Why Do Stocks Go Up and Down?

the president and chief executive of trim Tabs Investment Management. Charlie, thanks for being here in the studio with us. I gotta start with that simple question, but it's not really that simple because it doesn't It doesn't stick a lot of times. Why does stock prices move in one direction

versus another? Well, the simple answer this year, say, is the central banks of Japan and the e C and Europe have been adding about a hundred and thirties some odd billion every month and newly created money with which to buy financial assets. So everything else being equal, more money chasing an existing number of a financial assets, the price of those assets should go up. It's that simple.

Given that it's that simple, and that companies have been buying back their shares sort of adding to the demand and the supply of cash. Absolutely, he would think that first of all, any share buy backs would have the same effect, and second of all that stocks should keep going up as companies continue to repurchase their shares. But you just did some research showing that all share buy backs are not equal. Can you give us some color

from that? Sure? Uh? Our fun trim tabs, float shrink e t F ticker symbol t T a C in case anybody cares, only by sorry, only by companies who are grow in free cash flow and using a portion of that free cash flow to reduce the share count. Companies that borrow money to do buy backs, they don't outperform.

If you look at various buy back funds, they underperform our fund because they a lot of those companies that they do a lot of buy backs, they borrow to do those buy backs, and therefore the companies don't outperform and the stocks don't do well. So there's significant difference, I mean between a company growing cash. Free cash flow is the best metric there is, and if companies use a portion of the free cash flow reduced to share count.

That's a double good. So I guess that it's sort of less that uh, it matters what source of cash they're using than the companies just don't have as much free cash flow to to buy back their shares. Correct. Well, I wouldn't trust a company that's not making cash and using the cash to buy back shares. That sounds to me like they're more interested in the stock price than they are in the corporate results. You know, companies that

have no choice, like IBM, with there's no growth. Revenues have been shrinking and they keep They reduced a share account by fift and the price hasn't gone anywhere all right, So I want to just to go back to my most simplistic description of why prices move. It's because it's supplying to man, If you have a constant inventory and there's consistent and growing demand for that same inventory, the value of the inventory is going to go up the

value of the stock price. If no one wants that inventory, the price is going to decline. If that's the case, why are not? Why are not? Corporate inside is buying their own shares. But at the same time, you see that cash flow is growing for SMP five companies. If they're growing cash, why aren't they spending it? Good question. So I've been looking at corporate cash flow has been rising in aggregate and corporate buying, announced by backs, announced

share cash takeovers. I mean, even with the wal the Walmart as an exception, and the hundred billion for banks as an exception, because of the regulatory relief. Uh that those suxceptions, announced corporate buybacks have been shrinking while their cash flow is growing and insider selling is spiking and we're not and and also companies are reducing capital expenditures.

There's only one logical conclusion I make, and that corporate America is scared of Donald Trump and they're unwilling to invest big money into the economy and into their shares given the risks that are going on. I mean, yes, we we've we track real time data. Wage and salary growth has been rising faster this year than before. I really think that's due to one removal of as many regulations as possible, freeing up small business to actually get

stuff started. And too, a lot of small business America are definitely firm believers that Donald Trump is the miracle man. And uh so I think that's the only tail when we've got we have, UH, global commodities are in a recession, oil, metals, all prices have been trending lower. Automobiles, I say, automobile industry globally is in a recession. There's way too much excess capacity, and the housing market is not doing well. I don't believe that there's a shortage of supply, which

is why sales are down. Sales are down because demand is down. So how do you square this with how you invest? I mean, it sounds like you're pretty bearished well, except as I said to begin with, when when banks are adding to the amount of cash available to buy shares, the market is not going to go down. And I'm polish in my holdings, even though at some point in the future, UM, things will not do well. But when I don't know how long that's gonna happen. How long

is it going to take? We'll continue this conversation Charlie Biederman, founder of trim Tabs Asset Management, talking about what companies are doing with their cash, and this has definitely been an ongoing question, especially as when Charlie pointed out that share by backs have gone down. You have seen cash

go up. And not only that, but Blueberg published a story yesterday showing that the volume of bank loans is expected to grow at the smallest pace in years in the third quarter, adding to potential UH pressure on their balance sheets, but especially as as companies failed to aggressively expand. I want to content to continue our conversation with Charlie Biederman,

