The Right Way to Be Wrong

to one bull who is sticking to his guns. Doubts are once again swirling about the prospects for a US China trade deal ahead of the upcoming December fifteen tariff deadline, but according to a veteran stock market strategist, the signals hint that the longest ever bowl market can keep on running.

And of course we'll close out the episode with our tradition the Craziest Thing I saw in Markets this week, and Sarah, I'm excited we got another call to the What Goes Up hotline with a crazy thing a listener Solid Market. We did, and he's actually a second time caller, So we'll definitely play that message later on in the show. And remember, if you have any crazy things that you've seen in markets, you have questions that we want to acknowledge on the show, please feel free to give us

a call. That number is six four six three two four three four nine zero and we may even play your message on the show. Sorry, I wanted to give the listeners a little taste of how people like you and I do our our normal day job as UH stocks reporters markets reporters. Probably no big secret, but one of the first things I do every morning when I

get in is I look through my emails. They're usually about eight hundred that came in overnight, but I always search for the words strategy to see what all the strategists on Wall Street are writing about. And you know the big banks, you might be lucky to get a

note or two a week. But there's one guy who I could count on every morning there and his name is Jeff salt Um, and I like reading his notes, not only because it's good market analysis and kind of a mix of fundamentals and technicals, but also very well written stuff, so entertaining to read. So very happy to welcome him here to the show. Jeff, welcome to the show. You need to raise your standards. We'll see what what email he's reading tomorrow morning. All well, maybe we'll raise

him a little bit with our other guests. One of the nicest guys in the building, I think, real mentor to me brilliant broadcaster. And that voice you may recognize, that's Pim Fox, who's one of our commentators on the Markets Live blog here at PIM and a guy who sits right behind me. So we we got a lot to talk about, Pam. How you know I ask you a lot of questions that I can't answer all day long. Well, now we'll get to ask you a lot of questions.

Clearly that's gonna happen. Contradictions abound, all right, Jeff, you were with Raymond James for a long time, but you're off to a new adventure now. When you tell us a little bit about what you've got going on now, Well, I tried to retire eight months ago and it basically lasted three weeks. I've been writing Sought Strategy report for forty eight years, almost forty nine years, and there was such a demand for work that we created an LLC and had a website built and a soft strategy www.

Saut strategy dot com is a subscription service um And for some reason or another, these people at Capital Wealth Planning wanted me to know I'm really a consultant to them, because if I was an employee, they would have to approve everything I write for Sought Strategy, which you know two to three day turnaround is a lifetime in this business. So I'm a consultant to them, and I'm helping to manage one point seven billion dollars. I'm not not too shabby.

Three weeks is a pretty short retirement. You got that right back very quickly, so, Jeff is Sarah had pointed out, Um, your last note, Uh, you're remaining pretty bullish about this market now. I know you like to look at it sort of a mix of technicals and fundamentals. Walk us three your thinking on. You know, we've had this tremendous rally uh in the stock market. At same time the economic data got a little soft there. Maybe it's bottoming,

maybe maybe not, it has bottomed, Yeah, you think so? So? So is that is that the reason to bolish basically? I mean, obviously it would would be a good reason

to be bullish. Well, Ron Barron. A few years ago, I was coming back from being on a panel at Tiberon down at the RITZ Carlton downtown and he gave me a ride up to the the FDR because I was going to the GM building, which is where Barren Capital is and he put his hand on my shoulder halfway through it, and he said, you know, there's not many of us left, and I went, excuse me. He said, there's not many of his left that have seen a

secular bull market. So the people that say this is the longest bull market in history don't know market history, because the nineteen forty nine to nineteen sixty six secular bull market had a number of twenty and decline doesn't

end the secular bull market. You had the Jack Kennedy uh Steel crisis in nineteen sixty two, where the steel companies raised prices and the president said, no, you gotta put him back down, and the markets didn't like that and they got hit for thirty percent, but the secular

