Bankers on the Frontlines

insurance in the last week, a record by far. While markets remain volatile, resiliency has remained, and that too as oil prices fell to the lowest since two thousand and one. You know, and Sarah, I feel like we jinxed it by having the Craziest Thing we Saw in Markets on this show, because now all of a sudden, we're almost year into the show, and I feel like everything in

markets is crazy. It's it's all. We should have just named the podcast the Craziest Things we Saw in Markets this week, and then it could just be a general market recap. What do you think maybe we should have Although we also did get someone we officially launched the

podcast with the name What Goes Up? They said, you know, you're just waiting for what goes down to happen to then, yeah, that might that might have by the jinxta too, Sarah, before we start talking about the markets and get into and introduced our guests, I'm curious what life is like for you. You've been quarantined there in Manhattan for the duration of this virus. I I stopped going into New

York City round March twelve. I never thought i'd i'd ever missed that daily commute from New Jersey, but sure enough, Uh, strangely, I'm beginning to miss it. But I'm wondering. You know, we have listeners around the world on this podcast. I'm sure a lot of people are as curious as I am as far as what's just what's life like in

Manhattan right now? In this situation. You know, it's really strange, especially for the city, and it's it's really quiet, which when you think of Manhattan obvious so you don't think quiet. But if I were to go to my window right now and just look outside, I likely wouldn't see a single soul. I mean, I try to get outside every now and then to go on walks, but keep my distance. But you can pretty much walk in the middle of the street. There's hardly any cars around, um, which is

so strange to say. Usually you would see taxis, there'll be plenty of traffic. Now you're walking in the middle of the street to keep your six feet distance. But yeah, it's just there's an eerie feel. Especially it rained a lot this week, so it was particularly eerie because there was no one around and it was just gray and rainy. Um. But it's definitely strange. It doesn't it doesn't feel like

the city. It's such a weird phenomenon. You have these markets in just this spasm of turmoil, and your New York City is quieter than it's ever been. It's just a very surreal experience all around. It's it's weird still being here. I can promise you that. Well, let's get right to the markets then, and UM happy to introduce a new guest, first time on the show. Her name is Diane Jaffee. She is a senior portfolio manager at TCW. Diane, welcome to the show. Thank you, grilled to be here.

And I don't know where you're quarantining. Maybe you're in the city too or not anymore. I was there with Sarah for a while, but now we're in Thermon, Vermont. I think Vermont would be one of my top choices to uh to quarantine and get some fresh air and uh blue skies and everything. So good wise choice, social distance all the time in vermach nothing's changed. It comes natural, especially if you tell them you're from New Jersey. They keep their distance. I've I've learned in But Diane, let's

talk about these crazy markets. Because I know you're a value focused investor. You your senior portfolio manager at tc W. You manage several funds or at least on the management committee of several um But I I gotta say I've been doing this for many years now. I won't tell everyone how many. I like to keep the illusion that I'm a young, hip her. But I don't think I've ever seen anything like this as far as just the complete unknowns about what the earnings outlook is, what the

GDP outlook is? UH. And I know you focus a lot on dividends and dividend growth. What the you know where the stable dividends are going to come from? Who's going to cut their dividends? So I guess you know, to make a long question very short, like how do you do your job in this environment when there's so many unknowns. Well, Luckily, I have a great team of analysts who work with me. We have the largest internal research team on the equity side at TCW, with six

dedicated analysts. And I'm proud to say that our strategies are going to hit their twenty five year GIFTS compliant track record this month of April. So um that you know. So we've been through a lot of cycles together. We've worked together for eight team years on average. But you're right, this is different. This is a pandemic and um, and you can get bits and pieces of inform Asian if you go to Stars back in two thousand and three

or a bowla and two thousand and eighteen. But um, really we haven't seen anything like this for over a hundred years back to night. It really is unbelievable. And you shared a timeline with us in the notes, and

I thought it was really great. It's a stylized timeline, and essentially what you did was you lay out the months and you lay out at different areas of where we have passed and what we are looking forward to, so as what we have passed or in the midst of some are consumer panic and social distancing, US cases, Peak, policymakers Act, which have all happened. Now where you say the next test of the market is that's earnings downgrades because even when we look at bottoms up analysts estimates,

they haven't really haven't been able to keep up. Right now, they're only estimating pretty much a modest decline in earnings for the year. I mean, what are you guys expecting once we potentially do see the is flowing in or once earning season does start in a few weeks, what do you expect and how do you expect the market to take that? Yeah, I think there will definitely be a real test of the market bottom we saw in the last week of March. I'd like to source a

fund Strett. You know, they provided that graphic, which is great and I think it does help give a realistic picture within days or weeks of what we can anticipate.

