Stock Buying Opportunity Isn't Here Yet: Hugh Johnson

at Bloomberg dot com. Well, in days like today, when you have a big sell off in the equity markets, it's good to speak to a season grizzled veteran, and we have that in Hugh Johnson, Chairman and chief investment officer of Hugh Johnson Associates with about a billion and a half dollars under management. Hugh, it's great to chat with you today. Help us just to put what we're

seeing today on the tape into some context for us. Well, first of all, nobody knows, including myself, what's going to be the outcome out comfort the economy of China, the economy of the US, and of course the financial markets. We have some things that can reasonably serve as as a guide. We of course had the stars epidemic or problem that we had in two thousands three. In two

thousand fourteen, we had a bowl of notes. We've had this kind of thing before, and it's told us to kind of, you know, don't get caught up in the panic. I think that's always a mistake. So I think, don't get caught up in the panic. Maybe step back from what's going on and let them dost settle or let the markets settle down before you start making any investment decisions.

There is a somewhat bright side of this, if you can see anything bright in this, and that is we've gone from a level at least as I do the numbers of being meaningfully overvalued, to being let's say a little bit overvalued but not as much overvalued. In other words, this could have an opportunity, but it's it's not here yet. So the main thing is don't get caught up in it, and don't panic. It's not here yet. When do you decide to buy the dip? That's really a good question.

I I think you buy the dip when the valuations look a little bit better. You know, we started the day to put some numbers on a Lisa. As I do the numbers five percent overvalued or above the level we should average in the current quarter. You know, this is kind of fun with numbers. We've come down to where we're still a little bit over value three point six percent. Um I think you wait a couple more days.

If we got down to our level of say even being fairly valued or one percent one percent overvalued, I start to buy, start to buy, maybe buy some some things. Keep in mind, little just just how much further do we have to go to get to that point? Well, you know, and as I say, you've got to go down another three three to five percent in my view, three to five in in the either you can measure it by the SMP or the down. If you went down that much, I think then you could probably start

to start to buy. Well, what are some areas that you would be buying? Uh, you know, when this market does set it out, or if we do get that pullback, you're suggesting, well, that's great, that that's a great question. Because um, I haven't been very constructive or positive on the markets. I've been saying, you know, the markets are not going to have a particularly good year, especially after

what we had in two thousand and nineteen. So I've been trying to tell investors of what we've been doing is to add a little defense to portfolios and doing things like making sure you buy large capitalization stocks, add some defense by buying utilities and and consumer staples. Make sure you buy some value stocks. I'm not saying load up. I'm not saying reduce your allocation to equities. But I'm saying in two thousand twenties going to be a lot

more difficult a year. You can see that very clearly than two thousand nineteen. So I'm saying, add a little defense to portfolios. Remember, this has been an extraordinarily long cycle, the longest ball market in history, the longest expansion in history. Common sense alone says, look at trees, don't grow to the sky. You might add a little defense to portfolios. Is it's not time to go into the bunkers. It's not not time to take too much risk off the table.

But you have to watch very closely when when you're you're a record, When you've got these records staring you in the face. On the flip side, what would you have to see with respect to the spread of the coronavirus and the subsequence slow down on the Chinese and other related economies To change your view and become even

more pessimistic. Yeah, that's a great question. I'm not sure what it would take, but I think it would probably be you have to watch the news, and it's gonna be it's not going to be something you can easily quantify, and the news that you really want to watch is what's going on to China. You know, the Chinese economy is going to slow this year six point one percent down to five point eight percent. If we've got numbers or forecasts, shall we say from sensible plate people, that

looks like five and a half percent. Uh, then we're talking about the impact of this, uh, the coronavirus being a lot more significant than we had previously estimated our forecasts. And then we've got to reduce our forecast for the global economy or forecasts or not only China, our forecast

for the US. Remember China's an important export desition, that destination for the U S. And and then we're gonna bring earnings estimates for the SMP down, and that's when that's when we're gonna have some real problems I think in the markets. I'm hoping that doesn't happen, but nevertheless, that's what you gotta watch. You gotta watch what's going to be the impact on China, an important export destination for the U S. You you mentioned earnings were maybe

