Opinions Veeral KhatriA Comment -- General Comments From an ExpertA CommentaryN/ADec 08, 2017
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AI hardware stocks caught in a supply chain bottleneck are going parabolic now, given so much demand and limited supply. And yet Sandisk is trading at only 9-10x and their income margin has shot up from 5% last October to now 70%. They command extreme prices. Ultimately, hardware will see competition enter this space. You can't have 5 years of backlog and 1,500 data centres by 2028 at the same time. Software: do these companies have a subscription or usage-based model? Ultimately, AI will disrupt the subs model, but if you provide a service and infrastructure to AI agents, this is positive (usage-based), like Datadog and Snowflake. He likes software and the Q1 sell-off of 50-70% piqued his interest, but these businesses are still growing 10-30% topline and very profitable. He dove in. These stocks are a lot less attractive now than in Q1. That sell-off was partly due to short covering. The ones that have since gone parabolic will catch their breath, so any pullback would be a buy.
It's more about narrative and momentum that's driving share prices now, because there's much more algorithmic trading and more retail investors. So, market are growing more detached from fundamentals for longer. It's riskier, so pick your spots. Retails investors look at headlines, rather than ROI. Problem is, that creates bubbles.
When markets are at all-time highs, sometimes it's justified and sometimes it's speculation. He'd argue that right now there's an element of speculative excitement, as well as real fundamental earnings growth.
But we have this massive, diverging economy between the haves and the have-nots. And it's evident in a lot of places.
His belief (not the majority view) is that there's no way we come out of this with the IRGC governing Iran. He can't imagine any scenario where they're OK giving up their nuclear ambitions and walking away. It'll get a lot worse before it gets better.
But, contrary to his views, the market thinks there's a deal coming any day now.
There's always something more in tech, and he talked about quantum on last week's show. Technology is wildly disinflationary in terms of the productivity it adds.
For him, it always comes back to what do you pay today for that future growth? We're paying a bit too much for it. A case in point is SpaceX. The current generation won't be living on Mars. Perhaps there will be a reason for it someday for their great-grandchildren. The hype is completely misguided.
Loves it. At his firm, he's seeing vibe coding and productivity enhancements that are fantastic. It's very real and it's tangible. It'll have dislocations and disruptions in terms of employment -- the debate now is how much.
Some are saying we need a universal basic income, as a lot of white-collar jobs will be taken away. Robotics may replace a lot of blue-collar jobs, but that's been happening for decades. Still more blue-collar jobs today than there have ever been.
Time will tell. Question is what do you pay for these things today?
It's a great question to ask, especially as equities and valuations are at all-time highs.
Traditional fixed income is broken as an asset class. Because inflation is, potentially, a problem in the decades ahead (which it hasn't been for 40 years), we need to think about the traditional 60/40 split differently. We need to bring other asset classes into our portfolio.
An investor at this stage of experience in life, who has certain income needs, requires a very specific financial plan. They should work with someone. He can't give adequate advice during an on-air call-in show.
What he can say, however, is that traditional fixed income may not meet an investor's needs on real return. If you need growth because you spend more than you have, it's going to be harder to go to a fixed-income portfolio. It's not about trading decisions, it's about having the asset classes you need. It's about income needs and risk tolerances.
For example, there are all kinds of headlines about private credit today. But the right kind of private credit could further enhance the returns in your portfolio.
Consumer Sector
Well-known economist Peter Boockvar is a good friend of Larry's, and puts out a daily note. Larry highly encourages investors to follow Peter on Substack if they can (Larry provided a link in his blog).
Today Peter posted a chart that resonates. It tracks delinquencies for credit cards, student loans, car loans, and mortgages. Where we were in the GFC is similar to where we are today on all metrics except for housing. GFC was housing-related, so mortgages aren't there yet (but starting to turn up). Paid-up mortgages are saving consumers.
But the trend is starting to be a big concern. People who own homes and are doing well are now starting to see stress.
Here's the challenge.... Normally when markets are expensive, you get defensive in your portfolio. XLT represents consumer staples in the US, trades ~30x PE. A consumer cyclicals ETF trades at 35x PE, but it has TSLA in it at 225x PE and is 20% of the index.
We have a bifurcated consumer, and a bifurcated stock market. For example, COST is 46x PE, yet CAG is at 8x PE. At some point, we're going to get a rotation.
While he loves ETFs (and their low cost), we're now at a point in the economy where they're going to be challenged. You always have to understand where you are in the cycle. Right now, it makes more sense to pick your CPB and CAG and good dividend names than it does to rotate from consumer cyclicals to staples within ETFs.
Moving higher, but the shift is tilting toward caution. In the rebound we saw through March/April, investors were willing to buy almost anything tied to AI, growth, and economic recovery.
After a strong rally from the lows, markets are becoming a little bit more selective as valuations rise and expectations are harder to meet. The technology and AI-related spending will continue to lead the market, but investors are no longer rewarding just the story alone. Companies are needing to prove earnings growth can keep pace with the enthusiasm around AI.
Reopening of the IPO market reflects stronger investor confidence and improving risk appetite. But parts of the market can become overheated after the type of rapid rally we've seen.
Geopolitical risks are starting to dwindle a bit, and markets are reacting to that expectation. Interest rates remain a major driver of markets as well.
Expects volatility to continue in both directions until we hit midterms in the fall.
She's been saying that we've been in a recession for a while with layoffs increasing. As for the economy though, banks are continuing to show resilience even with mortgage renewal and interest rates where they are. Their balance sheets have been able to withstand all that.
Materials and technology have quietly supported the TSX. Pullback in energy will definitely have an impact on the outlook for the stock market. In case we see additional weak data out of Canada, she's tilted her portfolios toward the US and international.
There are strong businesses in Canada, but you have to be selective. She's optimistic for the next 18-24 months, and there are opportunities. Focus on quality businesses with durable earnings and longer-term themes.
She's not a gold bug. If there's money to make, she's in. Otherwise, she'll find something else.
Still likes it right now. She owns ABX, WPM, and some ETFs. No longer just an inflationary story, as central banks continue to buy. Still works as a diversifier and as portfolio insurance. Tends to benefit when uncertainty rises, and she expects a lot of that for at least the next 6-8 months.
Markets. He doesn’t see systemic risks or gross overvaluation, but does see a premium valuation in the markets. That means he has to be a.) a little more selective in stocks he owns and b.) if he does get a little more cautious, how does he migrate the portfolio to a more cautious stance. To do this, he starts to look at larger cap names instead of owning a bunch of junior or intermediate companies.