But earning season, we'll start with the big banks. They're on the front lines of this and um and it gives me a lot of comfort just to know that this economic backbone of the economy is really in a good place right now, you know, much different than it was in two thousand and eight, we've been stress tests, we've been steacard, we've been defast and so they're they're really going to be the front lines here in terms of the conduit for the Treasury and the Fed to

reach out to businesses, to reach out to lenders, to reach out to borrowers, um, and so it will be very telling what the banks say. Where do dividends and by backs typically fit into your investment process? Goldman Sacks had an analysis out saying that already this year we've seen roughly a quarter of the amount of by bucks we saw last year already pulled by companies. I mean, is this disheartening to you, guys, or do you feel

as though that's okay? Because companies have to allocate cash where necessary at this point in time, or maybe keep

more cash on their balance sheets. I think, um that I'm a big fan of dividends because it not only says that the there's good stewardship by the management teams of those companies saying, Okay, we've already fulfilled what we need to do for capex or you growth opportunities, and so we're returning cash to our shareholders in the form of dividends, and no entity likes to cut or suspend dividends,

so they have to think long and hard. In fact, said the other day that you know, even before the coronavirus, they were contemplating any kind of black swan event to make sure that those dividends were safe. So, for US, dividends are one of our five valuation factors. We look at price to book, price to cash flow, price to sales, price to earnings ratio, and dividend yields, and we particularly

like it when those dividends can grow over time. UM So buy backs, you know, I think you have to be very careful with them because you know, all those buybacks companies made last year or in January February this year, it looked pretty poor investments. And I don't want of the strategies at TCW is a dividend appreciation fund. And I just have to assume that the universe of companies that are going to be able to increase their dividends, uh this year, maybe even next year, just it's call

it the near future. It must be a very swiftly shrinking universe. I mean, where could one possibly look for sort of a dividend aristocrat in this scenario, a company that is able going to have the strength to be able to increase its dividend. I mean, am I right? That that's that's almost a very much a dying breed right now right there. Definitely know IBM right has famous stalwart provider of dividends. That's a big holding for us UM.

You know, our goal is to give our clients a diversified value portfolio that has capital return plus dividend appreciation. So uh, right now are yields in the dividend appreciation they're higher than SMP and the Russell one thousand value. We do have to be super careful about UM finding

the companies that can. Definitely, Chevron won't increase its dividend, right They've already said that, but they're doing everything to preserve their dividend and UM and that's important to us that they've been disciplined for the last five years or so that when we do have a pandemic, they are able to continue to provide their shareholders with their dividends. So dividends sanctity as well as the appreciation is going

to matter now going forward. Earlier on in the show, Diane, you said that you believe that what we would likely retest the lows that we saw back in March in the market. And I bring this up because you guys are in a survey and in the survey, seventy of respondent said that they believe that what we're seeing now and what we saw particularly last week is a bear market rally and will likely retest the lows. Why are you so sure or why do you believe that we

will retest the lows? And why do you think so many people out there believe the same as well. It's like Warren Buffett said that when the tide goes out, you can see who's wearing their bathing suits. And that's what's going to happen with earning suitis right? You know? You might think this company that you own, um, you know, has the balance sheet and income statement to uh persevere through this environment, and then reality hits like a pie

of face. So um, that's why earning season will be so super important because while we won't have a full quarter, test will have um, you know, the latter half of March for fiscal year quarterly earnings report, but we certainly will start to hear company guidance and and I think that's when reality will hit. Yeah, diet, I wanted to bring up a good question from a listener on Twitter,