a third of the way through this earning season. Any takeaways for you so far. Yeah, it's a puzzling thing. And it's been puzzling for every earning season we've seen for the last four or five earning season. And that is companies are coming in with better than expected earnings that's not as good as we sail for the third quarter that we saw in the fourth quarter, were still have seventy percent of the companies of giving US earnings

that are above expectations. But at the same time that we're getting that for the fourth quarter of two thousand and nineteen, earnings expectations are forecasts by myself and others for two thousand and twenty keep coming down. We worried about ten percent at the start of the fourth quarter. We're now down pretty close to eight percent eight point three. So estimates for two thousand twenty keep coming down. And and so I'm happy about what we saw for to

to the fourth quarter. I'm not really happy about what I'm seeing lying ahead for two thousand and twenty, and that makes my concerns are worries about valuation even deeper. Hugh Johnson, thank you so much for being with us. Hugh Johnson, Chairman and Chief Investment Officer of Hugh Johnson Advisors, over say one and a half billion dollars from Albany,

New York. Of course, what's driving the risk off field as the coronavirus which has been spreading and some of the measures that China has taken to prevent further spread. Joining us who has been weighing in all more day and all week last week, Drew Armstrong, team leader for you as healthcare Bloomberg. Drew, can you just bring us up to date? What is the latest in terms of the spread and the efforts to contain the virus at

this point? Well, I mean, I think the biggest things we're watching right now are kind of looking out for new global cases. We do know CDC is going to brief reporters a little bit later this morning, and we may get some updates on exactly what the situation is in the U S where we have five confirmed cases but several dozen people who have been under observation or in isolation. You know, approaching three thousand cases in China. Accounts there continue to rise. I mean, we've seen several

hundred more cases at it each day. And I think the biggest thing everybody is looking at is do things in China accelerate, um and continue to grow in a meaningful way. Meaning you've got kind of sustained ongoing transmission and a lot of the lockdowns that they've been doing there aren't working, which is a possibility. Um. And do we see kind of ongoing or sorry, do we see new transmission happening outside of China which would really put

this in a new phase. So Drew, just give us some sense of context maybe relative to say the stars of virus that of many years of several years ago, um, where we in scope related to that? You know, I think there's a lot of similarities, and people do make that comparison. I mean, there's similar types of viruses. Both are coronaviruses. They appear to come from some kind of animal reservoir um in China, and both are respiratory illnesses that can be deadly in the wrong type of patient.

You're looking at people who are maybe a little bit older, maybe a little bit sicker, Uh, those folks are in general more vulnerable to to any type of illness, whether it be the flu um or one of these more novel novel pathogens that we've been seeing. And so you know, you're seeing the same types of restrictions on trade, the same same types of economic worries that we're having here. Stars was a lot bigger than this was, but it's very early days. I mean, that was a long running epidemic.

I think one of the things you've seen that is different from Stars is that public health authorities around the globe are increasingly sophisticated about how they respond as China in particulars increasingly sophisticated. China is a very different place in two thousand two, two thousand three from where it is now. Some of the same practices, um, you know, we were talking about these wet markets and things like that, or you know, it's coming from an animal reservoir, maybe

in baths or something. Those are still the type of things you you worry about. The doocey is similar, but China is a really different country than you know, fifteen or twenty years ago. Yeah, although there are issues in terms of not having the right hospital beds, enough hospitals. They're building hospitals currently as we speak to try to meet the demand. Also just some basic supplies, the idea of gowns and protective equipment for the medical workers to

take care of the patients. How is that kind of I guess illuminating issues within China that are going to make this harder to to sort of stave off, even with the quarantine that's currently in place. Yeah, anytime you have a widespread outbreak, one of the big things that you worry about is isolation and containment. This is something

that public health or experts are going to talk. If you have people who are contagious, you don't want them around other people, And especially when you've got a virus that is this new and has some of these scary potential uh consequences to it, you need the hospital beds and you need isolation units. When you're dealing with thousands of new cases, No city around the globe is going to have the capacity to say, hey, we need to put three thousand people in isolation, and we need to

do it tomorrow. So you've got to build. And that's why they're putting together a hospital to deal with this. They did the same thing with Stars during that outbreak. So some of this is saying we just need to get the facilities in place where we can do the basic fundamental public health medical work to get these cases out of the population and stop them from potentially transmitting. That is going to be made tricky by this thing