founder of trim Tabs asset Management. And when I think of trim Tabs, I think of really great flows data which gives you a sense of where the money is going and where it is leaving. And Charlie, I'd love to get your sense, we were talking offline that it isn't flowing as much towards US equities as many people think, and yet the money just keeps flooding into fixed income. Can you give us sense of how much this is

the case. Well, since the start of the year, there's been a consistent outflow from US equity mutual funds, and there's been a less there's been an inflow, but smaller inflow than the outflow into US equity e t f s. So that says that money might be going from active management to passive and any new money that's going in going in passive is going you know, going into E t F. So you know, it's interesting we're seeing and where's the money going, what's going into bond funds as

well as some money going globally, you know, some of the UH markets that are doing the best, riskier markets, I don't know, players like to play, gamblers like to gamble, and so there's a lot of money going off shore as well. But what's interesting to me is, like we're talking, there's no new money from individuals. Corporations are buying less so far this year, and if it wasn't for the central banks, we would be in big trouble. I mean, it wasn't the central banks. They're the only source of

look new money with which to buy stocks. Let's just talk about briefly, just stocks in UH. The E t F in the trim tabs H A C right T T A C is the symbol, correct, and UH it's up sixteen point eight percent so far this year, SMP five up thirteen and a quarter at three quarters of a percent, So well done. Looking at the stocks, though, do you even care what the stocks do? Not? Really you don't, So you don't care whether you're long cognixt stamps,

dot Com and match group. You just want them to have certain characteris you wanted to have growing free cash flow and use a portion of it to reduce the share count. And where they don't increase the debt asset ratio, meaning they have a strong balance sheet. Okay, all right, Just wanted to check last question to you and just briefly because I know that you've spent a lot of time you lived in Santa Rosa, California. We've been tracking the wildfires that are there. What do you know? What

can you tell us? Well, the house I raised my son is gone. The whole neighborhood where for twenty years, the golf course, country club down the road half a mile all gone and my Santa Rosa in Santa Rosa, California. My son just told me that I didn't know until this till right before I came in here that are and fortunately we sold the house a couple of years ago,

but still the memories are gone. Yeah. Well, it's a it's a tragedy that is affecting a lot of people today as we look at images of a completely decimated, uh suburban neighborhood. Thank you, so much for joining us. Charlie Bierman, founder of trim Tabs Asset Management, joining us here after flying from Hawaii. I'm impressed that you came to New York from Hawaii at all. Right now, I want to take a look at who's growing faster. Who is going to grow faster in the next couple of years,

the US, Europe, or Japan. Our next guests thinks that Europe and Japan have the edge on the the US. That would be Ron Sanchez, chief's chief investment strategist at Fiduciary Trust International, which has seventy eight billion dollars in US it's under management and is a private wealth division of Franklin Templeton Investments. Ron, thank you so much for

joining us. Um. I'm looking at the blended average of analyst estimates for GDP in the US versus the Eurozone, and generally economists think that the US is going to grow faster than the euro Zone. In you think they could be wrong? Why? Well, the fundamentals in Europe are quite positive, and even if they don't grow faster than the US, they have the potential to grow for longer. They are definitely on a self sustaining recovery. Growth in

Europe has been meager for five years. They've been rolling in and out of a deck crisis UM. And for the first time they're moving past austerity. And so the fundamentals UM for the economy to have a kind of muddle through, meaning to to in a quarter, are quite compelling. And we think that if we look out over the next couple of years, they can continue to grow at that rate. We are here in the US, we've had

about eight years of an economic recovery. UM. If I look abroad, UM, I think it's it's in the early cycle of an economic recovery. And so from a market perspective, I think there's a greater opportunity for price returns there where their profit margins are half, their return on equity is not quite as strong as the US and UM, and valuations are a little bit lower. So from a market dynamic, UM, I think there continues to be compelling opportunity and certainly in UM that has been the case.