UH and see what your thoughts are. His handle is at j y Squall, and he said, I'm watching for this week's episode to understand how can the market be up when the jobless claims are skyrocketing? Now, specifically, I think I can answer his question for that day. He he wrote to us on Thursday, when President Trump had tweeted about his hopes for Saudi Arabia and Russia to UH cut oil production to to bolster that market. And I think that was a big part of that bounce

that day. It's sort of faded as the day went on, as people realized maybe this was a little bit of wishful thinking on the presence part. But in the bigger scheme of things, you know, we you see these ferocious rebounds in the middle of bear markets like we saw in fact, you know, the Dow was technically in a in a bull market that, like like Sarah wrote about, up off its lows. I'm just trying to figure out if you have any sense of who does the buying

at that point. I mean to me, it's almost as if traders understand sort of the playbook for a bear market, that you get these huge bounces in the middle of a market that is in the longer term trending downward. I mean, do you think it's as simple as that, sort of these fast twitch traders that that sort of take command of the market at times like this when real fundamental investors may be still on the sidelines more or less, there is a lot of cash on the sidelines.

Still surprising to me actually, um, considering how long and far the school market was. But you know, everyone likes to look in the rear view mirror in two thousand and eight, two thousand and nine were so horrible that a lot of people kept cash on the sidelines. What's um making it very difficult for investors in the in the here and now is that for the last thirty days or so, the stock moves have been plus or minus five percent. That's on heard of. That's an unprecedented

type of alatility. We're a big believer in dollar cost averaging. Uh. If we have found great opportunities in the market because of this set off, and you think the catalysts there for the future, we wouldn't go full out and buy the biggest position UM we would normally hold in the portfolio. I think this is a really good strategy for all investors. You know, leg into the position, um, because tomorrow maybe

down or tomorrow might be up. So UM, i'd like to I'd like to offer that really time tested advice. And UM, yeah, this is once we once we there are two hundred and sixties seven drugs in trial right now, whether to ameliorate or be a potential vaccine for the coronavirus. Something is going to work. You know, they're they're making do with antibiotics or old malaria UM drugs that are on the shelf that they're trying to dust off. But

we're going to find something. And this volatility is because people just don't now and we do need some some hope and resolution in terms of the disease to help us look forward for the longer term. But I will say, in terms of your comment about you know, how could the market be up when John was claims are so high. The market is an anticipatory animal and we like to

look forward. UM. I don't think anybody thinks this is going to be the peak in the job was claims Um but the markets will advance, uh when they can see beyond that, and that's super important. Over the next six to twelve months. Investors are looking at far out. So you mentioned dollar cost averaging, so you can spread

it out. But of course timing the market is virtually impossible, even for some of the biggest professionals out there, but for those who are dying to try to figure out if the bottom has passed, when one is best to get in. Is it typically better to be earlier or is it typically better to be late and be sure at least that we're headed on the way up and things are ameliorating or getting better. That is the age old question. I have so many clients who who who

think you know exactly you know? Should I be earlier? Should I wake till everything is good? And what happens is if you wait till everything is great, then you're afraid to invest because you think he's peaked. So you know value you know, and particularly are so we do tend to be early. But I do, like, I really do love the idea of dollar cost averaging in that's amazing. You said two hundred and sixties. Some drugs are in trial right now for something either too as a vaccine.

I guess we were to treat the symptoms of the virus. It's amazing, isn't it brings me? Brings me uh to uh point you made in this note uh opportunistic realization of profits uh meaning you know, selling your your winners when they've when they've may be gone a little too far where you've at least you know, been able to ride them a long time. And you you mentioned Jilliad, the stock appreciated because of its has this army of anti viral medications uh potentially to use in the fighting

assist fires. I've noticed. I mean, it seems like there's been in the midst of all this panic selling, there's been almost um an irrational exuberance towards some of these drug stocks. You know, I remember the Maderna Pharmaceuticals, very small, uh drug developer. Is that part of it with with why you you may have trimmed some of the Giliad steak? Is it? Are people just getting a little too excited

about some of these drug makers? Do you think, well, we still like the valuation of Gilead and um and you do you know, I'd like to think that investors when looking for companies that might be winners here in the event against COVID nineteen. When they saw that gilly I could be one of the winners and then looked at their batton sheet and their cash flow statement said oh, well, that's a juicy dividend that I can feel quite confident about. That. It was a key prompt thought process for them in

terms of um, Gillia as a stock in the portfolio. Um, but it did run up a little bit. And um and while they do have an army avantiid their old drugs, and that's you know, one of them, for example, help cure help, see right, help, it's helping to eradicated, which is amazing. Um. You know, we did get a little worried that if there were too many hopes pinned from Disappear, which is the one that is being tested in China and in the US right now, that there might be

