Tesla and AOL

market action hasn't seemed to have slowed one bit. At the same time, this past week, the cyclical and small cap trade started to peter out as mega cap stocks

made a run yet again. Head fake or a reversion to what's been the norm for so long, And Sarah, we will revert to our norm and finish the episode with the craziest things we saw in markets this week, and by all means, if you're a listener and you saw something crazy, give us a call on the Bloomberg Podcast Hotline at six four six three to four three four nine, oh, and leave us a voicemail and maybe

we'll play your crazy thing on the show. I got a pretty good one, Sara, and it's not even Bitcoin related. My first non bitcoin crazy thing in a while, and quite a while. I trust that surprises right then though, it is absolutely absolutely get ready, Get Ready. But before that, we'll talk about the serious things facing the market this week, and we're very happy to have on the show the head of equity strategy at Wells Fargo Securities. His name

is Chris Harvey. Chris, welcome to the show. Thank you very much, Thanks Mike, Thanks Sara. Great to be back. Great, great, Chris. I want to start up by saying, I'm I'm pretty sympathetic to strategists who are required to come out with a year end target for the SMP five because I feel like you can make a hundred great calls all year, get all the sectors right, get your factors right, get everything right. But every you know, why is Alex like me or just gonna ask you about that target? And uh,

you know, I can't help. But notice this week SMP reaching thirty eight fifty, which is actually your year end target. So I'm curious how you're thinking about it. Is it are you attempted to go back to the drawing board on that, or is it He's one of those examples where the market has just gotten ahead of itself and you're sticking with that that type of forecast. So, Mike, we like to get things done ahead of time. So we figured it, let's get done the first three months. Congratulation,

everyone waits another twelve months. Let's get it done. Let's get out of the way, and let's go forward. But what we do is we knew this is a very conservative target, and we prefer to have we we we buyas ourselves on the conservative side. We make very conservative estimates. Last year, we also had a lower target than the marketplace, and one of the things that was different from us

is we had a lot of confidence in it. We never cut our price target, and when things got really dicey, we found real value and felt comfortable in and around the market lows telling people to put money to work. Also, at this time last year, we ran into a similar situation where people are saying, hey, Chris, are you gonna raise your price target? What are you gonna do? No, we said no, and right now the answer is no. But we also know we have very conservative EPs estimates.

Part of that was we don't know what the tax regime is going to look like. It's a long year, and we'll say and we have no problems raising our targets or changing when when the information changes. What we really don't want to do is we really don't want to cut our target because we want We don't want to tell people there's value there when there really isn't. And so we we tend to error on the more conservative side. Like I said, we like to get things

done sooner rather than later. You get right to it. But Chris, something that wasn't so conservative on your end was you and your team were very early to this cyclical value small cap call, I mean, what way ahead of the pack, and we've clearly seen it play out over the past couple of months. Lately there has been a bit of a topping off where we have seen big cap tech come back, we've seen small caps start to underperform. From your perspective, are we going to see

this continuer? Is the catch up trade that we saw at the end of the beginning of one as well? I mean, was that what you guys were looking for? Was that all said and done? Well, a couple of things there. We had a heroic fourth quarter the last couple of months in the year with regard to small caps and COVID beta and encyclicality. To start the year, small caps are now I would say somewhere around the high single digits if you will right, we're closing in

on double digits. Pretty good return. We think it continues, but obviously you're over bought here. Um, we got a very big bounce from from the sweep in Georgia's people think that it's going to be more stimulus and more steepener, and what we need to see is we really need to see the fundamentals fill in and for that to occur, numbers just have to come out and st a bit of the consolidation, a bit of the back and forth.