So you say that in Europe they're moving away from austerity, what particularly are you pointing to when you say that? And so they're from a fiscal standpoint, UM, they have UM really tightened up their their budgets in response to the credit crisis. They spent a lot of money in Greece UM, and they haven't really developed pro stimulus UM policies, and fiscal policy actually has been contracting. That's why monetary policy, meaning the European Central Bank UM has set rates at

zero because they haven't really been able to UM. They're trying to offset the lack of fiscal budgetary spending. And I think a lot of those pressures are starting to ease UM. You're seeing a little capital investment come back UM, and I think the prospects are are are quite reasonable in in Europe, and the return profile looks attractive to US. So if you're holding US equities, you should maybe rebalanced and you should add some European equities. What would be

the action that you would take that is correct? And I think what we're experiencing is that investors have become preconditioned for the US. The US has been the best economy since the credit crisis. It went through its banking reforms a lot faster UM. Companies tend to respond quicker here in the US. Interest rates were low, and companies UM in the US have really, really benefited, and again you see that in the return profile. It has been

the strongest return profile. And I think the opportunities for the first time now UM are in global resynchronization outside of the US. But would that I just want to make sure you're not chasing the return, right, I mean, because you know that's always the issue. Right now that everybody knows exactly what it is and it's been articulated as you described, I would be WHOA wait a minute, this is already out there. All the money has already been made. Or is it just the easy money has

been made? I think the easy money has been made UM, But investors should always have a global diversification. They shouldn't rely on one economy, even though are just economy. And so when I look outside the U S, I I think there's a greater trajectory from Europe. If you look at emerging markets, they just emerged from a recession in early sixteen, and so the growth prospects of the emerging market are starting to re accelerate. I wouldn't describe the

economic backdrop as robust anywhere. That's not our central thesis UM, but a broadening out um of and a global resynchronization UM and an increase in trade activity is definitely taking place in and I think the return profile across the board has has started to show that. So when did you shift your thesis and what did you advise clients to do with the mix of their investments as a result, so you started to see UM an improvement in economic

activity UM in the second half of UM. Once commodities started to improve UM, you start a lows in interest rates. We saw a broadening out and that broadening out has continued a little bit of a hiccup around Brexit, but that actually, in hindsight, turned out to be the turning point.

So you haven't changed your thesis since the second quarter of That's right, Well, we continue as we get confirmation of our economic thesis, we continue to increase our allocation outside the U S. So how much have you increased it today for example versus the second quarter of about UM. So we're up to about a blend now of US about seventy of our portfolios from a global perspective, seventy five are in the US, are outside the US and back in the second quarter, and so a meaningful increase.

Can you speak a little bit about Japan obviously outside the United States, but there is a snap election that has been called, and this could throw into question Prime Minister shan Zo Abe's abeamics as well as uh end his role as the leader of Japan. So certainly political uncertainty both here last year in the US. UM, you saw it in France again, we'll we'll see it with Theresa May UM and and here with Abe. UM remains a fair amount of uncertainty. But having said that, UM,

we think he will prevail. UM. He's quite popular there. UM. And at the end of the day, UM, it comes back to the economic fundamentals, and we have six straight quarters of economic growth. I think it's the fastest um and consistent growth they've had in two decades. See, I think we're going to tell me that the Bank of Japan basically owns or sets asset prices because they own so much of the Japanese stock market to exchange traded funds, and they own so much of Japanese government debt the

the price center. That is absolutely correct. They target UM their tenure at zero UM. And we think that when you look around other central banks that have influenced their capital markets, I mean the US has done it. The CB has done it UM, and so has the Bank of Japan UM. And they've done it to a great extent. And not only are they buying US treasury notes, they actually, to your point, are are buying the broader index. And I think they own a fair amount of every major

company Japanese company UM. They want to think up of their five and so the technical support for that market in addition to the econom fundamentals and a return profile that is way less um than than other markets. UM. Again, we think there's opportunities in that in Japan. Just just real quick, I'm wondering. You know, the second quarter of sixteen was before the election in November. Your thesis didn't change after that at all? Did it? No? It did not.

Although we became more encouraged for the prospects for the first time of pro growth policies coming out of Washington, markets have really relied on monetary policy and not fiscal policy, and so we've had a a greater correction around our economic fundamentals, as you well know. In seventeen that has not yet panned out, UM, and there are prospects that maybe an eighteen we start to see some fiscal stimulus, but we're comfortable with the underlying trajectory of the economy.