because it has a long incubation period. We don't know are people with really mild symptoms spreading it around without necessarily knowing they get sick. There's some complicating factors here that I think the experts dealing with that are really still trying to get their hands on it real quickly. How did the Stars issue kind of take care of itself or how did that play out? Every almost every single outbreak like this, it comes down to good public

health practices. I mean, you get like a vaccine that came out for Stars. Vaccines tend to take you know when when when you talk about drugs you need months or years. Often they get developed well after an outbreak has ended. You know, we have a we have a bowl of vaccine now, but we also started developing it um in the beginning of the first outbreak in the two thousand tents, and we only just now have it Okay,

Drew Armstrong, thanks so much for that update. We'll look for the CDC briefing the reporters eleven thirty Wall Street Time, Drew Armstrong, team leader for US Healthcare busy reporter as the Healthcare team is as a track this coronavirus. Drew Armstrong, Bloomberg News. Joinings here on a Bloomberg Interactive broker studio. But we often hear the phrase think outside the box. But how about thinking outside the building. That's what our

next guest suggests that we do. Roosevelt Moss Cantor. She's the R. Bacal Professor of Business Administration at the Harvard Business School, also Chair and director of Harvard's Advanced Leadership Initiative. She joins us here on our bloom Interactive broker studios. But thanks so much for joining us. We appreciate you coming here. Talk to us about your book, Think Outside the Building. How advanced leaders can change the world one smart innovation at a time. That's the title of your book.

What do you what's the key takeaway there? So, if you want innovation, you can't stay stuck within today's structures, today's assumptions, today's thinking. And if you think about it. I mean, here we are, we're in a highly digital radio program. Um how I mean the news is no longer the newspaper. Education isn't the school of the classroom. Health is not the hospital. It's a lot of stuff that goes on outside and around it. And we're fixing

health by fixing nutrition for example. UM. So, if you're constrained by your job, the particular company you work for, if you're constrained by conventional thinking, you never can do anything novel or innovative. So have to get out. Can you give us an example of somebody who did this and took a risk and became incredibly successful in in their sort of innovations. Well, in many ways, many most

entrepreneurs do some of that. I mean they see that there's something totally different possible because they see the gaps they um so Uber, even though it had a very checkered history in the beginning in terms of of regulators and lots of other things. I mean, that was seeing that the conventional taxi industry was not meeting all the needs of people. You you're out there watching on the streets, it's not hard to see. But if you're stuck within um,

an existing corporation, you might not see that. And in my book, I tell the example the former president of Trader Joe's who has an entirely new retail concept now to feed people in food deserts and inner cities by um using food that would otherwise be wasted. And that wasn't his first idea. Took him a long time to get out of thinking traditional grocery store UM supply chains, and now he has something that's doing very well in Boston and is going to spread around the country. I'm

struck by the timing of your book. It comes at a time of incredible money going into venture capital funds, incredible amounts of money going into Silicon Valley, in particular, with unicorns being created with their valuations above a billion dollars regularly. I'm wondering, when companies get big quick, does that stifle innovation because people have to stay within the building and keep it going and try to generate profits rather than foresee the next sort of disruptive trend to

innovate around it. Certainly makes it easier for people to get stuck. If you're growing fast with one formula, and if you depart from it, you might undercut that formula. But then look at Amazon, which started out with books and has managed to expand to practically everything else, including selling its own computer system. That's amazing that Amazon Web Services is the biggest deal going on the cloud. What

does that have to do with selling books online? How about some more traditional industries, whether it's automni automobiles, are just manufacturing or you know kind of how are some

of those companies doing as it relates to innovation. Well, so, first of all, I had there was a very interesting comment at a conference UM that I had pulled together a few years ago and had invited Mary Barra from General Motors to talk, and we were talking about the future of transportation and she said, you know, when she was starting out in marketing that UM, the cell phone was first called the car phone because that was the only place people had carverone. She said, boy, did they

miss a bet. And now the car itself is a computer. The metal is the least value added part of the car. And that's interesting. We don't even know yet how all of that's going to play out, and how that car is going to talk to other cars, to the billboards, to the streets. Amazon, I want to go back to what you were saying, this idea that they've managed to innovate repeatedly to dominate a whole host of different industries.