bull market went on for another four years. In the eighty two to two thousand secular bull market, you had the eighty seven crash, which I was actually in Barren on September eighty seven saying the utilities peaked in the spring, the trentees peaked in the summer, and we're gonna get a waterfall decline. I didn't know to call it a crash because I ain't never seen a crash. I have now and Um, you know, you had the crash twenty two point six per cent in a day, but the

secular bull market went on for another thirteen years. So I think we're in secular bull market the last fifteen to twenty years, and there's not many of us left around that have seen one. So for those people who are out there saying that we're late cycle and maybe have been saying that we're late cycle for years, what would be your rebuttal back to them? My rebuttal back to that is the downturn was so severe and the recovery so muted that what you've done is elongate mid cycle.

We're still in mid cycle in my opinion. We're not late cycle, and if you look at the stocks that are performing, it will tell you we're not late cycle. So what would uh, what sort of signals would make you start thinking the cycle is getting late? Well, my dad, my dad was in the business, and he to tell me, son, if you think it's going up, be bullish. If you think it's going down, be barished. But for gosh sakes,

make a call. Because there's so many people in this business that talk out of both sides of their mouths, so that no matter what the markets do. They can say, see, I told you so, And if you make calls, you're gonna be wrong, and you're gonna be wrong more often than you think. And the trick in this business is to be wrong quickly for the minimus loss of capital. I got no problem at seventy years of age saying, hey, that was a bad call. I'm reversing, reversing my so.

I'm not a broken clock bull. There was a there's very few people. My friend Dick Russell passed away a number of years ago. He was the last great keeper of dow theory, and I down theory is not always right. It's subject to interpretation. But there was a down theory cell signal in September. I wrote about it ras cash. There was a down theory by signal in June of oh three. There was a down theory cell signal in November of oh seven, and then the majority of stocks

bottomed on October t of oh eight. Two point six percent of stocks trade and made new annual os on October. I've never seen that. That's a seven or eight standard deviation event. It is not supposed to happen in your lifetime. And I'm in print after being barished from November of

oh seven. I'm saying the bottoming process is started. And on March two, I'm on Bloomberg with Barton Biggs March second of oh nine, saying the bottoming process that started in October of last year is complete this week and we're all in. So I know Dow theory involves the transportation average. Uh sort of have to conf you know, confirm the down confirming the dow. So, um, how are you looking at that now? I mean, uh, is Cheney's aren't out a record right now? The the No, they're not,

but they did make a new reaction high. And according to down theory, the primary trend of the market is up. And the most important thing in analyzing markets is what is the primary trend? Is it up or down? Well, the primary trend is up. So alongside transports, some other areas of the market that I've heard other strategists investors talk about is needing to confirm the market size have

been the likes of small caps. And I know a couple of weeks ago, back in November, you did write about a so called golden cross in the Russell two thousands. So I was hoping that you could explain to our listeners what exactly it is and what actually that means. Does that mean we could see more future gains or even uh small caps leading going forward? On November five, you had and the golden cross is not as predictive for the S and P as it is for the Russell.

It's much more predictive for the Russell two thousand, and it occurred on November five, and it's when the fifty day moving average crosses above the two hundred day moving average, and the and the small caps have performed pretty well since then. And it's not just the US. The European small cap induseries had a golden cross on October. So it's kind of this concerted move by the small caps, which have lagged by the way they've lagged for all this year, and now they're coming to the four uh PEP.

