Learning to Love Lousy Stocks

banks the first to report. Our guests share their takes, and of course we'll close out the episode with our tradition, the craziest thing I saw in markets this week, So I've got some bad news for you about the crazy things I want again, I don't even have to hear yours. I know. As soon as you said bad news, I knew. I knew that's what you would say. But we'll see about that. Last week you really brought it. We'll see

by at this time. And remember you can always give us a call at our very own Bloomberg Podcast outline. That number is six or six three to four, read for nine zero. Tell us about the craziest things you've seen in Marcus or ask us a question, and maybe we'll even play your message on the show. Yeah, Sarah, as you said, it was quite a busy week UH in newsflow and markets this week. So luckily we have some very great guests to to break it all down

for us. Joining us for the first time on the show is the chief US equity strategists at Credit Swiss, Jonathan Gallup. John, Welcome to the show. Thanks very much, Sarah. Also, it was a big bank earnings week, as you mentioned. I will tell you this, I did not really pay much attention to them. And you know why that is because we have a great guest who's going to tell

you all about them right now. That's right, because our own Bloomberg reporter Lenan Newe UH covers banks very closely, and I figured I just let her read the bank earnings, so I don't have to help, all right, So you're here for right, So John, let's start with you. What are the notes you had out recently? Caught my eye. You're talking about this new product you have at the research desk at Credit Swiss. Let me just read the

introduction to it. UH. Over a hundred fifty years ago, British mathematician Ada Lovelace introduced the world what would later become computer programming. First of all, I did not realize that a hundred and fifty years ago. That's amazing that that was the seeds of computer program and the fact that it was a female mathematician is quite amazing as well, ahead of her times, fascinating. So in her honor, we

introduced ADA, the next generation of factor research. What makes ADA different is the sophistication of her methods and the simplicity of her insights in the market behavior. So you and then you went on to write a big report about some of the findings of this. I'm curious if I'm if I'm a client, is my relationship with Ada basically your reports or is it is there an interface people will be able to use eventually? At this point it's almost a personal relationship. Or what I mean by

that is it depends on what your your take. So the way this whole thing started was that investors were calling and said, I'm an energy investor. I've gotten my calls right on the earnings, i got my call right on the price of oil, and I'm under performing the market. My socks aren't doing what they're supposed to do. What

gives here? And so what we we did is we took factor research and we applied it at the company level to say, what is the market actually rewarding in energy, or in value stocks or in a dividend yield portfolio. And that's what the genesis of this was, and it's the reception has been fantastic. You hinted at what makes you different, and he said the reception has been fantastic. But before we get into some of the more macro findings, uh, the points of what you found with ADA, do you

find that it's difficult? Right now? We've heard time and again that quant investing, factor investing is really difficult. We've seen the likes of a q R cutting some of its workforce. We've seen redemptions from some of the most popular quant funds out there. I mean, how can you actually go about using factors and and do it well. I'm not expecting people to simply say ada, or which is kind of way we talked about it. AID is telling me to be in high dividend yielding stocks. So

that's what I'm gonna do. What it's what it's saying is all us being equal. This is where the market's going to pay you. Here are the companies that are the most levered or most exposed to those characteristics. Now let's start a conversation from these are the high dividend paying stocks within the stable space, the markets rewarding it. Here's why. Now go and start to do your work. So you're starting where the wind is in your sales.

So in in many ways it's it's very different than when you would get from an a q R where they're really depending on using you using them as an example, but they're where they're really depending on the quad to be the portfolio. This is really a tool. One line in this report I really struck home with me is you talk about sector biases. You say sectors are naturally

exposed to specific characteristics. For examples, utilities tend to have higher higher dividend yields in the broad market, and by extension of high dividend yield basket will tend to be overweight utilities. I think this is really important because all throughout last year, you know, when people are rotating from growth to value. You know, as kind of an old man looking at the market, I was gonna, no, they're they're they're rotating out of tech and into banks or

into energy. So I'm curious, like how much of the market's motivations do you think of investors motivations, still cling to those old sort of ideas of I'm going to buy the sector rather than I'm going to buy the factor. Well, you're you're you're actually asking several questions. So let me so so let me let me you know, if we started at the more, maybe you know, the biggest issue is that we have this perception that certain investment characteristics

