January 13, 2023 • 39 mins
Get ready for some bad earnings-season news. That’s the call from Savita Subramanian, the head of equity and quantitative strategy at Bank of America, who is expecting a 10% drop in earnings that will likely keep a lid on the S&P 500 in 2023.
She joined the What Goes Up podcast to give her outlook for the market and explain why she thinks analysts’ earnings estimates are too high: “We are going to see those estimates come down, and it's likely to happen after companies guide more aggressively lower around 2023 earnings. I think where we're going to see pressures are in companies with more labor intensity, like services companies, companies where you're really seeing cost pressure remain high. Those are the areas where we think that we're going to see some downward guidance on margins.”
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Episode Transcript
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Speaker 1 (00:13):
Hello, and welcome to What Goes Up, a weekly markets podcast.
My name is Mike Reagan. I'm a senior editor at
Bloomberg and then mal Donna Hark across Acid reporter with Bloomberg.
This week on the show, Well, in case you missed it,
there's a little bit of tension brewing on Wall Street.
Many economists and macro oriented investors are bracing for a
recession in and with that would likely come a nasty
(00:36):
drop in corporate profits. But analysts who study individual companies
haven't reduced their profit estimates enough yet to signal and
earnings recession is on the way. So what exactly is
up with this disconnect between the top down and the
bottom up views of the market and what does it
mean for your investments in We'll get into it with
one of Wall Street's best known strategists. But first of all, Donna,
(00:59):
I gotta tell you, I'm freaking out about something, but
you're freaking out about a lot of I'm freaking out
about something. Yeah, what is it? What do you cook
your cauliflower with? What type of stove do you have?
Oh my god, this is a sore subject for me.
Our gas is out in our building. I'm not cooking
anything that's good, that's good. Why these gas stoves are
killing us all? Do you realize that they're they're banning
(01:21):
them right, They're going to ban them all nowhere. I'm
very alarmed that news came out the same day that
they turned my gas off, well in my entire building.
So I'm not I'm just not going to eat. Yeah,
I'm just not going to eat for the next like
three months. Probably. I think this is a scheme by
door dash. I think they want you to go along door.
(01:42):
What do you think we should check how much they're
paying lobbyists to kill gas ovens? All right, Well, maybe
our guest has some thoughts on doordas. She might, she
might not. Probably not, I'll spoil it, probably not. But
who doesn't like delivery? Everybody likes celebrity, including our guests.
Probably I want to bring in Sevita Subramanian. She's the
(02:03):
head of US equity strategy at Bank of America. Savita,
welcome to the show. Thanks for having me. B Donna,
and I do love delivery. Who doesn't. I wish my
guest stove was out so that I had a good
excuse not to cook. It is a very good excuse
to get take out. I always thought my guest stove
(02:24):
was gonna kill me because the kids always leave the
pizza box on top of it, and I'm afraid the
dog's gonna sniff the pizza and go and turn. These
are some crazy it won't happen. It won't happen. Um
but sevida so so. Mike mentioned in the introduction, you're
one of our best known strategies on Wall Street, and
so I wanted maybe to just start out having you
(02:46):
tell us about your year and price target for the
SMP five hundred, and I believe that you guys also
have different variables and scenes playing out for the year.
Maybe you can talk about those as well. Yeah. Absolutely,
it's um so so our official year in target. You know,
it's it's kind of a point in time forecast where
we we think the market will close around four thousand
(03:08):
the SMP five hundred, which is really limited upside from here.
Um but we think there's a lot of moves within
the year. So let's talk about a range. I think
our book case, like, if everything goes right, we think
the market could go as high as forty hundred, which
would be a pretty great year, and then our bear
case and what we think is a reasonable floor for
(03:30):
the market is three thousand, which would be quite a
big drop from here. So, you know, I think our
views are in two thousand twenty three, it might be
a less than stellar year for the index, for the
market index, but we think there are gonna be a
lot of great opportunities within the SMP five hundred. And
(03:51):
you know, I think that's where we're really focused with
with our views is what sectors, what themes, you know,
what areas within the SMP five hundred can actually do
pretty well this year, you know, amidst a backdrop of
of relatively muted returns for the overall market. I want
to get into those themes and sectors sevida. But like
(04:12):
I said in the introduction, I'm fascinated by this notion
that pretty much everyone assumes all these earnings estimates from
the analysts right now or wrong, you know, all the
top down view of the market is that what are
they thinking, Uh, these estimates have to be cut? What
do you think explains that? I mean, our our analysts
just sort of waiting for the companies themselves to lower guidance.
(04:34):
You know, is this four fourth quarter reporting season really
gonna pull that out from all the conference calls. You know,
how do you see this unfolding? I think you're right.
I think that analysts are in sort of weight and
C mode, and maybe even companies are in weight and
C mode, because you know, the real positive surprise over
the last few years is that despite rampant inflation, cost
(04:59):
pressure or wage pressure, you know, everything going up to
you know, pretty high levels in terms of you know,
kind of margin pressure, companies have managed to navigate this
by either you know, pricing products more aggressively or by uh,
you know, cutting costs. And I think on top of that,
(05:20):
we're seeing corporates very nimble in terms of cutting costs.
A lot of the headlines recently have been around megacap
tech companies, you know, uh, kind of reducing their compensation
cost structure by by layoffs, you know, not necessarily great
for the economy, but good for their bottom line. So
so I think that analysts and you know, in corporates
(05:40):
are are probably a little less convicted in terms of
margins and cost pressure and pricing power going forward. Our
view is that we are likely to see some downward revisions,
and you know, our forecast for profits growth for three
is you know, two hundred bucks for the SMP five hundred,
(06:03):
and that would mean about a ten percent decline in
earnings peak to trough. Now, you know, I think that
makes sense to us amidst UH forecasts for a recession.
This is, you know, one of the most widely telegraphed
recessions of of all time. I think we're all just
sitting here bracing ourselves for it. UM, a teen percent
(06:25):
drop in earnings would actually be half of the typical
recessionary corporate earnings drop. So so we think that we
are going to see those estimates come down, and it's
likely to happen after companies guide more aggressively lower around
three earnings UM. But you know, I think where we're
going to see pressures are in companies with more labor intensity,
(06:47):
like services companies, companies where you're really seeing cost pressure
remain high. Those are the areas where we think that
we're going to see some downward guides on on margins
and savita. I want to ask you about what specifically
you'll be looking for this earning season, and I think
you guys have you guys have really great UM daily
(07:08):
and weekly research. I remember from past earning seasons that
you have Maybe it's sort of like an AI driven
model or something along those lines, where you sift through
all the earnings reports and you look for keywords and
some of the things that are mentioned the most number
of times. So if we're behind, if we have peak
inflation behind us, UM, what will you be looking for?
(07:31):
What keywords, what trends and and and UM will you
be sort of cluing into as these earnings reports roll out? Yeah,
thanks for that question, and thanks for reading our research.
Always read it. We do a lot of kind of
text analysis, and you know, some of the things that
we've been able to unearth UM during different periods are
(07:54):
you know, kind of inventory pressures, UM, demand destruction, UM
inability to price. So this quarter what we are laser
focused on our couple of things. As I mentioned, we
want to hear more from companies around whether the tightness
in the labor market is alleviating, because that has been
the theme for the last you know, almost eight quarters now,
(08:16):
is just the inability of companies to source labor unless
they dramatically increase prices, especially at the lower income end. UM.
We're also listening for more news around layoffs in services sectors.