How does a company create a culture of innovation? I think in the Amazon case, there are two different kinds of cultures of innovation. One is you have a founder that wants to dominate the world. And there was a time in Silicon Value where they all said total world domination. Jeff Bezos said Amazon meant it because he was he

was always envisioning things bigger um. And so partly the culture of innovation comes from a founder who has a big dream and is not going to let go of that big dream for the trivia of operations and turn operations over to other people. Ellen Musk is much the same way. UM. So there's another kind of culture of innovation, and I talked more about that in my book, which is a bottom's up culture of innovation, where you give people the sense of importance, the freedom to actually leave

the building and come back with ideas. I mean, I have an example of a law firm where there was a young man in the law firm who got the law firm to take seats in a tech incubator a law firm, and they weren't there to sell legal services. They were there to soak up a culture of innovation, and that law firm is one of the first with digital wills and other ways to use technology on routine services.

So I think that if you empower the workforce and also again get them outside of the conventional, there's only one answer, Rosabeth, what's the role of government in terms of fostering innovation? You could say Silicon Valley, the U. S. Tech business has been so successful because the government has taken a very light hand to regulation. That was after they were successful. I mean, you know, they like to say government had nothing to do with it, They shouldn't

have anything to do with it. Go away, And that was the uberstance for a long time that got them banned in many countries around the world. But in fact government has a big role because Silicon Valley was the result of the defense industry and defense spending, and so was um Boston's High Tech Corridor in Austin, Texas. Defense. That's government. Then there is healthcare, which has so much government spending. Boston is now the one the healthcare life

science as capital of the world. A lot of that was federal brands, So we don't write off government. It's the regulation later I think we might worry about, But initially government is a great seed fund. Professor, thank you so much, really really interesting insights and terrific book. Think Outside the Building, How Advanced leaders Can change the world,

one smart innovation at a time. Professor Roosabet Moss Cantor of Harvard, the Artbical Professor of Business Administration at Harvard Business School and also the Chair and director of Harvard's

Advanced Leadership Initiative. Joining us here in our interactive Broker studio is a really important discussion at a time of unprecedented amount of money going into venture capital, and a question about how to sort of get to the next level when it comes to tech advancement, when it comes to countering UH climate change, a whole host of other things. How do you set the stage to even understand what

might be the needed things going forward. Paul, we've talked a lot about the Everything rally and how that just has been a melt up. Well, there hasn't been a melt up when it comes to the shares of Wells, Fargo and Boeing Boeing in particular, absolutely slammed the past twelve months, shares down more than ten percent, kind of shocking. It's not more. Wells Fargo shares a completely little twelve month trailing period at two point four percent of a

decline including dividends. And the question that's emerging is how much is this a failure of corporate governance and what does that say going forward about what will it take to change both some of the issues and these companies as well as others that might be facing similar issues.

Richard Chambers joining us now President chief executive Officer of the Institute for Internal Auditors the I I A uh, and really I want to give a sense how much was a failure and corporate governance the main driver behind both of the scandals that we saw at Boeing and Wells Fargo. Well, first of all, thank you for having me, and it's great to be back. Uh. You know, corporate

governance is is an ongoing challenge we have. The i A, the Insued Internal Auditors has been surveying around this and doing a good bit of analysis over the last few months. And the issues that we see oath that Wells Fargo and it Boeing are not surprising given the kind of results that our analysis has has disclosed. In fact, the eight guiding principles of corporate governance that we have identified jointly with our with our partner at the Neil Center

of Corporate Governance at Tennessee University of Tennessee. Those eight guiding principles we surveyed around those and and corporate governance overall came out in this country at a at a barely a passing grade at a C plus um. We think there is so much yet to be done. But when you start to look at these two companies in particular, there there's certainly are a lot of questions about culture in the companies, and yet boards have on an overly

optimistic assessment of the culture and their organizations. Another survey we did said that boards think that the company is better managing that risk culture than any other risk. So boards are often uh surprised when these things happened because they just haven't been focused on them. It's interesting at Davos last week we were Bloomberg News was reporting a lot of discussion and commentary around sustainability governance, some of these issues taking you know, more Center stage. We even