I want to bring you in on this a little bit too. Um. Obviously it was going to be contrary and all this I was gonna say, asked Jeff of those small caps in the Russell two thousand, how many of them are actually profitable? I don't know the answer, not many, not many. And the reason I asked it in that format is because I was under the impression that earnings and economic performance would eventually drive stock prices. I agree with that, So why do we have such

a tepid economy. We got great numbers for employment, We got great numbers if you want to borrow money, but the economy is not growing. And in fact, you know, if you take a look at real inflation what people really have to pay for things, you know, we are at a negative real rate of return for let's say treasuries. So is that what drives people putting money into equities? What undepends the market strength? I would argue that the individual investors, for the most part, are not putting money

in equities. They're not just cautious, they're scared to differ. Yeah, which I think is a bad trade. By the way, I think there's a ton of money on the sidelines. I think before it's over, this is not the way bullmarkets end you've been around. But I'm not talking about but necessarily a bullmarket. I'm trying to look at the connection between the performance of the economy and the global economy if you want to add to it, and the performance of equities, because this seems to be the most

unloved bull market I can remember, we have stocks. Total return for the SMP five hundred year to date is twenty six and a half percent as total return, so it's got dividends and so on. Why don't people why why aren't you seeing anybody happy? It's it's just it's sort of bullies the actual performance of their portfolios. And that's why you should continue to be bullish. If you remember ninety nine and the spring of two thousand, everybody

was happy. So the wall of warrior still exists absolutely, And I would say that the anticipation of future earnings. I'm along a company called zyme Works z y m E at twenty and twenty four and they may have the magic bullet for cancer, and the stock has gone from twenty bucks to forty four bucks in six months

and they're not making any money. Yeah, but that you can make the argument, right, I mean, if you Sarah and Mike, you've written about this kind of stuff before, where you have binary events, specifically with the pharmaceutical industry, right, I mean a drug gets approved or you know, it doesn't perform, and then yeah, I think there's a million of them in the small cap well, there's a huge number of y We have a FED meeting come next week.

Most people don't really expect the Federal Reserve to do all of that much change anything. But Jeff, when you look at asset prices across the board and you try to conduct your analysis, how much do you take into account what the FED is actually doing well? I think I think the FED has been one of the drivers of of stocks. And I don't think interest rates are going up in the near term. I think they're gonna

stay lower for longer than people think. And uh, my work suggests that a fair market multiple in this interest rate environment on the SMP is somewhere between nineteen and twenty times earnings. And if you want to use at your denties hundred and seventy seven dollars from next year and put her twenty multiple on that, talking thirty on the SMP. You know, when you talk about the FED and the balance sheets, I mean, obviously, what are they buying?

The FED downs The Fed's buying almost you know, any name, a name, a debt instrument that that a central bank around the world is not buying. And you look at the bank in Japan, they're buying ets well, well, I mean all they're all, that's that's all on their balance sheet. The Fed. What it's really buying now is the short end of the treasury curve. Because we have this trillion dollar deficit, We've got massive issuance of of treasuries, same

story next year for the foreseeable future. Is that ever gonna turn around and bite us, Jeff, I don't think so. I say said I think interest rates are gonna stay over for longer than people think. And I think that with the so the the millennials are doing in their thirties what the boomers did in their twenties, and they're buying homes and they're eventually gonna shove money at equities,

which they haven't really done yet, but it's coming. It's coming, and that's gonna be a huge tale win for the equity markets as well. We've gotten through this conversation the bulk of it without mentioning US and China trade negotiations, which I must say I really respect, but him, I know, even paying a lot of attention this week, you can't

you can't write it. So why don't you It's a whiplash market, right because you know you you sit looking at the screen, and you can basically tell when a tweet has been put out there by the president or by member of his administration talking about trade one way or another, and so goes the market supposedly. But what I did was I took a look at the SMP. I looked at all the companies in there, and I put together a model portfolio of twelve companies. They're all

in the tech sector. And these twelve companies have between thirty and sixty five percent of their revenue in China. Right, we've heard all about, as you said, trade wars. So what I did was I tried to see, Okay, so I how did these stocks actually perform? Well, if you had bought them at the beginning of the year, you would have made on your money. So compare that to the SMP six and a half percent you would have