are good and others are bad. So we like high quality portfolios, we like stocks that don't have a lot of debt, we like stocks with growth and big global footprints. But every one of those characteristics does well or poorly in certain situations. I'll give you an example. Um right now, companies with deteriorating fundamentals that are heavily shorted are outperforming the market. Um And And you wouldn't normally think that

because it would sound like their negative characteristics. And what the key here is is to say, I'm not coming in with any boy. Let me you know, you know, if I have an opinion on what what types of things I think are gonna happen, or if I'm looking at trends, I want to start by saying that I I don't care all I want to do here is make money in the markets. Now tell me what the

best way to do that is. So that phenomenon you just mentioned, is that a function of shortcovering you think, or is it the notion that the economic aid is turning around, gonna start firming up a little bit, or maybe a combination of both. No, No, it's it's the ladder point. And I think that people misss think about. A short company is a company that in some way is broken. It's some hedge funds somewhere things. This is

a company that may go bankrupt. And if the economy is weak, which it was let's say, you know, for the majority of the last eighteen months or so, then a broken company and a weak economy bad news. All of a sudden. If the economy is getting better, they're gonna get pulled away from the precipice and things are gonna get better for them, and they're going to actually improve more than a really healthy company. And this is really frustrating for investors with a quality biased like I

bought the best company. They don't have, you know, dead on their balance sheet. Their businesses run really clean and everything right, and and in improving economy and they're getting less in the dust by this broken company with band management. And that's the whole point. They're bias towards quality is a dangerous bias if it's if it's not put in context. I do want to pick up on a point of one of the questions then, Mike, Yeah, but about the

fact that factors don't necessarily equate to particular sectors. In fact, across sectors you can find different factors, and you have a very interesting chart. And I find it interesting because in my reporting last year about low volatility, people constantly, constantly looked at low volatility and said, well, low volatility is doing well because utilities, real estate, consumer stables are

doing well. But what you actually find is that the areas of low volatility, the pockets of that factor that actually did well, we're in cyclical areas the likes of financials energy. Can you maybe dive a bit deeper into this difference, breakdown the idea that factors aren't just sectors you can't go across. So so, sarahly, one of the things that we that we start with is that we look at the factor or these basically, what's the factor.

It's just companies that are tilted towards a certain behavior, and we we look at them and say, I want to eliminate the sector issues. So if we're looking at low vall as what a low ball banks do compared to high ball banks, what a low vall um staples do compared to you know, other staples. And what we found was is that the area that low Vall did the best in were the most high vall parts of

the market. So so in energy and materials and discretionary in banks, we would say, well, Lovall didn't do well there, but in fact that's where really the juice was on this trade. So yes, utilities and staples and telco's did well. But if you were a professional investor um who was looking at this kind of work, you you would have played it entirely differently. You know, John, when I walked in here, you were going through some charts with Sarah.

I think you predicted the I s M manufacturing could could hit fifty two and a few months and there's a trade involved in that. Yeah. So so here's what here's what the background is that the what we call the I s M is a serving and so they ask a bunch of people who buy equipment for factories that they're purchasing managers and they say, how do you think it's going. Are you seeing demand for equipment? Are you able to get the equipment or the parts that

you need? And from that they derive this score on how good the economy is. And typically what they're reading is lines up pretty well with how the industrial data is coming in, you know, shipments and things like that. And right now the economy is saying that things are okay and the I s M survey is saying things are totally broken. There the gap is about as wide as it's ever been, and so the question is why

and how does that resolve? Because these gaps they're gonna close, either because the economy is going to follow the I s M down and do to poorly, or the I M is magically to go up. The guy who buying the equipment for his factory is totally freaked out by trade issues, so when he's asked, how do you think it's going all these things is I'm never going to

get these parts because they were manufactured in China. So I'm really concerned now that we have this trade deal done, now that we're starting to see a pick up in in in some of the economic data, especially in Europe and China in their domestic economies. My belief in the data says that it's not that the industrial data is gonna get worse. It's that the survey day is going

to get better. And what does that do is it pushes stocks up, and it pushes more cyclical companies, and it pushes lower quality companies like those short um kind of stocks that we're talking about. Those end up bleeding

in that environment. Lennon, I want to bring you in here because we did hear from the likes of the largest US banks, the sleek JPMR Game, Morgan, Stanley, Engleman, stacked Bank of America, you name it um on a macro level to start off, do you get the sense, uh, similar to what Jonathan is saying that the macro outlook is still strong and the consumers still looks strong, at

least from the bank's perspective. Yes, definitely, Sarah. So throughout this whole period when everyone's freaking about and freaking out about trade or recession concerns, and bank CEO's have all been very bullish. They've all talked about the positive US consumer driving a lot of business UM still not really being harmed by all the uncertainties and the macro sort of concerns. So yeah, they've been pretty optimistic and they haven't really turned more pessimistic as a as of this quarter.

