boring about that?

Probably not our personalities if we partaken in indulging in them. So those things you're partial to, we are. Yeah, we we don't see the market offering a lot of double digit returns in spite of the two areas that that that pimages quoted with the current macro backdrop, and we even think still think there's some value in sixth income markets, specifically in municipal bond markets just would of course the

appropriate for individual non qualified investors. But if you think about and this is again that sort of bifurcation and income inequality and just general disparity among developed economies both here over in in the EU, but they can state of the stock excuse me, the state of the housing market in the US very strong. I mean think about this. Mortgage payments and total debt services a percentage of income continue to drop in now stabilizing, they are stabilizing below

the two thousand seven levels. And then you have this is a fascinating fact and two thousand and six team, the US government collected one point for a trillion dollars of tax receipts the first half of two thousand and sixteen in their fistical year. So the consumer who's participated these self adulgent um consumer staples, the homeowner, the taxpayer are generally in good shape. The bonds issued by the municipalities where these consumers and homeowners and tax payer ars

live can make for generally attractive opportunities also in this market. Well, you just got talking about just not to finished talking though about the angst that people feel in the in the political environment. So if we can just put the sort of feeling part of it aside, I mean, what about buying a sector that has been beaten up, like

the energy business? Yeah, and and and and it had been beaten up, I guess, but I think it's the top or top one or two performing sectors now given the recovery and commodities, and think back to because kath Lean was characterizing initially, you have a commodity market that was defined or driven by this fear of a Chinese

hard landing, and all prices correlated so negatively. Granted it was exacerbated by the strength of the dollar and the expectation of higher Fed UH than the FED raising rates, but the primary function that drove those prices down was again more angst in fear that a market, an economy that's the second there large to the world, was only going to grow at six and a half to seven.

So I think maybe the emotional parsing that can be done to have more of a fundamental focus on some of the economic underpinnings is what always needs to take place and tends to endure over a long period of time and investing. But in the short term, don't you think we'll always be ripped around, whipped around by some of the emotional components of the investor psyche. Well, it may be whipped around by it, but the idea is that if you're a pro, you want to stay away

from the emotion. Absolutely, absolutely, and that's one of the things that drives us back to those two sectors. We like because human behavior patterns are a heck of a lot easier to predict than market patterns, and the consistency with with cash flow is allocated to those sectors to us is very sensible, and the enduring growth of cash flow capability that grows to dimdends and the stability of the stock prices are all things that attracted us to them.

That's okay, thank you so much for joining us. Fascinating. He likes every thing from indulgent consumer, stable stocks, communities. The CEO and partner of Kavar Capital. I'm Kathleen Hayes, pim Fox, Taking Stock, Bloomberg Radio,