Sure that that's not unusual, that's something we expect. But we still think there's another good six months to this trade. What I would say is we thought there was a good twelve to eighteen months in this trade. But with stimulus and with the sweep in Georgia, what we think is everything is now accelerated, right and the window is much shorter. Everyone's going to be concentrated. UM evaluation is still attractive, easy comps, and I think we're going to

have a very healthy m and a cycle. We should help the group because it's a great point where you you made where you said, we we still don't really know what the corporate tax situation is going to be this year. And I think it's it's clear that uh, the you know, Joe Biden was inaugurated on Wednesday, the

honeymoon doesn't look like it's gonna last very long. Already, there are some some Republicans coming out, even the moderates like Lisa Murkowski and Mitt Romney coming out and pushing back at the the size of that one point nine trillion dollar stimules planned from the White House. Um. Obviously, I think it's safe to assume they will push back at the at the tax uh equiporate tax increase too. I mean, is it's two or early to sort of start reading the tea leaves in Washington about what we

can expect from Biden when it comes to taxes and spending. Um, where are you, you know, as we sort of begin to see the administration take shape, are there any takeaways yet that that you have that kind of you know, can illuminate what you're thinking about as far as stimulus and taxes, um, And as far as stimulus and taxes, the the issue here is we're going to get Obviously we're going to get more stimulus. Right now, the question is is it a trillion dollars? Is it more than

trillion dollars? How much more for us? We don't care that much. Trillion was pretty big number, right, and you get that money into people, and what we know is it works, it's successful, and we have We're no longer talking about when the vaccine is going to come out. It is out, and now the question is when people want it or are capable of getting it right, and I think about June or July, the situation is going to look much different. But to get to the tax situation.

One of the reasons why we say the window of opportunities much shorter is it appears to be a rent not owned type situation. We're super cheap right in trugal is a day is long. We don't want to stick around for the bill. You're going to have to pay that bill. You're going to have to do that before the midterm elections. So that's saying somewhere in the second half of this year were the beginning of next year,

and so you know, we can talk about taxes. We can It's hard to say grnually what's going to occur. But we know that we've spent a lot of money, and sooner or later we do have to pay the bill, and we think it's coming, and so, unlike a lot of my peers, I'm a little bit worried about that because that's not gonna be a whole lot of fun. Usually when you raise taxes, it's not great for the capital markets and and it's it's not great for risk products.

So what's the allocation scenario for then? I mean, the understanding right now, at least as I've understood it, is that there are many who are still unsure if we're actually going to see a big change in the tax code, just considering that we did see a blue sweep by a very narrow margin. Then at the same time, it's just it's difficult to know what policy is really going

to be in focus when it might hit. So when you guys think about policy proposals that are going to be coming down the pipeline over the next two years, over the next four years, when clients are possibly asking you about these changes, how soon do you have to actually start implementing allocation strategy to mirror what might happen when you're unsure at the time, and what would those

changes actually look like. So, Sarah, it's a great question, right what we're looking at and what we typically use to to lead us into an allocation change or regime changes. The market is telling us we look for repricing. We've seen that repricing in bond proxies, in low volatility strategies, whether it's utilities or reads or or what have you. Then what we need to do is we need to find a catalyst, right and at this point in time,

we don't have that catalyst. What we think is by the summertime we'll start to hear the talk of tax bubble up. That's the beginning of it. By that point in time, we also expect to see small caps having outperformed even more. We expect a lot of the good news that in and around earnings and fundamentals to be reflected in price, and we expect to see another leg up in the euphoria within the marketplace, and that will give us the opportunity to make that shift, that repricing,

that catalyst in that timing juncture. Because I'm curious, if you're bullish on small caps, what sort of the best approach to executing on that is it would it be just a sort of a passive vehicle on eat TF for would you know, if you're an averag investor who sort of doesn't want to get into the nuts and bolts of all two thousand stocks and the russell, would you find an active fund or you know, how how would you sort of go about expressing a bullishness on

small caps? So em bullishness on small caps. If you're a retail investor, there's there's probably one of two two ways to do it. You can do it in some open ended mutual funds, and I would look for funds that that will provide you this exposure but with low fees. Or you can do it on an exchange excuse me, exchange traded mutual fund or e t F right, and those are pretty tax efficient. The fees on those are quite low and you can get in and out rather quickly.