One thing I love to look at BANC earnings for is the credit quality trends. Uh, And I don't know, for years now, everyone had and their brother has been predicting, oh, that they're about to turn and they're about the you know, the credit qualities. Yeah, what are you saying? As far as you know, delinquencies and that sort of thing, it's still very good credit quality UM, not a huge deterioration.

We are looking at those very closely. At Bank of America, the consumer business started to do a little bit worse, but that's not really a credit issue. It's more that they're earning less because of interest rate cuts by the FED. So we're keeping an eye on it, but so far they've done pretty well with credit. Just a quick question as because we've been we do a lot of work

looking at UM earnings data cross banks. But if you break the banks into two groups, which is the big money center banks and then the regional banks, and putting aside some company specific issues, but the big money center banks to Wall Street banks are expected to deliver much much better results and the regional banks UM not as much. Any thoughts on what's causing those those differences and how that plays out, the big banks would be so happy that you said that. So I think a lot of

it comes down to digital and to technology. The big banks have a lot of money to spend on these tools. They have a lot of money to really dive into that digital mobile app stuff, and so they're really making the bank much more efficient. They're making sure that consumers don't call, you know, a phone line to ask for their balance and instead or doing everything by phone, um, you know, by their mobile app. And so they're really pushing into a lot of efficiency because they can make

that investment in technology. So I would have guessed the interest rate scenario is part of it too. You know, your regional banks are more sort of saving loan type of businesses and and the big ones are more diversified. Is that m I just definitely more diversified, and UM for now have not seen a massive impact from the

fed's rate cuts, but that's coming well. You also even just look at this past quarter, for example, and you saw such a major boost from trading desks at the major banks, which isn't necessarily something that your regional banks would be doing either. Right, No, And we've been talking a long time about the structural decline in trading and whether you know this is just a trend that's going to keep continuing. But the fick trader has got to break this quarter. So bond traders, let me just give

you a few metrics here. JP Morgan came in a billion dollars higher than analysts predicted, Goldman Sacks six, Surgeon fictuating um and Morgan Stanley more than doubled from a year earlier. So that's a huge easy comparison to eighteen right. I mean the narrative then was that all the clients were sitting on their hands, not trading anything. Does it looked like the world was ending? Yeah, And now they've run to the other side of the boat and they said, oh,

everything's fine. Trade, it's going to be worked out, and so let's trade. Let's do a lot of business. Let's trade a lot of bonds, rates, mortgages. John, I'm gonna packing about five questions off of what well, non just had to say, all right, so you ready want to take notes like you know, you see pal take notes in the Nope. But I I wonder if you do buy into that notion that credits sort of leads the the equity market. Um, it's one of these common tropes

you hear all the time. I'm curious if it's it's one that's worth believing, and if so, sort of where do you look first for that deterioration? You know, is it in the consumer end? When if you start to see Joba's claims pick up? Is it sort of something that you just can't predict? Uh, you're right. You asked

five questions. But so if you said let me, let me, let me so, let me go and reframe it into the question I want to answer, which is i've intermedia trading, so but the you know so you're not and pivot so but the um, the question is what would basically make things deteriorate from here? What what can go wrong that we're problematic? And I think that there's two things

and we're seeing neither one of them. But the first thing is is that everyone's assuming right now that inflation will not be a problem over the next year, and that even though we have a tight labor market, and even though we're probably going to see an incremental pickup and inflation, it's gonna be nothing, which is going to freak the fat out a really spooked market. Now, if you ask me whether I agree with that consensus view, sometimes I do. I don't, but right now I absolutely do.