a near term self. And one of our disciplines is if stock appreciates above five per cent in the portfolio, we're automatically going to scale it back because we don't want any name to be too big. That's interesting, So yet you have a five percent cap on on any single holding in the portfolio. Yeah, it's just it's proven to be a good one. Yeah. Well, Mike, some would say that certainly, as you alluded to that some of these moves in the healthcare names are or have been

a bit crazy. So you know what time it is, then, I guess it's that time. Um, Sarah, we got a great uh call over the podcast hotline. For once in my life, I have the number handy, so I'll take the pressure off of you the only time, Mike. This is the only time I haven't never had. So the number is six four six three to four three four nine. Oh. So please, if you saw something crazy in the markets, give us a call, leave us a voicemail and maybe

we'll play your voicemail on the show. And if you have any other comments, Uh, we're happy to be very happy to hear from you. But we got a call all the way from Hong Kong a listener named Gerald, So let's listen to what he had to say. Hi, I'm going to cheat just a little bit, you know, like Mike. First, what I saw was a webcast from

a Tree Capital. In it, their co founder Howard Marks mentioned a memo he wrote twenty years ago with a quote that says you cannot predict the nixt recession or the next market sell off, but you can prepare for it, so for a wisdom as usual. Then the crazy part hits me. Just three months ago, when fund managers were

making theasts. How many times have you heard some very smart, very respectable managers say that although the market is richly valued, they could see absolutely no reason for a recession in the next six to twelve months. I may have heard this a dozen times on various podcasts, and I at every time there was no argument from me. These are smart and successful investment professionals. But that was just three months ago. It is crazy how things can change on

a dime like that. How far in the future can we really see? Yeah, I think he makes a great point. You think of all those look ahead uh forecast pieces that people spent countless hours on and you know about a month end of the year, they're all sort of null and void. What do you take exception, Sarah with him saying I cheat a little bit. I thought you were going to say, that's what you agreed with. He was calling you out. But it does remind me of one line, I won't I won't call the shop out.

But there was one line I read earlier this year that said, maybe the best reason to be bullish is the fact that there's no reason to be bearished. And then you have all of this evolve and it just goes to show really it's nothing anyone could have predicted, right right, Yeah, Diane, I'm wondering how you handle something like that. I mean, it feels like not so long ago, everyone had to be a European political science expert to

get through the debt crisis, you know. Then we were all became sort of oil field experts and credit oil credit experts, and then Iranian experts and US trying to trade experts. But I gotta say having to become a an expert on viruses is something new. Was It must get overwhelming as a fund manager to try to have to react to crisis after crisis like this, especially when so many of them turned out to be sort of false alarms, and then all of a sudden you get

hit by something like this. I mean, is this this must have been one of the more stressful episodes of your career. I would imagine, Well, I care deeply about our clients and my most important job and we have a lot of dear friends in Hong Kong. My most important job is really to hold their hands during this time and say, you know, let's you know, we're going to be vigilant here. We're coming through the portfolio. We're doing it for you. We're going to lead out the

names that should be leaded out in mature. We're investing in the ones that will prosper for you and have power for you and your portfolio going forward. So that surprisingly um comes to be called upon more often than not, the job of saying this is our job, this is what we love to do, and we love to take care of you. You know, trust us. We're going to guide you through this and come out the other side for your investment portfolio. Okay, Diana, I just hope you're

washing your hands after you're holding all those hands. Right, sir, what's the craziest thing you saw in markets this week? So my goes back to what we are discussing as it relates to earning seasons. So Jonathan Golf, who had on the podcast a while back from Credit Sweeze, he had a statistic saying that last week, seventeen percent of analysts revised their estimates, So that's actually a lot. That would amount to about four times of arder or fifteen

times a year, So it's very high. But it's the problem is, and what's crazy is it's just not fast enough. Still. Estimates continue to be stale, and it seems as though bottoms up sells size. Analysts just can't keep up with the news flow or even just try to figure out what companies are going to go about reporting. So it's just pretty crazy because we're heading into this earning season and we don't really have a consensus for the market

to base anything off of. I agree, I and I read that story of yours certain In fact, I quoted it on the Tom Keans radio show to think you show you how how much I'm paying attention there, and that is It's true. Though you think in a normal world you would think seventeen percent of earnings estimates were changed. It sounds like a massive number, but it seems low in this environment. You know, it seems like every single estimate out there should be changed. It's crazy, Diane, have