made investing in these twelve companies. So then I went back and I said, okay, so maybe this is just an anomaly because it's just one year. I went back to the end of sixteen after the election. Because the rhetoric from candidate Trump is pretty much the same as the rhetoric and the action of President Trump. You would have made even more. You would have made about eighty five percent on your money. And the reason that I came up with is because it's not about trade. This

trade wide believe is going to be a footnote. It's a about the big pattern changes in trade having to do with Asia. You're looking at four point eight billion people in Asia, so you've got four point the US economy. It's still gonna be big, still going to be important, but it is a decreasing importance in global capital. So that was my take on trade. Ask you to name a few of the companies that are in that portfolio. Oh yeah, um, A M D for example, Uh, probably

the chip makers. Um. Also small companies. I looked, for example at Skywork Solutions, not one of the twelve I looked at, but I mean they've got over twenty of their revenue coming from China. I think it just got an upgrade on Thursday and the stock has really outperformed. In one of your notes, you did say we expect earnings to rebound just like the economy. How much of a rebound is actually possible though, I think you're gonna accelerate by the end of GDP growth, and I think

earnings are gonna follow along with that. And again, earnings are the mother's milk of secular bull markets. And you know, it was Warren Buffett that said, in the short run, the stock market is a beauty contest, but in the long run, it's all about earnings, and that's absolutely correct. I just want to ask you having to do with that, uh, with that point, do you think that this is also

going to raise commodity prices? Because if you have GDP growth that is around three percent, will that pull commodities higher as well? Yeah? I think I think commodities are going to trade higher. I think they've suppressed the price accrued oil too long. I did see where Saudi Arabia is talking about four dred thousand barrel hut um. But I mean if you if you go to China, like twenty years ago, you went to China, all you saw

was bicycles. Now you see his cars and a lot of re buicks, which I don't understand, but it's it's the demand that's going up in India and China for gasoline and energy is immense. Well, that's a nice segue into another topic you uh touched on recently, and that's MLPs. The Semester Limited Partnerships. Mainly it's it's usually wheel pipelines that convert to an MLP to get that that preferential

tax treatment. These stocks amaze me because every now and then you'll see one with a with a dividend yield or distribution yield of like not twenty but double digits for Hillari and de Hilarian Index yields between eight and nine. But yet, you know, when you buy a dividend stock, you tend to like that safety. You expect that dividend to be stable if not grow MLPs it's a it's a whole another situations. So walk us through how you think about MLPs uh specific there's a big distinction between

upstream MLPs and midstream MLPs. The best MLP portfolio manager I know is Eric Kaufman at V Capital, and he told me eight years ago, you don't want to own the upstreams they have too much price sensitivity to crude oil, but the mid streams. Because everybody, all the upstreams went bankrupt and because of that they sold the mid streams down. Now you can think of midstream MLPs Master Limited Partnerships as a transportation company without wheels. Because you're exactly right, Mike.

They own they own the pipes, and they own the storage facilities, and they have long term contracts with people like Chevron Exxon, and they have distributions that the good ones have distributions anywhere from six percent to eight percent, and the two best in the business or ep D and et extraterrestrial. You like that. You like the midstream because they're sort of less sensitive to the price of They basically have no price sensitive They're they're sensitive to volumes,

how much volume is coming through the pipes. And what your listeners should know is that somewhere between seventy and eight of that distribution is tax deferred. So if you're my age and you're looking for income, it makes a lot more sense to buy the mid streams. And they're cheap, the cheapest they've been in twenty years. And my daddy used to tell me some good things tend to happen to cheap stocks. Right, So it doesn't matter what the price of oil is, because if you need to transport it,

you have to transport it somehow. You can't lie it sitting around. It's correct. But speaking of the price of oil, PIM, I know you've you've done some work. I don't want to give any spoilers out, but you've got an outlone. It's fine. It has to well, basically, it just has to do with we've got a lot of crude oil and you know Jeff mentioning the pipeline system for example,