I think that we're it's going to stay contained and that's gonna be really healthy. The second issue is if you look at and there's two different kinds of jobs data. There's are we hiring people and are we firing people? We care about both, but we really care about the fires um. And so what we're seeing is the weekly jobless claims, which is that read just keeps getting lower and lower, and all indications are that that it's going

to stay healthy. But if that turned, it's you know, if we look at the two things that typically tell you this there's a real problem. The first one everybody focuses on is the yel curve, and we talked about that last year quite a bit, but probably the one that's more important. If you see the weekly jobless claims kind of spike up, watch out, that's a problem. But right now we're not seeing that. So those are the

things that matter. You know. It's funny about inflation. I I everyone came out saying, oh, this was a weaker than expected CPI report this week. Of course CPI was still two point three percent, you know. Um, So I wonder if part of it is that everyone has sort of recalibrated their expectations of the Fed to some degree, the symmetry of that target that U they will allow

to run a little hot. And I know they look at PC more than than c p I, but they will, you know, allow a breach of two percent, maybe a little higher than what people have previous previously expected. Well if if if first of all, as you said, you know, PC is is what the Fed looks at. And for those people here don't like follow the jargon on what's PC and c p I. So you go to the grocery store and you realize that butter is doubled in price, So you know, is that inflation? It is if you

actually buy butter at twice the price. But if you do what most of us do, would say, wow, but it is expensive. I'll buy olive oil, which has not gone up in price, Then you actually you didn't experience any inflation. You substitute things out and and so there's if you look at it in that context, which is overall, am I paying more money when I go to the grocery store to get the groceries that I need? That

number is still a really low number. And the FED if they say not that the two percent, and we think that two percent is a ceiling, it's not. If it's kind of a central tendency or or you know your target, then we we were not even close to two let alone that being an average over over purity of years. So there's really at this point not a lot of threat, even though some of these readings are

tipping up a little bit. All right. So if we set the backdrop based on this conversation we're having, the economy is healthy, turning to the upside, Inflation is muted, interest rates are low. So at the end of last year, as we were discussing earlier, we saw the value trade take off. This year so far it's been completely squashed. It's as if we're back to the beginning of Bigger

is better. You see the things doing well, Apple doing well from your point of view, especially using the technology that you guys have been using to dissect all of this is the value trade? Over? Can you know yet? And if not, where can you squeeze some more juice out of it? Right? So I think that there So I think there's there's two issues here. Um, when you call it the value trade, you're kind of taking a

whole bunch of things and you're squishing into value. So so so if you said our low pe stocks that that under are formed by ten percent over the less you know, let's say year to eighteen months that have jumped in the fourth quarter by roughly ten percent, is that part of the trade mostly over? I think the

answers yes. However, if you look at the same issue with small caps, it looks like they have a lot more room to run if you look at non US companies, so Europe relative to the US more to run, emerging markets more to run. Um, So you almost need to not you almost you absolutely need to look at this in more more individual slices because they're not all the same. But in terms of how long does this continue to go for our take is probably something in the three

to six months range. This is not a new world where where the economy is gonna take off, and and and the like. This is a near term trade. It's a bounce. If you're a stock trader, this is super important. If you're a long term investor, probably less. So, you know, I think one consensus or near consensus from a lot of the sort of look ahead pieces I read at the end of the year from people like you was uh uh, And I'm not sure if you came out

and said this yourself. But then the numbers kind of imply that valuation expansion was a big story last year. From the next level. Not a lot of people expect more expansion and ps this year. Um from the macro level. Is there a chance of that surprising people? You know? Is that is and is a trade deal kind of

a catalyst for for some more frauthy valuations. So one of the things that we try to do is to to take what we call the consensus narrative, this thing that we all believe not because we actually ran the numbers, but because it sounds large. So the market was up twenty nine and a half percent last year, you had, dividends is up thirty one and a half. Stocks must be expensive, and we do know in that environment we actually had near zero EPs growth, so obviously something was

going on. However, if you if you look, what really happened was you had a really horrible fourth quarter of eighteen and the majority of last year's return was simply reversing the fourth quarter. So if you instead looked at eighteen and nineteen combined, what you actually found was the entire market run over the two years was driven by earnings,