So you know, so far we've really heard it only
from you know, megacab tech companies. We're waiting to see
whether that spreads to a broader array of companies. UM,
(08:38):
we're also listening for thoughts around you know, kind of
this inventory mismatch. So we've seen some of the supply
chain frictions alleviate, and now we're wondering how much inventory
companies have to work off, and that could be another
drag on on pricing, power, demand, earnings pressure, etcetera. We're
(08:59):
all you I think some of the other factors that
we're paying attention to from a from an earnings for
share perspective are buy backs. So you know, the last
five years we've seen buy backs contribute about ten percentage
points of SMP profits growth. That's a huge amount and
it's really unusual versus prior cycles. So if that buy
(09:20):
back trend also decelerates, and there are good reasons to
believe it does, I mean, the government is now taxing
corporate buy backs. You know, companies might be more likely
to hold cash rather than spend it on buy backs
if we are worried about a downturn. So that's another
trend we're listening for um and our view is again
for share earnings growth has been really juiced up over
(09:42):
the last five plus years by just um you know,
rampant buy back activity, and if that cools, that will
be another source of potential risk to two earnings going forward.
You know, Sevita, you've mentioned some of the layoffs among
the big tech company ease. I think a lot of
people are bracing for perhaps a wave of layoffs in
(10:03):
the financial sector, you know, which I'm assuming a lot
of our listeners are employed in our layoffs. Automatically good
news for the share price this year is as just
to be blunt and say it out front. If if
I see a headline such and such is cutting x percent,
is that automatically good news for the stock price or
is it is there more nuanced? Do you think, well,
(10:24):
you know, it's good news and that the company is
being nimble and addressing this issue of you know, bloated
compensation costs and maybe you know, rationalizing capacity. But I
do think that the the signal it's giving us is
that this company is in workout mode. So yes, they're
being nimble, they're addressing these issues. But First of all,
(10:46):
it means that they you know, sort of misallocated capital
um in in in a better period of time. And
second of all, it means that from an economic perspective, especially,
I think in this getting into this recession, what could
be different this time is that a lot of the
layoffs are really happening at the higher income end or
(11:06):
the skilled labor end. And what that means is that,
you know, typically in a recession, luxury goods are more
defensive than lower, lower price point products. But in this recession,
maybe luxury isn't as defensive because a lot of the
layoffs are really much more acute at that kind of
skilled services and tech level. UM. So those are some
(11:28):
of the things that we're watching from a company perspective.
For the most part, we've found that investors have lauded
the news around layoffs um you know, as a source
of alleviation of margin pressure. But I think that you know,
whether or not that's enough to offset the Also, deteriorating
(11:48):
demand is the big question, so top line becomes important. Yes,
companies are being very nimble at managing costs, but they're
doing this because they're seeing less demand and and less
ability to um, you know, continue operations with their current
labor setups, so that that votes ill for you know,
demand in uh in terms of uh, you know, kind
(12:11):
of top line growth. When we look at tech companies,
one of the things that worries us, and we're underweight
information technology as well as communication services, and one of
the things that worries us is that, you know, kind
of similar to Y two K back in two thousand,
we've seen this massive pull forward of demand for tech
(12:31):
during COVID work from home, um, you know kind of
you know, all of the telecommuting that we've done, and
so what we're seeing now is potentially a hit to
CAPEX on software of companies that already sort of you know,
really address their software spend over the last couple of years.
(12:55):
So I think that's what we're worried about for tech
companies is you know, maybe what they're doing is great
in terms of managing costs, but how much of their
demand is really cyclical rather than as sticky as what
everybody was forecasting, you know, in the in prior years.
And we mentioned recession a couple of times down how
(13:15):
this is one of the most well telegraphed recessions ever
but you actually say that this is not your mom
and dad's recession. So I'm wondering what you are expecting
and how you might characterize. I will say that was
good news when I read that, because my dad was
born right at the beginning of the Great Depression. So
for me, that's why you could crowd his life. You
(13:40):
could put like ten pounds of spaghetti on his plate.
He'd eat every piece of spaghetti because he yea spaghetti
is exactly right. I mean, I think that when we
think about our parents, and you know, prior generations, recessions
looked really different. And I think I mean, obviously the
Depression was was one of the most acute recessions we've
(14:03):
ever seen, I think, even two thousand and eight, when
when you think about kind of the drama that took
place within corporate America, within consumers, homeowners, it was really
broad spread. It was driven by this you know, massive
credit cycle. And I think the good news is that
today corporates and consumers actually look pretty well capitalized, at
(14:28):
least for the time being. And maybe that's just a
function of really low interest rates, but I think what
corporates learned in two thousand and eight was that leverage
is evil, and they have now locked in relatively long
dated fixed rate obligations on the on the debt side,
Like to me, the most encouraging number is if you
(14:50):
compared today's average maturity of debt on SMP balance sheets
to that in two thousand eight, today debt terms out
at about on average a eleven years back in a way,
it was more like seven years. So we've seen this
this longer duration exposure to to fixed rate debt, which
I think is good news because that means that higher
(15:11):
interest rates won't hurt these companies overnight and they have
time to navigate that that process. Consumers similarly are well.
They got a big bullus of cash from the government
in one so you know, balance sheets of consumers and
corporates look pretty great. The government is holding the bag
when it comes to debt. So if you look at deficits,
(15:32):
if you look at FED balance sheets, I think what's
different today is that the FED has never had this
type of an asset base. We've seen trillions of dollars
of you know, kind of bond purchases occur over the
last ten plus years, which have been great for risk assets,
but not you know how does the FED navigate unwinding
(15:53):
all of that debt? I think that's the trillion dollar
question because we've never seen this movie for and and
that's what We're a little more worried about the public
sector than the private sector in this recession. I think
what blows my mind the most is, you know, we
(16:15):
are all expecting this recession, and then yet you right
in your quant models the most attractive sector is financials,
which you know would not be what you would expect
ahead of you know, at least these big recessions that
you know, two thousand and eight, that sort of thing.
So yeah, I guess to some degree that's just a
testament to the effectiveness of the of the reforms of
(16:38):
two thousand and eight, and how what a different economic
environment it is with the high inflation everything. But walk
us through what makes financial stick out in your quant
models to be so attractive? Yeah, I mean it's a
it's a great question because I think when you think
about what to own in a recession, financials would probably
be the last sector you'd want to own. And it's
(16:59):
because we all think of two thousand and eight, where
that was the point of maximum pain. Today, I think
the good news is that financials companies are not necessarily
holding the credit risk. They haven't really been allowed to
lend to low quality consumers. They've been you know, kind
of regulated by the government, um, forced to arguably over
(17:19):
capitalize balance sheets or you know, today, if you look
at a chart of leverage for financials, we're at you know,
a sixth of where we were in terms of leverage
risk relative to two thousand eight. And we've never seen
this type of a monstrous drop in leverage going back
to you know, the nineteen thirties. So I think where
(17:39):
the lending risk resides is not necessarily in US large
cap banks or financial companies. It's really outside of the
financial sector. You know, you've seen a lot of of
lending through private equity, venture capital UM companies that have
burgeoned in an environment of zero in trist rates, zero
(18:01):
hurdle rates, you know, kind of free capital, and I
think that's where we are more worried about this unwind
of public sector debt. So yeah, So, like I said,
it's not your mom and dad's recession and that the
credit cycle. You know, we are seeing credit conditions tighten,
but it's not necessarily as threatening. Two banks given that
(18:24):
they've been regulated to deal with these types of credit
credit cycles. Um from lessons that we learned in O eight. Uh,
you know, I think financials is also this sort of
closet high quality sector. And it feels weird for me
to say this having lived through the financial crisis, But
when you look at the earnings variability of financial companies
(18:45):
relative to the market, you know, tech is a far
more cyclical sector today than financials is. Financial companies actually
have lower earnings volatility than the SMP five hundred, which
is kind of shocking, right, I mean, it's it's almost
like financial has morphed into the regulated utilities sector because
of you know, the fact that these companies have been
(19:08):
so scrutinized and have been so disciplined about capital cushions. Said,
I also want to ask you about this point that
you make about how bonds over stocks is now the
consensus for at least the first half. But then you
also add, um, given drops in equity sentiment and positioning,
one of the biggest risks today might be that of
(19:30):
being under invested in stocks. So how are you thinking
about this? Because we heard we've also been hearing from
people I think even gun Luck said it earlier this
weekest part of his quarterly webcast, that people should be
positioning six in bonds and stocks, And I'm wondering what
you think about that. Look. I mean, I think that
bonds did horrifically last year, so one could argue that
(19:54):
there is some you know, kind of upside risk to
fixed income. From a yield perspective, bonds now offer much
more competitive income than than you know, the dividend yield
on the S and P five hundred, So a lot
of things have changed over the last twelve months. But
I think what worries me is that when you think
(20:15):
about bonds, the biggest demand for ten year treasuries over
the last few decades has been from the FED buying
bonds through quantitative easing and from China buying US treasuries.