had the Business Roundtable talk a little bit. I guess the announced last year the companies should focus more on sustainability than stock price, and as an old Wall Street guy, it just sounded silly to me. I mean, where do you think corporate America is in terms of balancing you know, shareholder returns, which have always been kind of the responsibility of boards and management to maybe some of the you know,

e s G type metrics as well. Well. I can tell you that our study that we did, the American and Corporate Governance Index study that are referred to a minute ago, sustainability was the lowest grade of all areas as far as board oversight, UH mirror mirror C as an overall grade. UM. I think boards are are maybe appropriately reacting to shareholder expectation. Shareholders are anxious to see

immediate returns. There's some you know, instant gratification if you're trading in the market by a lot of people, and so boards try to be responsive to that. But I think they fail their shareholders by not doing anything long term about taking any kind of view and sustainability. The implication in your results that basically there were some serious problems with corporate governance both at Boeing and Wells Fargo that should have left some of the issues as not

a huge surprise. Leads to another question, which is are we going to see more surprises like this? Based on the fact that on average, companies in the US are barely a passing grade and there probably are others that have severe failures and corporate governance out there, I think it's inevitable. I think it's inevitable unless unless boards began to anticipate risks that aren't clearly on the radar, risks like culture. Unless they begin to anticipate it, I think

we're in for a lot more than okay. So give us a specific example of something that a corporate board should be doing that you often see a failure to do well. I think the corporate board at a minimum should be looking and having conversations with more than just the CEO and the C suite. Corporate boards should be talking to the head of internal audit, the head of HRU too, corporate compliance executives to get a sense of

what lies beneath the surface. Because what we often see is when these culture debacles explode, is the boards are are completely amazed they're surprised because in many cases they either hired the CEO or the CEO got them appointed, and so there's this natural level of trust there and they just can't anticipate or don't don't foresee the kind of problems that the company finally gets itself into. Well maybe you know it's interesting. Black Rock recently said that

sustainabilities can become a much bigger part of their investment process. Um, do you think that might kick start some boards to say, hey, if I want to support of a black Rock or some of these other big investors, I gotta take this thing more seriously. I think it's a good, good indication

of maybe a trend that will emerge. Black Rock I think, if I'm not mistaken, said uh that even where they have indexed funds, they intend to get more activists or more active in uh in voting their shares around these issues of sustainability and and kind of the strength and effectiveness of corporate governance. So I do think it's a good start, but I think we have a ways to go. There's sort of a popular belief that during times of froth or rallies, and I don't know if you will

define this is a time of froth. But certainly there's been a very long standing rally that shareholders overlook problems more easily because they just want the gains. Do you feel like corporate governance has deteriorated and that just in general internal auditing standards have to perated as shareholder has become more forgiving in light of the gains that we've seen. I do think that when everything is going well, there's

a tendency not to look below the surface. You see the water is calm, but you may not see the currents underneath um. And unfortunately a lot of these things tend to build up over time. I think I saw where somebody observed recently. It was Hemingway who said, um, everything is calm until it isn't um. And no, I think it was everything is is subtle until it becomes very jumps out absolutely right. So just real quickly, external auditors what how much responsibility should they bear for some

of these issues? Well, the external auditors have a have a tough job to do. I think they're doing probably a lot better job than they were twenty years ago. In the wake of uh in Ron world calm and all the accounting reforms I think they're doing a better job. Again, if you look, many of the of the big corporate scandals we're talking about, even the ones you referred to

earlier today, weren't financial reporting frauds. They're not uh, misstatements that the external auditors overlooked and until external auditing regulations or standards require them to look beneath the surface at things like culture, at what kind of compliance culture, for example, a company has. Until those are required, I don't think that they're going to be the ones who identify these things. These are the things that the internal uditors can find.

Richard Chambers, thanks so much for joining us. Richard Chambers, President and chief executive Officer of the Institute of Internal Auditors, based down in Altamont Springs, Florida. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. Paul Sweeney I'm on Twitter at pt Sweeney and Lisa Abram Woyd's I'm on Twitter at Lisa Abram Woyds One. Before the podcast, you can always catch us worldwide.

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