and multiples are actually were down a tiny bit. Now, if you look at that really great return that you had over eighteen and nineteen coming from earnings, about of it was there'll maybe a little less than fifty, but about it was from the tax cuts, which is not gonna repeat itself. So if you take out the tax cuts, you're left with something which was like five percent a year on earnings. So it's so I think that people

are misframing it because it's convenient to do. Now if you if you look at why, and we we believe actually the multiples are going to drift, not immediately but over twenty Right now, at forward, PE is about eighteen. And the reason is, first of all, interest rates are super low, and the second thing is that companies are

returning a crazy amount of cash back to shareholders. What they're being rewarded for is not hoarding the money and making bad investments with it, but simply returning it back. And I think that that many are making mistake to be concerned that higher than average multiples does not mean that they can't go higher anyway, right, right, Yeah, The valuations don't ever sort of bring the top of the market.

I guess, yeah. I mean, there's going to come a certain level that you're gonna say, listen, I'm just uncomfortable with this. But if normally p's running fifteen and now they're running at eighteen, but companies are returning twice as much capital and interest rates are half the level, I just I just think that we're really far away from where multiples are going. Can I make a point on tax cuts? Also? One of our colleagues wrote a great story about how the bank's got eighteen billion in tax

cuts from the Trump tax plan last year. Pretty amazing. So do we know how that Well, obviously it would have helped profits, but and so now the total effect is thirty two billion tax for the big experience. Speaking of benefits to banks, I do just want to get your take because something that was very noticeable this week while we were awaiting the signing of the Phase one trade deal between the U S and China UH and President Trump was running through the role call of everyone

who was at the event to witness the signing. There are a lot of big bank executives. There are a lot, at least a lot of people in the financial services industry. So I want to get your take. Is there something about the trade deal that is supposed to really help or will it actually benefit the financial services industry. Yeah, it was a funny moment when Trump asked or said that the banks should say thank you to him. He

was speaking to a JP Morgan executive. That was hilarious. Um. Yeah, I mean the banks are all very keen to get bigger in China. UM. Golden Sact prior to the trade deal was already saying that it wanted to double its amount of staffing in China. The question now is whether they can deepen their impact because they already have to

have these kind of JV structures. So if you were in a j j V with a big American bank, which is just be like okay, fine, I'll sell everything and you can take over you know that that's a negotiation. Theoretically they can now have a wholly owned subsidiary exactly. And so the question is whether the partners are actually going to be okay with that, whether the banks can kind of you know, broaden or widen their steak in some of these entities. So does the partnership kind of

get gained them entrance into the exactly. There is something to be said for a local partnership because it gives you local trust and a name brand and something that you can kind of get your toll holding. So our Chinese consumer is going to be happy with, you know, Golden sax brand or do they want a local firm that kind of opens the door. Maybe they buy one

percent and go Yeah. It reminds me see, and I'm sure that everyone is kind of looking at their looking at their businesses and figuring out what to do, trying to start those negotiations because now it's green light. I think that's our green light for the craziest thing of the week. John's impressed with that, Segway, I can tell

every because he said media training. He knows all right, lad Lot already told me that her craziest thing is one of her own stories, which I'll allow so self serving, but I gotta do it because this story really touched a nerve. I wrote a story about how Wall Street's bonus culture is dying because of the quants, right, because

you're catering to quant clients, I'm sure. And so these days, you know, the quantz and the robots and automation doing much more of the work that the traditional old school trader used to do. And so that kind of means that cost pressure and team team dynamics now are really important rather than just the one trader saying I'm gonna make a big bet and I'm gonna make tons of money. Um. Really touched a nerve. Got a lot of reader emails lamenting the good old days, saying, oh no, I need

to go and take a coding class. Um. So that was that was the craziest thing. I just didn't I didn't anticipate this type of reaction that people really, you know, unleash. They're kind of angst on me after I I think when you're telling someone, uh that part of their job or part of their pay is that threat, um, they might not be too happy with you. They were not

happy alright, sir, can you beat that? Alright? So this week I'm leaning back on just some of the old classics because how could I not If you look at shares of Tesla or you look at shares of Beyond Meat this year, it's really just unbelievable. So shares a Beyond Meat up about fifty this year, shares of Tesla up about year to date um. And these are companies that had had some struggles a couple of months back up,

but now they're back and they're very hot. And yes there has been news flow to help these gains, uh and kind of inspire these games. But at the same time, just the sheer strength of what we've seen has been pretty crazy. Yeah, they're just classics that you can run with Johnna. They tell you about our gibbick. Here the craziest thing we saw in markets this week, well, I'll wing it. Um. We we didn't analysis of the fourth

quarter expected earnings. This is just consensus um expectations and for the fourth quarter and then all of and the expectation is that is going to be a massive rebound. And everyone kind of wrote off the the earning story because you had no earnings to speak of in and what the um and and so, first to your point on trade, the biggest um changes those SMP companies that are doing the majority of their business outside of the US. The numbers are like double digit growth expectations for for