it has basically been reversed. Right. There used to be that we would import oil, we would process it down in the gall Coast, and then it would be shipped

northeast west wherever two consumers in the United States. Well, there's so much oil in the United States, those pipelines have had to be reversed, and now the oil is going down to the Gulf Coast and it's being exported now it's not and being exported in the form of crew but also in the form of l n G liquefied natural gas, and that is proven to be a big market. But like any big capital intensive industry, you gotta be aware because what happens is there's demand. People

see it. So what do they do. They build huge supply opportunities, right, whether that is at a liquefaction plant or building more pipelines or building too many ships. And it's just what happens in the mining industry. That's why I was interested in what happens to the commodity complex, because unless you get commodity prices to move higher, a

lot of these projects, they are very expensive. First of all, they are not going to be profitable, and you're seeing that with some attempts to shut in production in the Permian and in various shale places in the United States because they can't get it to a market that can pay for it. In fact, I think there was a story that natural gas was actually the producers were actually paying people to take the natural gas away because they

couldn't flare it and they couldn't sell it. So the Henry hubb the Henry Hubbs full correct, exactly, it's full. And so you know, when you look at oil, as Jeff alluded to, you have the OPEC oil cartel, which is trying to manage price by decreasing production. The only problem with that is you have countries like Russia, like Nigeria who need the oil. I mean they need the revenue, right, that's hard currency for them. Well, what else are you going to sell? So I think that push pull is

going to continue. Good. So we've had this range. Yeah, maybe, which is for the foreseeable future. I would think so. I would think that, you know, it's pretty arranged bound because anytime the price starts to go up, what you're gonna do is you're gonna see producers in the United States who have got big debt on their balance sheet, They're going to start to produce as much as possible. And the US is the swing producer. I think the US now produces fifteen per cent of the world's oil.

That is amazing. Imagine that fifty years back, all going through Jeff's mid stream MLPs. I guess, as long as as long as the tax, as long as the tax law stays the same. And that is a footnote just to mention with the MLPs, because there was a lot of issue having to do with getting rid of that sort of real estate investment trust like passed through of income. What if Elizabeth Warren comes in and bands fracking, not a snowball's chance in hell? Why do you say that?

Do you hear what Kamala Harris said a week ago? She said that, um, when I'm president, of course she's out now. But when I'm president, I'm gonna make all the pharmaceutical companies roll back drug prices, and if they don't do it, we're going to confiscate all their patents and the government's going to own I mean, I'm gonna excuse me, you're about constitutional law or law in general. I was gonna say, how do you go? Long lawyers

moved to Washington, d c. Well done, well done. Well, if we're talking about lawyers, I think it's officially time for the Craziest Things segment of the show. Uh, Sarah, I believe we got a call to the hotline. What we'll tell us about that? We did. We got a second time caller. His name is Morgan Hill, and he is an investment associate in South Florida. So take a listen.

Weird of fan that happened. I saw Petra diamonds, which are struggling from uh, you know, a lot of debt and falling diamond prices, recently sold as twenty carrot blue gym essentially for like fifteen million dollars. Never knew that twenty carrot diamond couldn't be sold for that much, but it happened. So crazy thing that happened in the market recently. I gotta say it was a good one, but he took a page out of your book from esoteric markets.

That's true, that's true. Fifteen million dollar blue diamond, Jeff, is your wife getting a special present. She's got the diamond I gave her fifty years ago when it's just like five. Imagine what it would be worth now and right? And well that that's what I was going to mention, is that just be mindful. What you mentioned is very important. It's a blue diamond. Colored diamonds, colored precious stones are

increasing in value and are rare. On the other hand, sorry, Jeff, regular diamonds, on the other hand, they are falling in price. And yes, and there are just too many of them, and two beers and the old cartel that used to control them. That's right, they are losing their grips. That's right. All right, Sarah, Can you top a fifteen million million blue diamond? I challenge you to top that is the

craziest thing you saw this week. I will admit offhand that this is a bit of a stretch because it's not necessarily something that happened in markets, but it does pertain to a certain CEO of one company, and that is David Solomon. The CEO of Goldman Sacks. So Amazon was having one of their big cloud conferences, and it turns out that yes, uh, David Solomon is a DJ. He often DJs at different events around the country, sometimes in the summer at the Hampton's He's DJ before I know,