And both of those big sources of demand have left
(20:36):
the building. So I think that that's something we need
to think about. Is quantitative tightening is happening real time.
I mean, it started last year, and basically our our
rates team thinks that quantitative tightening as projected will basically
remove about you know, a trillion plus dollars of demand
(20:58):
for treasuries. Over the next twelve months. That's a lot
of money, and we don't know who is going to
step in and fill that void. So our view is okay, Yeah,
bonds are offering a higher yield than they were last year,
so from an income perspective, they do look on the
margin more attractive than a lower dividend yielding equity. But
(21:21):
if rates continue to rise, and if that demand for
bonds is continuing to wane rather than wax, that's where
I worry about the upside risk to interest rates and
thus downside risk from a price perspective to bonds. I think.
Also what's shocking to me is that over the last
twelve months all of the equity bulls have become bond goals.
(21:42):
And the most one of the most consensus themes that
we hear is, you know, buy bonds in a recession
and then move into equities and the recovery. Our view
is this, like I said before, this might be a
very different recession where bonds don't necessarily hold up as well.
And the reason is that, you know, the twin deficits,
(22:03):
the fact that the public sector is holding the leverage.
So our view is okay, sure, dividends are lower, but
there are still a bunch of stocks in the SMP
five hundreds that offer competitive yields with bonds and with
the fixed income markets. And the good news is that
equities can grow their earnings if inflation remains sticky and high.
(22:24):
So buy companies that have you know, reasonable dividend yields
and also the ability to navigate an inflationary environment or
rising interest rate environment and continue to grow those dividends
and remain competitive with fixed income. So I still think
that the argument for holding equities in a rising interest
(22:44):
rate environment remains intact. Companies have the ability to grow earnings,
whereas fixed income is exactly that fixed income. You can't
grow your earnings in an environment of rising interest rates.
And with you know, equity income sort of being a
much bigger potential source of return, I think than it
than it has been in the last negade or so.
(23:06):
To simplify it's to sort of the most simplest terms.
Is it like by the aristocrats index type of thing,
do you think? Or that type of company? That type
of company exactly, these boring kind of steady eddie companies.
In fact, my favorite screen and I tell my parents
about this. I tell my friends about this, But my
favorite quantitative screen is like the easiest thing to do.
(23:27):
So you take the Russell in thousands stocks like the
one thousand largest companies in the US equity market. Take
the largest one thousand stocks in the US equity market.
You look for the dividend yield. You rank all these
companies by dividend yield, and then instead of buying the
highest dividend quintile, you buy quintile two. It's that easy.
(23:49):
So just by quintile two of the Russell in thousand
by dividend yield, and what that does is it gives
you kind of competitive yields with the market. So you're
buying companies higher dividend yields than the overall market. But
you're also screening out companies that are becoming very high
dividend yielders because their prices are falling and they're about
(24:11):
to cut their dividends, because that is anathema, and especially
during a recession, that's where a lot of these high
dividend yielding companies end up in purgatory for cutting their dividends.
And then you also basically clip that coupon and you
avoid companies that are growing too expensive when their dividend
yield drops, you know, below a certain threshold. So that's
(24:32):
where I think the real action is going to be
from a from a total return perspective. And one of
the things that we found is that quintile to by
dividend yield has outperformed every other quintile of the market
and has offered a much lower probability of losing money
than other areas within that dividend spectrum. So similar to
(24:55):
the aristocrats, it's really the idea of don't stretch for yield,
but look for safe and growing dividend. You I wanted
(25:18):
to ask about your process and say I put you now,
we know our favorite screens. In fact, I have a
headline in my head already. That's right. But I'm curious,
you know, since you and your team are so well followed,
so respected and influential on Wall Street, I'd love to
know just kind of the basics of your process. Say
(25:40):
I were to take you and put you on a
desert island for a year and then bring you back
and put you in front of a computer, what what
would be the first sort of things you would you
would look at? Yeah, I mean I think that well
it's always changing. So that's the tricky part. You know.
For the last ten years, one of the things that
we've been forced to pay attention to is how much
(26:01):
the FED and stimulus have juiced up the market. So
I think having a you know, a whole slew of
macro charts showing inflation trends, valuation trends, you know, kind
of UM leverage, you know, kind of the big picture
story for what's been happening in the world. So if
(26:22):
in twelve months we come back and we see that
the FED has successfully unwound all of the quantitative easing
that that we enjoyed, we'll feel a lot better about
the market because we were past that point of the unknown. UM.
I think also, you know, what we try to do
is look at you know, when when people talk about
you know, what you want to do is buy the
cheapest stops in the market. Well, some of the things
(26:44):
we try to do is we test those theories and
in many cases they hold true, but in many cases
they are patently false. So I think, you know, a
lot of our work, UM would be centered around Okay,
this seems like it's a it's a thesis that makes sense,
but Let's test it. Let's see how those stocks that
had you know, the lowest valuations, the highest free cashulalow yield,
(27:06):
all these different things that investors care about, Let's see
how they actually did in the real world. And one
of the things that I find fascinating is that human
behavior drives a lot of asset class rotation. And this
is sort of similar to the bonds versus stocks argument.
So you know, when you start to see if you know,
(27:28):
if I come back in a year and everybody hates
bonds and loves stocks again, that's going to change my
tune around, you know, whether you want to be in
stocks or bonds. So I think that also paying attention
to sentiment, positioning, crowding themes that are just well vaunted
and everybody is expecting something to happen, those are also
(27:51):
really important to pay attention to because you know, while
we learn in finance classes that it's all about earnings,
growth and terminal rates and you know, all the numbers,
in reality, there's a huge amount of psychology involved in
what works in a in a market cycle. So I
think that's also really important to pay attention to. Basically
just as much data as I could get my hands on,
(28:11):
I think would be the answer to your desert island question.
And memes, of course, don't you don't forgive me Twitter
the memes, the meme stocks are back in action that
Beth and Beyond, that's right, Yeah, I mean we don't
care as much attention to that because I feel like
the alpha there is so short term, so unpredictable, that
it's almost easier to fade that and wait for it
(28:32):
to be behind you. There's some good memes about bed
Bath and Beyond going around now because apparently they use
foam to make their towels look so pristine in the stores,
so now there's pictures of it all over the all
over Twitter, at which I need to spink less time. Um. Okay,
(28:53):
one one more very cool point from um one of
your your notes, you said, the market is hoping for
a FED pivot, but it really shouldn't. A FED easing
cycle amid tightening credit conditions. I e, recession has been
the worst backdrop for stocks, and I feel like nobody.