So I prefer because of liquidity in e t F, but some people if you're going to buy and hold it for some period of time, mutual fund also also makes sense for a lot of retail investors. But you're right, buying two thousand stocks of the Russell is probably not

your best use of your time. I feel like whenever we talk about small caps, oftentimes, especially the skeptics, bring up the term zombie companies, and especially coming off the back of COVID nineteen and worries about insolvency or debt repayment and companies not being able to bring up the cash that they need to actually move forwards from this point in time, even if we are going to see

a rebound and earnings, UM, there's a concern there. So from your perspective, when you say that the concern about zombie companies at this stage is overblown, I mean particularly in the small cap space, or is it just a situation where if you're going to get into investing in small caps you just need to be aware of the

risks that that are at stake. Uh. Sorry, I think the risk is overblown, And I think I had a conversation recently about bankruptcyes and the whole creative destructive process, and there were many companies that did go belly up or go bankrupt and when you needed that to clear out certain things, and we needed that creative destructive process too to reach a final end. I think there's more

to go. But as far as investing in small caps, I don't see if you you look at the exposure, to look at the names in there, I don't think you haven't an obscene amount or even a significant amount of zombie companies or zombie risk there. The other thing to think about to know is that if you're a public company, access to the capital markets, credit is widely available.

And if you want to issue stock, excuse me, well, you can issue stock, but if you want to issue dead you can do it at very low rates, and you can do it in significant size. So liquidit is really not an issue at this point in time. And I don't think the whole zombie risk is a big issue for smaller caps. Chris, I wanted to get back to your your head uh note and a few predictions you made. One is very productive provocative, So of course

I'm gonna I'm gonna key in on that. But you wrote that Tesla in December of echoes A O. L in December of boy, that's that's gonna put some shivers up some spines, I think. But walk uster sort of unpacked that first. Why why you're making that comparison, right? So we're getting lots of things, getting the spidy senses starting to tingle. Right, I remember remember nine nine, and I remember what was happening. You had a lot of speculation,

had a lot of retail investors getting involved. If you recall the phrase, I think it was each rade clicking in their steward, right, And we have a lot of a lot of funny things going on now. But what was what was amazing to me is a o L at the time, was was a game changer. Right, It's an amazing technology. The stock had an incredible run run I really hadn't seen before, and it was going into the SNP late in the year at a very large market cap or a very large waiting Okay, that that

to me was the beginning of the end. Right. Ninety nine was a fantastic year for stocks. But but after ninety nine, many of your tech companies and many of your growth companies lost their value. Now you have another game changing technology right in Tesla, and you have a stock that has performed amazingly well, and it's going into the SMP December late in the year um at a very large waiting our market cap. Right, what this signals

to me is this growth at any price. This this is signaling and that we're close to the end of the growth at any price type investment strategy. Right, it's not a call on a particular stock, but what it shows you is that we've reached a level. And so back in the late nineties, it took twelve months for that for the regime change to cur And what I'm telling clients now is everything is accelerating, right. Everything that I thought was going to happen more or less occurred,

but just in a very compressed time period. So if it took twelve months um back in late nineties, we think it probably takes six months now for that regime change really to occur. And it was more. This is a signal, and what we're seeing, you know, funny enough, is I think the big pain trade for a lot of people on the buying side either a recovery or a strong recovery, because many people haven't traded in a

post recessionary environment. Many people have been trading in a low growth recessionary environment, and when growth is abundant, different things happen. The market rewards value in small camps and cyclicals, and that could cause a lot of pain for much of the BI side, because they're so steeped in that growth trade. All I can hear is that a O L noise from back in the day, you know, the I still have an up and running a O L emailed, but it exists that I'm not going to tell you

what it is. It's embarrassing, but you still have the floppy drives anymore. You get like five in the mail a day. And Uh, Chris, I want to ask you, though, so, if you believe that Tesla and its addition to the SMP five hundred marks a shift from this growth at any price regime, do you also believe that it signals a possibility that what we're experiencing now ends in a

dot com crash fashion. I is something I find so amazing is that we have heard since June that many times, many people saying the markets in a bubble, there's plenty of euphoria. Then we go on to the summer, Then we see retail traders buying options. We hear it again that the markets very euphoric. We hear it again in December, and all of a sudden we're in the new year and months have gone by, markets have gone up. How many percentage points since the original euphoria calls and we're

still sitting here. So even if that were the case, I mean, what can you even possibly do out right? So again, there there's a lot in that question that there's a lot to unpack. Um. And I'm gonna, like all good equity strategies, I'm gonna talk my book a little bit, and I'm gonna say I told you so, right, I had to, Um, but I gave you the disclaimer. Right. So at the beginning of the summer, what we told clients is we're expecting a market melt up. We're expecting

tem per cent tem percent plus run. And what we said is we don't expect to sell off until we reach higher levels, um, because as we go higher, that makes the foundation a little less stable. We hear a lot of the talk about speculation and bubbles and so and so forth. I've been through several bubbles. Yeah, it's true that there's a lot of retail investors and I have friends that that now in theory trade better than George Soros and it's a day and all this other stuff, right, Um,