Bloomber has covered it before. Uh, but he DJ at this Amazon cloud event. But the really crazy part was that supposedly a lot of people had no idea who he was. They didn't they didn't recognize him to literally, who's this guy on stage? DJing? Turns out CEO of Goldman sex Hey, look, whatever it takes to get Amazon as your your client, I guess. Uh. He came out afterwards in a suit and talked about how important a WS is to his business. Jeff, did they tell you

about our gimmick? The craziest thing in markets this week? The craziest thing I saw in the past two weeks was Kamala Harris saying she's going to compliscate all the patents that Mirk and Fis or have. Did we see any of the companies react, I don't remembers, non nonplussed, that's why she dropped out. How about you? You You see anything crazy. Well, I mean, I don't know if it's

crazy or not. But if you take a look at the socks right, which is the Philadelphia Semiconductor Index, and then you also take a look at the Philadelphia Gold and Silver Miners Index, you'd think they would diverge, right, because you buy gold and silver, talk about diamonds and so on. You buy those is a hedge of haven right, you stick those. Actually they both outperformed the SMP five. And it just you know, the the look at the

gold miners that moves in lock step opposite lockstep. The interest rates has nothing to do with any anything else. And so this idea that you have these havens, these divergences, I gotta say, it's a new it's a it's a different market. Now. It was a crazy year in markets in that it was truly in everything rally, the havens rally, treasuries go hold everything rallied, I mean E M debt. And yet no one seemed to like it. Right, Golden t LT both up roughly, the SMP up around. You

look at oil up an immense amount. Really everything higher. The reciprocal of that is in two thousand and eight, everything went down there was nowhere to hide except cash, right right, quite the difference. Well, and that even the reserve fund broke at the book, so so even that wasn't a sure But well, I'm gonna talk about from my crazy thing a stock that most certainly did not

rally this week, and that is Peloton. I I don't know, I'm sure listeners have probably already heard this, but you're going to climb on your bike about that for those who haven't. You know, obviously the goal of buying a big ad uh placing a big ad budget it in the market is to boost sales. Booster stock didn't work out so well for Peloton this week, the adverse effect, right. So they had this ad where a woman gets a

Peloton like from her husband for Christmas. She's very excited about Sizike exercise, the exercise bike with the program with the the basically an iPad attached to it that you can watch the classes and and she goes gung ho on Peloton for a year and and the internet. I think sarah the word these days, as they just canceled Peloton over this. They I as as a husband, Um, I'm kind of at a loss. I think the only solution is not to get your wife anyway. I'll be

completely honest. I didn't really see the issue and it sure you could look at the ad as being I don't know, maybe a bit strange, but hey, if someone got me a peloton, I would be psyched. I would be really happy about it. I don't think I would be offended that someone was telling me or hinting at my house. It would become a close wrap something on everything. I do have a theory that the guy whoever bought that fifteen million dollar diamond is a guy who bought

his wife a Pelton last Christmas. Cuts a good chance of that. Very good, very good. You sound like you speak from experience conspiracy theories have found from Mike Reagan. But with that said, Jeff South Pim Fox, thank you so much for coming on the show to day pleasure. Great to be here. 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 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 pont Seck, Mike is Reagan Onymous, and pim Fox is at pim Fox. You can also follow Bloomberg podcast US at podcasts. What Goes Up is produced by Tofur Foreheads. The head of Bloomberg Podcast is Francesco Levie. Thanks for listening, See you next time.