You're like the first person I've heard say this. Yeah,
I mean I think what what a FED pivot would
(29:13):
suggest is that the FED is worried and you know,
I think basically what we found is that when you're
in that environment where the FED has been tightening, credit
conditions have been tightening, and the FED feels as though
they're tightening has actually worked, it's sort of too late
(29:34):
and the damage is done within markets, and until credit
conditions actually ease, you don't want to be involved in equities.
So our view is right now it's happening, is the
feed is tightening and credit conditions are tightening. What would
be a better outcome is if credit conditions actually eased
(29:57):
in the next twelve months, and we don't think that's
going to up, and we think the FETE is going
to continue to tighten to try to cool this white
hot economy, super high inflation, and they will it like
they have in every other cycle, will probably go too far,
at which point you really don't want to be in equities.
(30:17):
You're you're really in that demand destruction recession mode, which
is a period of time where equities generally do the
most poorly. So I think that, you know, what what
we're seeing right now is sort of the FETE is
doing what they probably need to do. They're trying to
cool inflation, they're trying to unwind a lot of the
benefits that we enjoyed over the last ten years, and
(30:39):
them stopping prematurely wouldn't necessarily be a great sign. It
would be a sign that, you know, we're really in
in a demand slow down, and that would be negative
for earnings, that would be negative for cyclicals, that would
be negative for the economy, etcetera, etcetera. And that's you know,
precisely when you don't want to own cyclical equities. Savida Supermannian.
(31:01):
It's so great to catch up with you and hear
your take on the markets. We can't let you go
just yet, though. We have a little tradition here on
the podcast, Ldonna, what's it called craziest thing? I always
get it wrong? Weirdest? How many times we have we
done this, I always call it weirdest, right, and we
can call it weirdest if you want. I always get
it wrong. I'm sorry. I will literally never learn. I
(31:23):
will go first. Mine is actually very good. Okay, it's
super fun. Okay, I picked it with you in mind.
There's an India based company called Dream eleven. It runs
a fantasy sports platform and now their employees have to
pay a fine of one thousand, two hundred dollars if
they contact a colleague while the colleague is on a
(31:45):
day off. Isn't that crazy? I guess this company has
like a policy where workers have to take at least
a week off annually, and so if somebody emails you,
they have to pay this huge fine. Why did you
think of me on that? Because you love to email
me when I'm on, when I'm on, but it's usually
(32:09):
about the Buffalo bills or something that yeah, or about
the podcast. How about you, Savida? Have you seen anything
crazy recently? Here's what I think is crazy. Feels like
every investor is laser focused on what the FED is
doing with the short end, with you know, FED funds rates,
how much they're tightening on the short end. But the
(32:29):
truth is it doesn't actually matter that much. The long
end is much more important, and nobody is talking about
quantitative tightening. That to me is the craziest thing in
the market is that we are all focused on the
exact wrong part of the curve. That's pretty good, that's
pretty good. What I mean, is there a potential for
(32:51):
them to ease up on quantitative tightening before cutting rates?
You think? And how would that be? Perceived. Well, I
think that that's what everybody is hoping for, but I
don't necessarily know if that happens. If they really want
to control inflation, they need to tighten on both ends.
So I mean, I just feel like this is a
market cycle where well, oh, here's the other crazy things.
(33:11):
So if you think about the average portfolio manager, the
average age of a portfolio manager in the United States
is about forty I think it's like forty three years old.
Make me feel old, the oldest person in the room,
and fine, and forty three years old, So think about it.
This has been a cohort of individuals who have worked
(33:34):
during a period where all you needed to do was
by the stocks that went up. Momentum was the best
stock selection factor for the last you know, couple of
decades here. So that's what portfolio managers and professional investors
have been sort of trained to do on this almost
in this Pavlovian process. And you know, valuation hasn't mattered
(33:58):
for a very long time up until us the last
couple of years. So I think that's another very interesting
part of this environment. Yeah, definitely on the flip side, though,
they also grew up with supercomputers, and you know, we
didn't even know what quant and factor investing was back
in the day, So you know there there maybe there's
(34:18):
an edge there too, to the youth and the technocratic
nature of it. True, you young whipper snapforts, all right,
that's pretty good. All right to my crazy thing. I
had you in mind, and Voldonna, because I'm gonna put
the two of you against each other in our game show.
(34:39):
The prices prices precise, not the prices, right, Savita, Yes,
completely different, so differently, completely different. But Savida, I know
you look at a million different points of data. One
thing I don't ever hear anyone talking about is actually
the share prices of different companies. You'd never hear any
analysis for good reason. What's it really matter? Where does it?
(35:01):
I don't know. So the question is what's the highest
stock price in the sp I'm not talking about evaluation,
I'm not talking about Hathway. It's not it's not Berkshire
Hathway what they used to well remember they were excluded
from the SMP for a long time before they did
the split. To uh, it's not Berkshire hath not Perkshure Hathway.
(35:23):
The highest price stock in the SMP five hundred just
share price, not priced the book. Just watch her down
to make sure she doesn't pull up her I'm looking
straight at the camera. I mean, I would have to
say it's like one of the mega cab tech companies
that have just never that haven't split. But I feel
(35:45):
like all of them have split. Um, that's true. And
remember it's a crazy thing because you're probably not gonna
get it. It's exactly we never hear much about. Is
it one of those like I'll give you You're right.
I don't think it's ever done to split it did
a reverse one for thirty split way back in nineteen three.
No splits. Since I bet it's one of those like
(36:06):
research companies, what's the one they just like have like
public profiles and do consulting for different public companies like shoot,
I'll remember it all right, wild guests, just at the price,
you don't have to name the company. Undred eighteen hundred
dollars Sevita, what do you think three thousand, three thousand
(36:29):
Sevita is a little bit closer four thousand, eight hundred
and twenty eight dollars from shared down from a peak
by the way of fifty nine dollars in December. You'll
never in a million years guess the company NVR Inc.
The trades for almost five thousand dollars a share. I
(36:51):
don't even know this company, so you think about that
or a round lot of you know of NVR is
gonna cost you half a million dollars? Basically, isn't it
silly not to split that Sevida Like, he's never a
liquidity premium that you're missing out on and everything. I
mean absolutely, that is why how many shares are outstanding?
(37:12):
I don't know. I think it's like a fifteen billion
dollar ish market cap, so interesting. I never would have
guessed it. I never and that's why I think it's
the craziest thing I saw this week. That is wild.
I need But now I'm so bothered by not having
not being able to remember the other company I was
(37:32):
thinking of because I didn't really even guess one r NVR. Okay,
that's wild. Is the craziest thing I saw this week.
Wild thing I saw. But I'm glad you didn't guess it.
Actually I was. I was thinking Sevida is going to
get this, But I'm glad you don't know. No, I'm like,
I'm more. I don't. I don't. I'm not a stock jock.
(37:54):
I'm more of like a macro. So yeah, I was
lummoxed by that one. That is a good question. That's good.
I find it still a company would let their stock
price trade that high, but real maybe they're proud of it.
Yeah exactly, I mean we're talking about it, so right. Anyway, Savita,
(38:17):
is so great to catch up with you. Really fascinating conversation.
I hope we can have you back something likewise. Thank
you again, Yeah, thank you for joining us What Goes Up.