But what we where we are? Right, if you go back to late nineties we were heading into a set ship. We've already had that recession, and if you go back to late nineties UM, there are many companies that really didn't have a business model. It was things like clicks and eyeballs and so and so forth. A lot of big tack, a lot of big growth. The underlying fundamentals are good, and what we're arguing about, what we're talking about is relative value relative performance. We think it's just

stretched too far at this juncture. Typically when growth works, it is in a lower growth, lower rate environments, and it's because there's a scarcity value and there's no alternative. Well, now you have an alternative. The growth from any of these small cap and make cap stocks going to be, we we think, quite impressive. We think the reaction function is going to be quite strong. And what we think is there's probably a two tier market, which is what

you're beginning to see. And one of the reasons why we haven't been so euphoric on our price target is we can see a big rotation up the capitalization with the ubercaps where people do rotate UM. A lot of the uber caps just trade water or perhaps even sell off as as people use them as a source of funds, but it's not this massive capitulation because the underlying pladimentals

are actually okay. You will see certain strategies, whether it's momentum or other things, have some difficult time, and we'll see some you know, double digital corrections at some point in time. But I'm not in the camp that we're in a bubble and and this is this is terrible and it's all gonna end in a in a very sad story. Um, there's a lot of good values out there, but it really is more similar to the late nineties down the capitalization in those mad caps, in the places

where COVID has really had had a significant effect. And as we go forward, what you pay for something is going to mean a lot more. And if you're trading at a hundred and fifty times earnings, yeah, suddenly the stocks will work, but most of them probably don't. And you can see a really healthy correction in some of these high flyers if you will. So, Chris, A lot of people listen to this podcast solely for my brilliant

cryptocurrency analysis. It's true, right, that's it's I Actually, they they think whenever I whenever I mentioned it, people I think the listeners roll their eyes and shake their fists at their phone. Um, but uh, you did make an insitioning call on crypto and your look ahead peace. Let me read it here. We sturgence of interest in crypto as a preferred speculative instrument further presses the topic of institutionalization of digital assets. I'm curious if you can unpack

that for us a little bit. Um. You know, I hear further install institutionalizing crypto and I worry, well, does that bring with it sort of systemic risk along for the ride? Um? So I'm wondering how you see that shaping up in one as far as the institutions embracing crypto. And you know, if I can add throw one more in there, if you know Gary Gensler as the uh, if he gets confirmed for the SEC, if that plays

any role in how that all shapes out? You know, the best I can tell is he probably knows more about crypto than probably most government regulators. I'm not sure if that ends up being good or bad. I it's kind of a two handed economist with it as far as I can tell. But how do you see it all shaping out? Yep? Um? How do I see it all shaping on. It's um. It's still very murky, right. But the point that we were trying to make it at the end of the year is cryptos are are

here and people are beginning to accept them more and more. Um. Whether you look in the NFL and an NFL player wants to be paid in crypto, right, Um that you look at and when I go out and I talk to people. One of my associates, um part of is a millennial. She and our friends have been involved in cryptos for some time. And now what you're seeing is some of the larger institutions talk about it, say we're going to put it in our mutual funds, and there

is a more of an acceptance to it, right. And so what you would expect to see is more regulation, um, but more liquidity. You should expect to see a lot of volatility, right. There has been and continues to be a lot of volatility, but over time that that volatility to come down somewhat. And I think what you would also expect to see is a widowing out of a

lot of there's a ton of cryptos out there. I think what will happen is there will be some sort of consolidation and you'll have just a handful of cryptos that people really want to try transact on. But it really still is, you know, and I don't want to be evasive, but it really still is wide open, and it's just developed so quickly. And the point being is it's going to be accepted to some degree. It has lots to change, there's lots to do um but it's