Ron Sanchez, thank you very much. He is the chief investment strategist Fiduciary Trust International, seventy eight billion dollars in assets under management. It's the private wealth division of Franklin Templeton Investments. All right, let's turn our attention now to another giant consumer products company. This is the real tail, the retailer Walmart. And helping us to understand this is Punamgayal are Bloomberg Intelligence analysts and expert when it comes

to all things retailed. Punam. Uh, you know, we've been hearing this story about how they're going to add a thousand online grocery locations, They're going to open what two and fifty stores outside the United States. Uh, they're gonna buy back twenty billion dollars in shares. Is this first of all? Is this all a done deal? I mean, can they just say they're gonna do this and it's going to happen or is this relying on future results? No?

I think I think what they've said is going to happen, you know, buying back twenty billion dollars in shares is under their control opening stores. I'm assuming they already have Lisa signed, are close to having the locations UM done. And then in terms of growing online sales, forty were sent next year. That could be a wild card, it could be better good reverse, but that's still a pretty aggressive and good number for them to chase UM going

into next year. I'm struck by the cost of all of this, to buy back twenty billion dollars of shares and also to open all of these stores, and also to invest in the distribution software and personnel necessary to really build out that online presence. That's all expensive. Is it going to cut into their earnings more than people are really pricing in right now? No, I don't think so, because a lot of it is coming out of their capex, and their capex has been relatively flat on a dollar

basis um for the past few years. But there are shifts in Quebex. So you heard them say that new store growth next year is going to slow in the US, especially, They're only going to be opening about fifteen supercenters next year, so you know, you know there's money coming out of some places. I'm going into other places. The focus right now is clearly on digital in the US, and um, it needs to be because they need to compete with Amazon.

You mentioned Amazon. The shares that Amazon are taking a hit there down a little bit more than a half a percent right now, three dollars are down more than seven dollars a share. Do you think that in a way Amazon's purchase of Whole Foods has brought on a more direct competition with Walmart in an area that Walmart

is already very good at groceries? You know, yes and no. Keep in mind that Whole Foods only has less than four locations in the US, and they're probably targeted more towards the upper income demographic, whereas Walmart, with thousands of ware of centers in the US, they target kind of everyone and mostly Middle America. So yes, there's some overlap,

but not so much. Still, but I'm struck by Target because Target has been a loser as Walmart has improved its salaries for lower income workers and has expanded more online. Of yet it shares are up a little bit. How does this play into target strategy or is that just a completely separate story. So targets a little different. Um, Walmart more than fifty percent of their revenues come from grocery, where Target is still under So Target is not a

grocery retailer. Grocery helps them bring in traffic, but that's not their main line of business. You know, they're more known for their apparel, their kids, their baby, and their health and wellness. So I think it's a little different. Yes, Target needs to step up. It's offered on grocery and digital to get traffic, which is what everyone in retail is focused on. It's all about traffic, and grocery helps

with traffic. Tell us about this smart card system that came with the Jet dot com three point three billion dollar acquisition that Walmart did. Has to do with the way that you pack your items online and maybe even using a debit card rather than a credit card. Yes, it's interesting. You know, they said they'll move over the next year and a lot of what Jet has in

terms of technology, you know, Walmart will adapt. But essentially, if you're buying let's say multiple items, they can price it, they can pack it, you can choose to pick it up in store, which they'll offer savings on because keep in mind, the last mile is what costs them most in terms of online delivery. Fulfillmon, so just packaging everything

together will help them with the bottom line. Well, I'll just mentioned quickly that, you know, they also said that they're going to hire two thousand what they call category specialists. They're going to oversee all aspects of a particular product line. So if you want to know what the best food plastic food bag is, they're going to have someone there or maybe even you know, treadmills plastic food bags of treadmills expert two thousand people. Foodom Goyle thank you so

much for joining us. Fredom Goyle is a senior analyst in US retailing for our own Bloomberg Intelligence and thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm Pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa Abramo. It's one before the podcast. Ask. You can always catch us worldwide on Blueberg Radio.