We'll be back next week and so then you can
find us on the Bloomberg Terminal website and app or
(38:38):
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 Rea Anonymous,
Bill Donna Hich is at Bildonna Hich. You can also
follow Bloomberg Podcasts at Podcasts. What Goes Up is produced
by Stacy Wong. That for listening, to see you next time.
(39:07):
Thank thank thank
Hello, and welcome to What Goes Up, a weekly markets podcast.
My name is Mike Reagan. I'm a senior editor at
Bloomberg and then mal Donna Hark across Acid reporter with Bloomberg.
This week on the show, Well, in case you missed it,
there's a little bit of tension brewing on Wall Street.
Many economists and macro oriented investors are bracing for a
recession in and with that would likely come a nasty
(00:36):
drop in corporate profits. But analysts who study individual companies
haven't reduced their profit estimates enough yet to signal and
earnings recession is on the way. So what exactly is
up with this disconnect between the top down and the
bottom up views of the market and what does it
mean for your investments in We'll get into it with
one of Wall Street's best known strategists. But first of all, Donna,
(00:59):
I gotta tell you, I'm freaking out about something, but
you're freaking out about a lot of I'm freaking out
about something. Yeah, what is it? What do you cook
your cauliflower with? What type of stove do you have?
Oh my god, this is a sore subject for me.
Our gas is out in our building. I'm not cooking
anything that's good, that's good. Why these gas stoves are
killing us all? Do you realize that they're they're banning
(01:21):
them right, They're going to ban them all nowhere. I'm
very alarmed that news came out the same day that
they turned my gas off, well in my entire building.
So I'm not I'm just not going to eat. Yeah,
I'm just not going to eat for the next like
three months. Probably. I think this is a scheme by
door dash. I think they want you to go along door.
(01:42):
What do you think we should check how much they're
paying lobbyists to kill gas ovens? All right, Well, maybe
our guest has some thoughts on doordas. She might, she
might not. Probably not, I'll spoil it, probably not. But
who doesn't like delivery? Everybody likes celebrity, including our guests.
Probably I want to bring in Sevita Subramanian. She's the
(02:03):
head of US equity strategy at Bank of America. Savita,
welcome to the show. Thanks for having me. B Donna,
and I do love delivery. Who doesn't. I wish my
guest stove was out so that I had a good
excuse not to cook. It is a very good excuse
to get take out. I always thought my guest stove
(02:24):
was gonna kill me because the kids always leave the
pizza box on top of it, and I'm afraid the
dog's gonna sniff the pizza and go and turn. These
are some crazy it won't happen. It won't happen. Um
but sevida so so. Mike mentioned in the introduction, you're
one of our best known strategies on Wall Street, and
so I wanted maybe to just start out having you
(02:46):
tell us about your year and price target for the
SMP five hundred, and I believe that you guys also
have different variables and scenes playing out for the year.
Maybe you can talk about those as well. Yeah. Absolutely,
it's um so so our official year in target. You know,
it's it's kind of a point in time forecast where
we we think the market will close around four thousand
(03:08):
the SMP five hundred, which is really limited upside from here.
Um but we think there's a lot of moves within
the year. So let's talk about a range. I think
our book case, like, if everything goes right, we think
the market could go as high as forty hundred, which
would be a pretty great year, and then our bear
case and what we think is a reasonable floor for
(03:30):
the market is three thousand, which would be quite a
big drop from here. So, you know, I think our
views are in two thousand twenty three, it might be
a less than stellar year for the index, for the
market index, but we think there are gonna be a
lot of great opportunities within the SMP five hundred. And
(03:51):
you know, I think that's where we're really focused with
with our views is what sectors, what themes, you know,
what areas within the SMP five hundred can actually do
pretty well this year, you know, amidst a backdrop of
of relatively muted returns for the overall market. I want
to get into those themes and sectors sevida. But like
(04:12):
I said in the introduction, I'm fascinated by this notion
that pretty much everyone assumes all these earnings estimates from
the analysts right now or wrong, you know, all the
top down view of the market is that what are
they thinking, Uh, these estimates have to be cut? What
do you think explains that? I mean, our our analysts
just sort of waiting for the companies themselves to lower guidance.
(04:34):
You know, is this four fourth quarter reporting season really
gonna pull that out from all the conference calls. You know,
how do you see this unfolding? I think you're right.
I think that analysts are in sort of weight and
C mode, and maybe even companies are in weight and
C mode, because you know, the real positive surprise over
the last few years is that despite rampant inflation, cost
(04:59):
pressure or wage pressure, you know, everything going up to
you know, pretty high levels in terms of you know,
kind of margin pressure, companies have managed to navigate this
by either you know, pricing products more aggressively or by uh,
you know, cutting costs. And I think on top of that,
(05:20):
we're seeing corporates very nimble in terms of cutting costs.
A lot of the headlines recently have been around megacap
tech companies, you know, uh, kind of reducing their compensation
cost structure by by layoffs, you know, not necessarily great
for the economy, but good for their bottom line. So
so I think that analysts and you know, in corporates
(05:40):
are are probably a little less convicted in terms of
margins and cost pressure and pricing power going forward. Our
view is that we are likely to see some downward revisions,
and you know, our forecast for profits growth for three
is you know, two hundred bucks for the SMP five hundred,
(06:03):
and that would mean about a ten percent decline in
earnings peak to trough. Now, you know, I think that
makes sense to us amidst UH forecasts for a recession.
This is, you know, one of the most widely telegraphed
recessions of of all time. I think we're all just
sitting here bracing ourselves for it. UM, a teen percent
(06:25):
drop in earnings would actually be half of the typical
recessionary corporate earnings drop. So so we think that we
are going to see those estimates come down, and it's
likely to happen after companies guide more aggressively lower around
three earnings UM. But you know, I think where we're
going to see pressures are in companies with more labor intensity,
(06:47):
like services companies, companies where you're really seeing cost pressure
remain high. Those are the areas where we think that
we're going to see some downward guides on on margins
and savita. I want to ask you about what specifically
you'll be looking for this earning season, and I think
you guys have you guys have really great UM daily
(07:08):
and weekly research. I remember from past earning seasons that
you have Maybe it's sort of like an AI driven
model or something along those lines, where you sift through
all the earnings reports and you look for keywords and
some of the things that are mentioned the most number
of times. So if we're behind, if we have peak
inflation behind us, UM, what will you be looking for?
(07:31):
What keywords, what trends and and and UM will you
be sort of cluing into as these earnings reports roll out? Yeah,
thanks for that question, and thanks for reading our research.
Always read it. We do a lot of kind of
text analysis, and you know, some of the things that
we've been able to unearth UM during different periods are
(07:54):
you know, kind of inventory pressures, UM, demand destruction, UM
inability to price. So this quarter what we are laser
focused on our couple of things. As I mentioned, we
want to hear more from companies around whether the tightness
in the labor market is alleviating, because that has been
the theme for the last you know, almost eight quarters now,
(08:16):
is just the inability of companies to source labor unless
they dramatically increase prices, especially at the lower income end. UM.
We're also listening for more news around layoffs in services sectors.