an exciting part of the market. And by the same token, a lot of people are using it, we think, are using it to speculate, and that could cause a lot more volatilities we go forward. But when when we talk about institutional acceptance, I mean, even just this past week, for example, black Rock came out and filed these updated perspectus is to make bitcoin an eligible investment in two of their funds. So just shows I mean, people are

clearly thinking differently about it. But Chris, before we get to sharing our crazy things, Uh, there's one more prediction that I wanted to call you out on and then ask you if it's made you kind of think about any of your other predictions, and that just being the one that's already occurred about the Georgia runoffs, the idea that you had predicted that the GOP would retain Senate control. We're now when this runs twenty two days into a

cross one off the list. Are you second guessing any of your other top ten predictions at this point or is it too early to say? Um, not not second guessing. So again, full disclosure and and and full responsibility and accountability. We were wrong, right we we expected GOP to hold onto the Senate, But to be quite honest, we weren't wrong by very much. UM. And I have to say that it's helped our book. It's helped small caps, it's helped high COVID beta, it's helped the cyclical trade more

so than I ever would have thought. UM. With regard to the rest of our prediction, it's a long year. What we tend to do is we want to be more than last year. I think we were somewhere around seventy, which was a great year. This year, yeah, it's I can't say it feels good to lose one right out of the gate, but by the same token, uh, it's

really helped our book a lot. UM And I think you know the point that we're just talking about this is more what we're trying to do is predict things that you know, I have a high degree of probability, are a little out there, but have a high degree of probability of occurring. And the crypto is a good example of that. So yeah, a little painful, um, but I'm not going to change this yet. In the next night, and I will say I hit rate of s which I think many people were surprised by the entire year.

It's pretty impressive. I was gonna say, I like that Chris grades his previous year and seventy is you got a grade these on a curve? Seventy percent is pretty dark good I think for for this, for this type of thing, if you're you know you're you're winning. Yeah, I would be lying if I wasn't surprised as well. I was looking for and we've got somewhere I'll take you stand clear of the craziest things we saw in markets this week. Well, Sarah, I think it's that time.

Have you come for pared? I did come prepared, I've I always come prepared. Mike, I'm just trying to increase the drama a little bit. Does that mean I'm kicking us off? Alright? So I don't have a price is right. But I do have a bit of a trivia question for you. If you had to guess what's the best performing stock in the SMP five this year, what would you say? Oh, man, best performing? I know the worst is Twitter? So if you're short the Twitter is uh

the worst? The best performing, I'm gonna say one of the banks? I don't know that. All right, good guess Chris. Do you have any thoughts? I would say game Stop, but I'm not sure a game Stop is in the SP five, So let's go with Western Digital. Alright, So a bit surprising at least I was caught off guard. Your best to performing stocks in the SMP five hundred this year General Motors and Ford and each is up more than thirty Interesting. What a change. That's quite to change.

I mean, there's been a lot of talk of technological investments and Microsoft teaming up there with with GM and getting into the autonomous car space. But still I think, uh, I mean, clearly, as we just discovered, I think many people would be surprised by that very young. But you know what I wonder, is it back in the day it used to be every day there is a different speculation about who is going to buy Tesla. Maybe now everyone's speculating on who Tesla is gonna buy, just throwing

it out there. That's some good speculation, Mike. It's one way to wrap up production just by Ford, By four, GM, Volkswagen. They could probably buy all of them at this point. It's secondary offering and just take out the entire car industry that don't listen to me by listeners, by the way, none of that's going to happen. That's that's just me. Uh, that's that's my prediction. We'll see that he's gonna bank his entire predictions that he'll get his zero percent or

if he gets real lucky. That's that's a good one, though I did not know Ford and GM interesting. How about you? Christis witness anything crazy in the past week or so? So that one of the craziest things I've seen over the last couple of days and over the last week has been the reaction um or the performance

of some of the heavily shorted consumer stocks. These stocks are going up many days at double double digit returns, and the amount of short or short interest in these stocks is obscene, and so I think this can continue. But I haven't seen this kind of movement in a number of a group of stocks in a long, long time, and it is very consistent, and it speaks to um heavily shorted stocks being covered and covered rapidly. And I'll have read on this a little bit more because I

know you. When I asked you what the best performing stock in the SMP five hundred was, you guest, game stop and game stop. I mean, just a couple of days ago, or about a week ago on the four teen, short interest as a percentage of shares outstanding was and now it's already come down to about sixty seven percenter. So and like you said, I mean it's almost at least last week, every single daycent game fifty seven percent Game.