UH for next year. However, the current quarter is going to see none of that because we are still seeing and you talked about things being good in the banks, but the industrial companies and the material companies and the energy companies, um and and even some of the big tech companies are really expect expected to have a week quarter. So this is going to be a you know, surprisingly week quarter with unbelieve probably strong expectations for next year.

And what I'm hearing when I talk to investors is they're struggling with buying into this story. They want to believe things are going to get better, but they're hugely skeptical, which to me is actually an opportunity. So you think, is it possible we actually see double digit earnings growth for the benchmark this year? No, you're not gonna see

for that. You're not gonna be double digit for the bench book, but you will see is so take energy for example, it's abtracted like two from earnings last year for the whole SMB and had a horrible number. It's going to have super easy comps. So Energy is gonna put up in a relative growth rate compared to the

prior year huge numbers. The big tech companies um that we're faced with either a semiconductor cycle or internet issues, had really huge margin pressures and costs in and so they're set up to put up really really big relative gains in the year. So the delta on this is going to be Energy, megacap tech are going to be just They're They're going to be double digit winners. And I think that there's this skepticism of people buying into that success plenty. All right, Mike, you talked to big games.

Now time for the winning entry and the craziest thing. Well, first, before I get to that, let me start with a friend of mine texted me with his entry. Uh. He worn though that I can't think of a market angle on this one. So maybe, uh, if if anyone always have a friend who calls in with but so if anyone, if anyone can think of a market angle for this story, it is crazy. Yeah, but called the hotline if you got a market angle. But it's a man. This says a story from the Des Moines Register. I think I

saw a few other places too. Man going through a nasty divorce with his wife. He uh petitioned the judge uh to do it by trial by combat. He basically wants to have a sword fight with his wife. And according to this guy, trial by combat has never officially been outlawed. You can still requested. I don't know. I think he's watching too much Game of Thrones. I think their friend wins, so the market I go first. I allow him to win if we can, going back before duels.

He's going way way back trading by combat. But here's here's my craziest thing of the week, courtesy of the Coin Desk website via the Money Stuff newsletter, which I find a lot of crazy things, and some people have launched a new cryptocurrency backed by tins of sardines. First, the reporter, I think thought it was a joke because it's UH mentioned April one in the in the White paper about it. But no, this is the real thing, and I looked it up. I did some research, and

by that I mean I googled sardine vintage sardines. Apparently John sardines are an appreciating asset. There are some aficionados, aficionados if you follow me. Yeah, it's like sardines appreciate they taste better after a few years, tins of sardines appreciating value like a fine wine. I know it sounds crazy until when and um, I don't know. It's it's

got to be an ex expiration day. But so this cryptocurrency would buy tens of sardines swore them, and that's that's what underpins the value that it actually might be the first cryptocurrency that makes sense to me too. Sadly, Look, I'm going to say that as crazy, but considering the fact that when we first started this podcast you flat out said to me we cannot talk about crypto, I think you might be disqualified. We've already broken the role

many times there you're a sardina aficionado. But with that said, Jonathan golob Lynn and New and thank you so much for joining us today. Thank you what goes up. We'll be back next week. Until then, you can find us on the Bluebog Terminal website and app or wherever you get your podcasts. We'd love it if you took the time to rate interview the show on Apple Podcast. Some more listeners can find us, and you can find us on Twitter. Follow me at at Sarah Ponzeck. Mike is

a Reaganonymous our guest. Lenan Newen is at Lenan T. Newen. You can also follow Bloomberg Podcasts at podcast. What Goes Up is produced by topor Foreheads and edited by Darrell Dillard. The head of Bloomberg Podcast is Francesco Levie. Thanks for listening, See you next time.