So you know, so far we've really heard it only
from you know, megacab tech companies. We're waiting to see
whether that spreads to a broader array of companies. UM,
(08:38):
we're also listening for thoughts around you know, kind of
this inventory mismatch. So we've seen some of the supply
chain frictions alleviate, and now we're wondering how much inventory
companies have to work off, and that could be another
drag on on pricing, power, demand, earnings pressure, etcetera. We're
(08:59):
all you I think some of the other factors that
we're paying attention to from a from an earnings for
share perspective are buy backs. So you know, the last
five years we've seen buy backs contribute about ten percentage
points of SMP profits growth. That's a huge amount and
it's really unusual versus prior cycles. So if that buy
(09:20):
back trend also decelerates, and there are good reasons to
believe it does, I mean, the government is now taxing
corporate buy backs. You know, companies might be more likely
to hold cash rather than spend it on buy backs
if we are worried about a downturn. So that's another
trend we're listening for um and our view is again
for share earnings growth has been really juiced up over
(09:42):
the last five plus years by just um you know,
rampant buy back activity, and if that cools, that will
be another source of potential risk to two earnings going forward.
You know, Sevita, you've mentioned some of the layoffs among
the big tech company ease. I think a lot of
people are bracing for perhaps a wave of layoffs in
(10:03):
the financial sector, you know, which I'm assuming a lot
of our listeners are employed in our layoffs. Automatically good
news for the share price this year is as just
to be blunt and say it out front. If if
I see a headline such and such is cutting x percent,
is that automatically good news for the stock price or
is it is there more nuanced? Do you think, well,
(10:24):
you know, it's good news and that the company is
being nimble and addressing this issue of you know, bloated
compensation costs and maybe you know, rationalizing capacity. But I
do think that the the signal it's giving us is
that this company is in workout mode. So yes, they're
being nimble, they're addressing these issues. But First of all,
(10:46):
it means that they you know, sort of misallocated capital
um in in in a better period of time. And
second of all, it means that from an economic perspective, especially,
I think in this getting into this recession, what could
be different this time is that a lot of the
layoffs are really happening at the higher income end or
(11:06):
the skilled labor end. And what that means is that,
you know, typically in a recession, luxury goods are more
defensive than lower, lower price point products. But in this recession,
maybe luxury isn't as defensive because a lot of the
layoffs are really much more acute at that kind of
skilled services and tech level. UM. So those are some
(11:28):
of the things that we're watching from a company perspective.
For the most part, we've found that investors have lauded
the news around layoffs um you know, as a source
of alleviation of margin pressure. But I think that you know,
whether or not that's enough to offset the Also, deteriorating
(11:48):
demand is the big question, so top line becomes important. Yes,
companies are being very nimble at managing costs, but they're
doing this because they're seeing less demand and and less
ability to um, you know, continue operations with their current
labor setups, so that that votes ill for you know,
demand in uh in terms of uh, you know, kind
(12:11):
of top line growth. When we look at tech companies,
one of the things that worries us, and we're underweight
information technology as well as communication services, and one of
the things that worries us is that, you know, kind
of similar to Y two K back in two thousand,
we've seen this massive pull forward of demand for tech
(12:31):
during COVID work from home, um, you know kind of
you know, all of the telecommuting that we've done, and
so what we're seeing now is potentially a hit to
CAPEX on software of companies that already sort of you know,
really address their software spend over the last couple of years.
(12:55):
So I think that's what we're worried about for tech
companies is you know, maybe what they're doing is great
in terms of managing costs, but how much of their
demand is really cyclical rather than as sticky as what
everybody was forecasting, you know, in the in prior years.
And we mentioned recession a couple of times down how
(13:15):
this is one of the most well telegraphed recessions ever
but you actually say that this is not your mom
and dad's recession. So I'm wondering what you are expecting
and how you might characterize. I will say that was
good news when I read that, because my dad was
born right at the beginning of the Great Depression. So
for me, that's why you could crowd his life. You
(13:40):
could put like ten pounds of spaghetti on his plate.
He'd eat every piece of spaghetti because he yea spaghetti
is exactly right. I mean, I think that when we
think about our parents, and you know, prior generations, recessions
looked really different. And I think I mean, obviously the
Depression was was one of the most acute recessions we've
(14:03):
ever seen, I think, even two thousand and eight, when
when you think about kind of the drama that took
place within corporate America, within consumers, homeowners, it was really
broad spread. It was driven by this you know, massive
credit cycle. And I think the good news is that
today corporates and consumers actually look pretty well capitalized, at
(14:28):
least for the time being. And maybe that's just a
function of really low interest rates, but I think what
corporates learned in two thousand and eight was that leverage
is evil, and they have now locked in relatively long
dated fixed rate obligations on the on the debt side,
Like to me, the most encouraging number is if you
(14:50):
compared today's average maturity of debt on SMP balance sheets
to that in two thousand eight, today debt terms out
at about on average a eleven years back in a way,
it was more like seven years. So we've seen this
this longer duration exposure to to fixed rate debt, which
I think is good news because that means that higher
(15:11):
interest rates won't hurt these companies overnight and they have
time to navigate that that process. Consumers similarly are well.
They got a big bullus of cash from the government
in one so you know, balance sheets of consumers and
corporates look pretty great. The government is holding the bag
when it comes to debt. So if you look at deficits,
(15:32):
if you look at FED balance sheets, I think what's
different today is that the FED has never had this
type of an asset base. We've seen trillions of dollars
of you know, kind of bond purchases occur over the
last ten plus years, which have been great for risk assets,
but not you know how does the FED navigate unwinding
(15:53):
all of that debt? I think that's the trillion dollar
question because we've never seen this movie for and and
that's what We're a little more worried about the public
sector than the private sector in this recession. I think
what blows my mind the most is, you know, we
(16:15):
are all expecting this recession, and then yet you right
in your quant models the most attractive sector is financials,
which you know would not be what you would expect
ahead of you know, at least these big recessions that
you know, two thousand and eight, that sort of thing.
So yeah, I guess to some degree that's just a
testament to the effectiveness of the of the reforms of
(16:38):
two thousand and eight, and how what a different economic
environment it is with the high inflation everything. But walk
us through what makes financial stick out in your quant
models to be so attractive? Yeah, I mean it's a
it's a great question because I think when you think
about what to own in a recession, financials would probably
be the last sector you'd want to own. And it's
(16:59):
because we all think of two thousand and eight, where
that was the point of maximum pain. Today, I think
the good news is that financials companies are not necessarily
holding the credit risk. They haven't really been allowed to
lend to low quality consumers. They've been you know, kind
of regulated by the government, um, forced to arguably over
(17:19):
capitalize balance sheets or you know, today, if you look
at a chart of leverage for financials, we're at you know,
a sixth of where we were in terms of leverage
risk relative to two thousand eight. And we've never seen
this type of a monstrous drop in leverage going back
to you know, the nineteen thirties. So I think where
(17:39):
the lending risk resides is not necessarily in US large
cap banks or financial companies. It's really outside of the
financial sector. You know, you've seen a lot of of
lending through private equity, venture capital UM companies that have
burgeoned in an environment of zero in trist rates, zero
(18:01):
hurdle rates, you know, kind of free capital, and I
think that's where we are more worried about this unwind
of public sector debt. So yeah, So, like I said,
it's not your mom and dad's recession and that the
credit cycle. You know, we are seeing credit conditions tighten,
but it's not necessarily as threatening. Two banks given that
(18:24):
they've been regulated to deal with these types of credit
credit cycles. Um from lessons that we learned in O eight. Uh,
you know, I think financials is also this sort of
closet high quality sector. And it feels weird for me
to say this having lived through the financial crisis, But
when you look at the earnings variability of financial companies
(18:45):
relative to the market, you know, tech is a far
more cyclical sector today than financials is. Financial companies actually
have lower earnings volatility than the SMP five hundred, which
is kind of shocking, right, I mean, it's it's almost
like financial has morphed into the regulated utilities sector because
of you know, the fact that these companies have been
(19:08):
so scrutinized and have been so disciplined about capital cushions. Said,
I also want to ask you about this point that
you make about how bonds over stocks is now the
consensus for at least the first half. But then you
also add, um, given drops in equity sentiment and positioning,
one of the biggest risks today might be that of
(19:30):
being under invested in stocks. So how are you thinking
about this? Because we heard we've also been hearing from
people I think even gun Luck said it earlier this
weekest part of his quarterly webcast, that people should be
positioning six in bonds and stocks, And I'm wondering what
you think about that. Look. I mean, I think that
bonds did horrifically last year, so one could argue that
(19:54):
there is some you know, kind of upside risk to
fixed income. From a yield perspective, bonds now offer much
more competitive income than than you know, the dividend yield
on the S and P five hundred, So a lot
of things have changed over the last twelve months. But
I think what worries me is that when you think
(20:15):
about bonds, the biggest demand for ten year treasuries over
the last few decades has been from the FED buying
bonds through quantitative easing and from China buying US treasuries.