I mean, it's just it's it's remarkable to watch. It's it's amazing to me someone would short a stock that's already that heavily shorted. I mean, you know, I don't know, it's have you not heard of these guys on Reddit that are going to take you to the cleaners on this? But that's that's pretty good though. And I wonder, you know, Chris, I wonder if it's just people looking at the vaccine coming and stimulus coming and and just getting over excited

about these consumer names. To some degree, I think that could be part of it. Um, there could be some liquidations that are going on, and obviously the fundamentals are changing and and that's all playing into it. But you're right, well, when you're you're that heavily shorted, funny things can happen, and that's exactly what's occurring. Yeah, well that's pretty good, alright, Sarah. I'm ready for for prices right. We'll see how Chris does that the prices right game here in the alternative

assets space, and this is really alternative, Sarah. You know those little stickers you get on a banana, you know, it'll say like dold banana, like Ecuador, Panama, wherever. Don't don't tell me that banana stickers are now being auctioned in some strange marketplace sort of sort of. So one of those stickers ended up on a twenty dollar bill

and it wasn't just placed there by someone. It was landed on there during the printing process of this twenty dollar bill at some you know, government printing facility in Texas in to the point where you know that little the seal of the treasury and the serial number are both printed over top of the the dull banana sticker. And you can make your own jokes about banana republics if you want. I will not. I will not make

that joke. But so, my favorite part about the story, and this is on CNN dot com, by the way, UM, is the theories on how it got there. Uh. One guy saying, well, it might have been sort of part of their quality control process. Someone put it on there to see if it could get through and they forgot to weed it out. Another guy's like, no, I'm pretty sure it's just a joke. Someone just did a practical joke, put the banana sticker on the twenty and it got printed.

Of course, as you can probably guess, that twenty dollar bill is now up for auction. UM and collectors of these types of things loved mistakes like this, Like if you're collecting a coin or a piece of currency, if there's some a steak involved, Uh, it totally raises the value of the item. And clearly this is about his hilarious sized mistakes can get. So, what's the what's the bid? Sarah?

If you're playing prices white, what would you bid for a twenty dollar bill with a banana sticker embedded into it underneath the Treasury seal. All right, not what I would bid, but maybe what one of these fanatics who love mistakes would bid. I'm gonna go. I'm gonna go with nine hundred. I'm gonna keep my my poker face. But Chris, what's your what's your bid on the twenty dollar bill with the banana stickers? Since I love bomb Bombarker and prices, right, I'm gonna go nine one. That's

how you play. That's how you play the game exactly. That's a that's how you play. Current bid and this is Heritage Auctions in Dallas. Current bid fifty seven thousand dollars. Are you serious? Yeah? Well, there's like some sellers speed too, so it's closer to sixty nine or the buyer's premium. They caught these auctions, so seventy grand for the bill. The last the last few times around, I had done

really well with learning my lessons about overshooting. Now after today, I'm going to start overshooting again, and then I start being way off once again. Wise move. I love the nine and one. That's how you play it. That's that's this guy's congratulations. We gotta get Chris on Prices right, sponsor him all right, well, Chris Harvey, winner Price is right. We'll have to catch up again sometime soon and also at the end of so we can see if you

get that higher hit rate again. Predictions for the year of a Chris Harvey of Wells Fargo Securities, Thanks so much for joining the show today What Goes Up. We'll be back next week. Until then, you can find us on the Bloomberg Terminal, website and app, or wherever you get your podcasts. We'd love it if you took the time to rate and review the show on Apple Podcasts

so more listeners can find us. And you can find us on Twitter, follow me at at Sarah Pontzack, Mike is at Rea Anonymous, and you can also follow Bloomberg Podcasts at podcasts. Also thank you to Charlie Pellett of Bloomberg Radio and the voice of the New York City Subway System. What Goes Up is produced by Topur Foreheads. The head of Bloomberg Podcasts is Francesco Levi. Thanks for listening. See you next time.