you seen anything crazy in markets this week? I know it was a pretty calm week. Well, we've got two conflicting stories. Will there be uh, because of cohabitation and self quarantine me with your significant other, Will there be a baby boom? Um or countered by you know, post the major quarantine process in China. Is there going to

be a spike in divorce rates? And there was a Bloomberg article that said, um, and you know it's from China, so you know, we're not sure, but that that divorce rates are picking up steadily and um and that maybe, uh, they're going to put some laws into place. They have a third day cooling off terry when they go back to work and maybe say, oh, well, it wasn't so bad. It's it's crazy how it's changing everything in society, like stuff like that. You would never think, you know, it

would have that big an effect. That reminds me sort of another crazy thing we had offered to us from our our friend Ben Emmons at Medley Global Advisors. He pointed out that Bloomberg story mentioning and Diane, you remind ided me of this talking about a baby boom. But he pointed out the story that there is a shortage of condoms in the world. I guess because because the raw materials are being used for for the gloves so, um, maybe maybe that baby boom is not not such a

wild idea. It sounds crazy, but Diane, I'm actually curious. I mean, people think about demographics. When you think about long term investing opportunities. If you think of the possibility for a baby boom, could you imagine anyone out there maybe betting on that or investing based on the possibility

of a baby boom coming forwards? Of course, you know, for nine eleven, there was some thought that maybe that tragedy, that horrific tragedy, would cause people to think about and then we didn't see, we didn't see much of a

baby boom. But when it's from that, but when it's a prolonged period of cohabitation, and um, I think I think that it would be surprising to see people either duck pets or decided to have a family and um, you know, one of them into our portfolios Propter and gamble and certainly Pampers you know, might be right there you go, it's you know, I actually did predict a baby boom on Twitter early on in this and I was joking, but I'm gonna resend the joking part of it.

I'm now now I'm going to say that was a serious It was very early to Mike in case anyone that was a serious prediction, not a joke. I'm going on the record train. All right. Well, I'll end it with the craziest thing I saw. And God bless the New York Post. Whenever I think I've run out of crazy things in the markets, they're they're They're always there for me. Uh and Sarah. This is interesting for two reasons. Obviously, like yourself, everyone is supposed to be staying in their

apartments in New York. You're not supposed to be going out. Um, but you're familiar with the famous statue on Wall Street of the charging bowl. It's called everyone knows that famous iconic at you. Well, I'm gonta left. The New York Post take it away here with their headline nude woman ignores coronavirus warnings to straddle the charging bull statue. Did you see that? So this the snaked woman decided to go and jump on the back of the charging bull statue.

This is really sanitary, I know, and I guess it. Look there's no one around, I mean no one's probably touched the bull in in days. I will say she wasn't completely nude though. I I researched this. I looked at the pictures. She had a cowboy had on and some New York fashion, yeah, some kind of bandanna around her face. And this being the New York Post, you didn't get just one picture. You got a full five picture photo essay of this incident. Um And as the

Post points out, I am cheating a little bit. The guy in Hong Kong's right, I'm cheating a little bit because this was actually last week, but it was wasn't published until after we UH published the podcast. So I feel like I'm in the clear there. And where's the connection to markets? Mike, I get the charging, but well

here it is. Here it is, And I'll just let you make your own conclusion based on the final sentence of the New York Post story, which says the unsanitary stunt came as US stocks rallied for a third straight day with the DAL finishing up and fifty two points. There's a connection, so they might want to get her back out there. I don't know. I'm just just just in case that's hysterical. All right, Well, I'm sure going forwards there will be up plenty more for us to

choose from and to include. But Diane JOFFI, thank you so much for joining the show this week. Thank you guys, it was really a lot of fun What Goes Up. We'll be back next week. Until then, you can find us on the Blueberg Terminal website and app or ever you get your podcasts. We'd love it if you took the time to rate interview the show on Apple podcast so more listeners can find us. And you can find us on Twitter, follow me at Sara Ponzach and Mike

Is at Reunonymous. You can also follow Bloomberg Podcasts at Podcasts. What Goes Up is produced by Topur Forehead. The head of Bloomberg podcast is Francesca Levie. Thanks for listening, See you next time.