And both of those big sources of demand have left
(20:36):
the building. So I think that that's something we need
to think about. Is quantitative tightening is happening real time.
I mean, it started last year, and basically our our
rates team thinks that quantitative tightening as projected will basically
remove about you know, a trillion plus dollars of demand
(20:58):
for treasuries. Over the next twelve months. That's a lot
of money, and we don't know who is going to
step in and fill that void. So our view is okay, Yeah,
bonds are offering a higher yield than they were last year,
so from an income perspective, they do look on the
margin more attractive than a lower dividend yielding equity. But
(21:21):
if rates continue to rise, and if that demand for
bonds is continuing to wane rather than wax, that's where
I worry about the upside risk to interest rates and
thus downside risk from a price perspective to bonds. I think.
Also what's shocking to me is that over the last
twelve months all of the equity bulls have become bond goals.
(21:42):
And the most one of the most consensus themes that
we hear is, you know, buy bonds in a recession
and then move into equities and the recovery. Our view
is this, like I said before, this might be a
very different recession where bonds don't necessarily hold up as well.
And the reason is that, you know, the twin deficits,
(22:03):
the fact that the public sector is holding the leverage.
So our view is okay, sure, dividends are lower, but
there are still a bunch of stocks in the SMP
five hundreds that offer competitive yields with bonds and with
the fixed income markets. And the good news is that
equities can grow their earnings if inflation remains sticky and high.
(22:24):
So buy companies that have you know, reasonable dividend yields
and also the ability to navigate an inflationary environment or
rising interest rate environment and continue to grow those dividends
and remain competitive with fixed income. So I still think
that the argument for holding equities in a rising interest
(22:44):
rate environment remains intact. Companies have the ability to grow earnings,
whereas fixed income is exactly that fixed income. You can't
grow your earnings in an environment of rising interest rates.
And with you know, equity income sort of being a
much bigger potential source of return, I think than it
than it has been in the last negade or so.
(23:06):
To simplify it's to sort of the most simplest terms.
Is it like by the aristocrats index type of thing,
do you think? Or that type of company? That type
of company exactly, these boring kind of steady eddie companies.
In fact, my favorite screen and I tell my parents
about this. I tell my friends about this, But my
favorite quantitative screen is like the easiest thing to do.
(23:27):
So you take the Russell in thousands stocks like the
one thousand largest companies in the US equity market. Take
the largest one thousand stocks in the US equity market.
You look for the dividend yield. You rank all these
companies by dividend yield, and then instead of buying the
highest dividend quintile, you buy quintile two. It's that easy.
(23:49):
So just by quintile two of the Russell in thousand
by dividend yield, and what that does is it gives
you kind of competitive yields with the market. So you're
buying companies higher dividend yields than the overall market. But
you're also screening out companies that are becoming very high
dividend yielders because their prices are falling and they're about
(24:11):
to cut their dividends, because that is anathema, and especially
during a recession, that's where a lot of these high
dividend yielding companies end up in purgatory for cutting their dividends.
And then you also basically clip that coupon and you
avoid companies that are growing too expensive when their dividend
yield drops, you know, below a certain threshold. So that's
(24:32):
where I think the real action is going to be
from a from a total return perspective. And one of
the things that we found is that quintile to by
dividend yield has outperformed every other quintile of the market
and has offered a much lower probability of losing money
than other areas within that dividend spectrum. So similar to
(24:55):
the aristocrats, it's really the idea of don't stretch for yield,
but look for safe and growing dividend. You I wanted
(25:18):
to ask about your process and say I put you now,
we know our favorite screens. In fact, I have a
headline in my head already. That's right. But I'm curious,
you know, since you and your team are so well followed,
so respected and influential on Wall Street, I'd love to
know just kind of the basics of your process. Say
(25:40):
I were to take you and put you on a
desert island for a year and then bring you back
and put you in front of a computer, what what
would be the first sort of things you would you
would look at? Yeah, I mean I think that well
it's always changing. So that's the tricky part. You know.
For the last ten years, one of the things that
we've been forced to pay attention to is how much
(26:01):
the FED and stimulus have juiced up the market. So
I think having a you know, a whole slew of
macro charts showing inflation trends, valuation trends, you know, kind
of UM leverage, you know, kind of the big picture
story for what's been happening in the world. So if
(26:22):
in twelve months we come back and we see that
the FED has successfully unwound all of the quantitative easing
that that we enjoyed, we'll feel a lot better about
the market because we were past that point of the unknown. UM.
I think also, you know, what we try to do
is look at you know, when when people talk about
you know, what you want to do is buy the
cheapest stops in the market. Well, some of the things
(26:44):
we try to do is we test those theories and
in many cases they hold true, but in many cases
they are patently false. So I think, you know, a
lot of our work, UM would be centered around Okay,
this seems like it's a it's a thesis that makes sense,
but Let's test it. Let's see how those stocks that
had you know, the lowest valuations, the highest free cashulalow yield,
(27:06):
all these different things that investors care about, Let's see
how they actually did in the real world. And one
of the things that I find fascinating is that human
behavior drives a lot of asset class rotation. And this
is sort of similar to the bonds versus stocks argument.
So you know, when you start to see if you know,
(27:28):
if I come back in a year and everybody hates
bonds and loves stocks again, that's going to change my
tune around, you know, whether you want to be in
stocks or bonds. So I think that also paying attention
to sentiment, positioning, crowding themes that are just well vaunted
and everybody is expecting something to happen, those are also
(27:51):
really important to pay attention to because you know, while
we learn in finance classes that it's all about earnings,
growth and terminal rates and you know, all the numbers,
in reality, there's a huge amount of psychology involved in
what works in a in a market cycle. So I
think that's also really important to pay attention to. Basically
just as much data as I could get my hands on,
(28:11):
I think would be the answer to your desert island question.
And memes, of course, don't you don't forgive me Twitter
the memes, the meme stocks are back in action that
Beth and Beyond, that's right, Yeah, I mean we don't
care as much attention to that because I feel like
the alpha there is so short term, so unpredictable, that
it's almost easier to fade that and wait for it
(28:32):
to be behind you. There's some good memes about bed
Bath and Beyond going around now because apparently they use
foam to make their towels look so pristine in the stores,
so now there's pictures of it all over the all
over Twitter, at which I need to spink less time. Um. Okay,
(28:53):
one one more very cool point from um one of
your your notes, you said, the market is hoping for
a FED pivot, but it really shouldn't. A FED easing
cycle amid tightening credit conditions. I e, recession has been
the worst backdrop for stocks, and I feel like nobody.
You're like the first person I've heard say this. Yeah,
I mean I think what what a FED pivot would
(29:13):
suggest is that the FED is worried and you know,
I think basically what we found is that when you're
in that environment where the FED has been tightening, credit
conditions have been tightening, and the FED feels as though
they're tightening has actually worked, it's sort of too late
(29:34):
and the damage is done within markets, and until credit
conditions actually ease, you don't want to be involved in equities.
So our view is right now it's happening, is the
feed is tightening and credit conditions are tightening. What would
be a better outcome is if credit conditions actually eased
(29:57):
in the next twelve months, and we don't think that's
going to up, and we think the FETE is going
to continue to tighten to try to cool this white
hot economy, super high inflation, and they will it like
they have in every other cycle, will probably go too far,
at which point you really don't want to be in equities.
(30:17):
You're you're really in that demand destruction recession mode, which
is a period of time where equities generally do the
most poorly. So I think that, you know, what what
we're seeing right now is sort of the FETE is
doing what they probably need to do. They're trying to
cool inflation, they're trying to unwind a lot of the
benefits that we enjoyed over the last ten years, and
(30:39):
them stopping prematurely wouldn't necessarily be a great sign. It
would be a sign that, you know, we're really in
in a demand slow down, and that would be negative
for earnings, that would be negative for cyclicals, that would
be negative for the economy, etcetera, etcetera. And that's you know,
precisely when you don't want to own cyclical equities. Savida Supermannian.
(31:01):
It's so great to catch up with you and hear
your take on the markets. We can't let you go
just yet, though. We have a little tradition here on
the podcast, Ldonna, what's it called craziest thing? I always
get it wrong? Weirdest? How many times we have we
done this, I always call it weirdest, right, and we
can call it weirdest if you want. I always get
it wrong. I'm sorry. I will literally never learn. I
(31:23):
will go first. Mine is actually very good. Okay, it's
super fun. Okay, I picked it with you in mind.
There's an India based company called Dream eleven. It runs
a fantasy sports platform and now their employees have to
pay a fine of one thousand, two hundred dollars if
they contact a colleague while the colleague is on a
(31:45):
day off. Isn't that crazy? I guess this company has
like a policy where workers have to take at least
a week off annually, and so if somebody emails you,
they have to pay this huge fine. Why did you
think of me on that? Because you love to email
me when I'm on, when I'm on, but it's usually
(32:09):
about the Buffalo bills or something that yeah, or about
the podcast. How about you, Savida? Have you seen anything
crazy recently? Here's what I think is crazy. Feels like
every investor is laser focused on what the FED is
doing with the short end, with you know, FED funds rates,
how much they're tightening on the short end. But the
(32:29):
truth is it doesn't actually matter that much. The long
end is much more important, and nobody is talking about
quantitative tightening. That to me is the craziest thing in
the market is that we are all focused on the
exact wrong part of the curve. That's pretty good, that's
pretty good. What I mean, is there a potential for
(32:51):
them to ease up on quantitative tightening before cutting rates?
You think? And how would that be? Perceived. Well, I
think that that's what everybody is hoping for, but I
don't necessarily know if that happens. If they really want
to control inflation, they need to tighten on both ends.
So I mean, I just feel like this is a
market cycle where well, oh, here's the other crazy things.
(33:11):
So if you think about the average portfolio manager, the
average age of a portfolio manager in the United States
is about forty I think it's like forty three years old.
Make me feel old, the oldest person in the room,
and fine, and forty three years old, So think about it.
This has been a cohort of individuals who have worked
(33:34):
during a period where all you needed to do was
by the stocks that went up. Momentum was the best
stock selection factor for the last you know, couple of
decades here. So that's what portfolio managers and professional investors
have been sort of trained to do on this almost
in this Pavlovian process. And you know, valuation hasn't mattered
(33:58):
for a very long time up until us the last
couple of years. So I think that's another very interesting
part of this environment. Yeah, definitely on the flip side, though,
they also grew up with supercomputers, and you know, we
didn't even know what quant and factor investing was back
in the day, So you know there there maybe there's
(34:18):
an edge there too, to the youth and the technocratic
nature of it. True, you young whipper snapforts, all right,
that's pretty good. All right to my crazy thing. I
had you in mind, and Voldonna, because I'm gonna put
the two of you against each other in our game show.
(34:39):
The prices prices precise, not the prices, right, Savita, Yes,
completely different, so differently, completely different. But Savida, I know
you look at a million different points of data. One
thing I don't ever hear anyone talking about is actually
the share prices of different companies. You'd never hear any
analysis for good reason. What's it really matter? Where does it?
(35:01):
I don't know. So the question is what's the highest
stock price in the sp I'm not talking about evaluation,
I'm not talking about Hathway. It's not it's not Berkshire
Hathway what they used to well remember they were excluded
from the SMP for a long time before they did
the split. To uh, it's not Berkshire hath not Perkshure Hathway.
(35:23):
The highest price stock in the SMP five hundred just
share price, not priced the book. Just watch her down
to make sure she doesn't pull up her I'm looking
straight at the camera. I mean, I would have to
say it's like one of the mega cab tech companies
that have just never that haven't split. But I feel
(35:45):
like all of them have split. Um, that's true. And
remember it's a crazy thing because you're probably not gonna
get it. It's exactly we never hear much about. Is
it one of those like I'll give you You're right.
I don't think it's ever done to split it did
a reverse one for thirty split way back in nineteen three.
No splits. Since I bet it's one of those like
(36:06):
research companies, what's the one they just like have like
public profiles and do consulting for different public companies like shoot,
I'll remember it all right, wild guests, just at the price,
you don't have to name the company. Undred eighteen hundred
dollars Sevita, what do you think three thousand, three thousand
(36:29):
Sevita is a little bit closer four thousand, eight hundred
and twenty eight dollars from shared down from a peak
by the way of fifty nine dollars in December. You'll
never in a million years guess the company NVR Inc.
The trades for almost five thousand dollars a share. I
(36:51):
don't even know this company, so you think about that
or a round lot of you know of NVR is
gonna cost you half a million dollars? Basically, isn't it
silly not to split that Sevida Like, he's never a
liquidity premium that you're missing out on and everything. I
mean absolutely, that is why how many shares are outstanding?
(37:12):
I don't know. I think it's like a fifteen billion
dollar ish market cap, so interesting. I never would have
guessed it. I never and that's why I think it's
the craziest thing I saw this week. That is wild.
I need But now I'm so bothered by not having
not being able to remember the other company I was
(37:32):
thinking of because I didn't really even guess one r NVR. Okay,
that's wild. Is the craziest thing I saw this week.
Wild thing I saw. But I'm glad you didn't guess it.
Actually I was. I was thinking Sevida is going to
get this, But I'm glad you don't know. No, I'm like,
I'm more. I don't. I don't. I'm not a stock jock.
(37:54):
I'm more of like a macro. So yeah, I was
lummoxed by that one. That is a good question. That's good.
I find it still a company would let their stock
price trade that high, but real maybe they're proud of it.
Yeah exactly, I mean we're talking about it, so right. Anyway, Savita,
(38:17):
is so great to catch up with you. Really fascinating conversation.
I hope we can have you back something likewise. Thank
you again, Yeah, thank you for joining us What Goes Up.
We'll be back next week and so then you can
find us on the Bloomberg Terminal website and app or
(38:38):
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 Rea Anonymous,
Bill Donna Hich is at Bildonna Hich. You can also
follow Bloomberg Podcasts at Podcasts. What Goes Up is produced
by Stacy Wong. That for listening, to see you next time.
(39:07):
Thank thank thank
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