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Speaker 3Generally, I do think we trend upward through the rest of the year. A lot of buybacks that need to happen, rebalancing. There are reasons for it to go upward. Plenty of reasons I can say it could go downward too. I'm more worried about next year than the next couple months.
Speaker 4Welcome to Thoughtful Money. I'm Thoughtful Money founder and your host, Adam Taggart, welcoming you here at the end of the week for another weekly market recap. This time, featuring my good friend, the exsanguinated portfolio manager, Michael Leibowitz. Mike, how you doing? I'm doing great. What did you say? Exsanguinated? Exsanguinated. What does that mean? It means all the blood's been removed. So we had a massive bloodletting yesterday in the markets. And I got a number of questions for you, Michael, but I think the one that's just on everybody's mind is what the heck just happened. So we'll talk about that in a moment. But yeah, Michael, you know, what, S&P down over 4%, NASDAQ down nearly 6%. It was a hell of a day. We're seeing a little bit of a recovery here on Friday. But what in your mind was the trigger? I know, you know, Lance is always telling us that we always try to ascribe some sort of narrative to market forces. A lot of times, it's not really the full explanation. But what is the current thinking on the street for why this bloodletting happened yesterday?
Speaker 3So, you know, I think first of all, it's important to understand that people, investors, especially institutional investors, invest going into the election, thinking things are going to, whatever their thoughts are, what's going to happen. The event occurs, and then there's a period where traders have to rebalance, where they have to hedge, where they have to buy, where they have to sell. In a lot of cases,
Speaker 4unwind hedges, right, that they put on before.
Speaker 3Unwind or add hedges. It depends on which way they're leaning. And so usually after an event, a known event where people have been preparing for it, like an employment number, CPI, a Fed meeting, the election, you get some sort of unwind of some of those trades or add-ons to some of those trades. So you should always expect some volatility going into an event, whether the event goes off exactly as people thought or not. And so I think it's important to understand that there's a lot of completely different. So just to add to the cauldron, there was already kind of some volatility built in. And I think what happened was we had the sharp move up on Wednesday, and then the sharp move down. And in the process, a lot of hedge funds got caught offsides one way or the other. And with that sell off, it looks like a hedge fund went belly up or was forced to cover margin, could have been more than one. You know, I've heard rumors have been about 10 names floating around. I honestly have no idea who it is, if it is someone, but there are some hallmarks that lead us to believe that that's the case. And first of all, fundamentally, not much has real on an investment. perspective, not much has changed with the elect with the election, specifically around AI. The Democrats have, you know, many of them have publicly stated, they think we should slow down the build out there, they're voicing what they're hearing from their voters. The Republicans have been doing this to Governor Abbott in Texas, Texas is the first or second biggest day for data centers already put a freeze on permits. The new governor is saying that everything under construction will be closed. And so I think that's a big thing. And I think that's a big thing. She just wants to review the process. So in the state of Texas, there may be changes in other areas. But with data centers, it seems to be kind of that same legislative track that it was on. And I think that's true for many other places. So to blame the tech wreck, or whatever you want to call it, what happened yesterday on during going to be no more data centers, I think is kind of a big thing. is not correct. We're going to have data centers, they're far too valuable. And if we don't, they'll be in Mexico or Canada or somewhere else, they will get built. And, you know, at the Senate and House level, it's hard for them. A lot of that is more local jurisdiction, jurisdictional, whether it's county or state. So a lot of those AI data center decisions come from that level. And I think level, not the Senate or the House or even the executive branch. So fundamentally, I'm not sure much changed from what we knew before the election to afterwards.
Speaker 4Can I ask a question around that? So I think it's fair to say that the blue wave was larger than most people expected, right? So in other words, I think going in, folks thought that the Democrats were going to take the House, but it was unclear they were going to take the Senate. They took the Senate much more than folks expected, but they want a lot more governorships than folks expected. And there, to your point, yeah, the data centers are still going to get built, but I think on the margin, Wall Street might be saying, yeah, but it's going to be even slower going forward than the resistance we thought, because more of these Democrats people who ran on a, I'm really concerned about data center platform, got in. So again, it's not that the data centers are not going to get built. And to your point, even if it's not here, it might be in other neighboring countries, but that's slowing the CapEx build out. And because the AI is such a huge part of both the markets and the economy, even a slowing, even a 20% ratcheting down the build out schedule, that's going to have pretty material market implications, won't it? Maybe. They can't build
Speaker 3them fast enough as it is. So, you know, there's such a backlog of demand for data centers. I'm not sure. And there's so many in the progress of being built. I'm really not sure of that story. You could be right. But it's one of those wait and sees. And this is, you know, this, this pressure on data center build outs is not just Democrats, it's not blue. No, it's both sides. So that's my point is not going to happen. It's just that what we knew before the election and what we knew after, in my mind, is not material, materially different. And that's what matters. If the market knew it before, it was priced in. So what really changed? And that's where I think it was much more technical, unwinding of positions, margin calls, whatever triggered it. And then so then you look for more technical evidence. If this was really a crash, it would have been a crash. It would have been a crash, the beginning of a real crash in in the market, especially focused on technology. Bonds would have done much better yesterday on Wednesday when the market got hit hard. Bonds were up a little, but it wasn't anything spectacular. Gold was OK. I would have expected to see more either up or down, but not kind of flattish gold. The dollar was relatively unchanged. So you didn't see it in other parts of the market. Where you typically see a bigger reaction like it
Speaker 4could be right.
Speaker 3Wednesday could be the beginning of, you know, the the the bubble in AI crashing like everyone, you know, like so many people are warning about. But there's very little evidence and all this kind of the way it all happened around the election. And and it just leads me to believe that this was a technical
Speaker 4issue. OK, so let me ask you a couple questions around this, you know, based on some rumors and stuff or just narratives that are going along. But first, would not surprise, I think, most people to find out that there was a big hedge funder, several, you know, that got caught with their pants down and were forced to liquidate. And that's why things were just so relentless yesterday. But presumably there had to be some sort of instigation. Right. Some some sort of trade where they realized, oh, my gosh, we're way under water on this trade. Do we have any sense of what could have started that? So maybe it would have been a down 50 basis points kind of day, except these guys found themselves over leveraged and on the wrong side and then things cascaded down from there but but what do you think was the you know the the the trade that they might have been so on the wrong side of that then started forcing them to
Speaker 3sell ai but not the date not the hyperscalers long the build out of ai and if you go back and look at uh wednesday right thursday was the blow up wednesday was the day the market was up a lot the hyperscalers amazon microsoft etc they were up five six seven amazon they were up five six seven percent those the chip makers the uh like caterpillar those companies were flat to lower so there was already pressure in those those sectors they had grossly underperformed the day before so there was already and they had been declining they had been just out of favor they've been out of favor for a little while so you know go back to that situational awareness fund that blew up what was that two months ago they blew up but on the other side there was who who bought it all citadel citadel bought all their securities at a discount my guess is that there were hedge funds that knew that there were that there were hedge funds off sides and were purposely shorting or selling or pushing some of those stocks down and it kind of created more of an avalanche than just one firm relenting um so you know i i think we have to be careful assigning fundamental political rationales to something that i think at least at this point and look no one knows for sure well there may be a few people that know for sure but from what we we know what what we know what i think this is much more technical than it is um anything other than that okay um so there
Speaker 4are some people out there that are claiming all right look the ai bubble had burst and now you know it's gonna the next couple of months quarters you know maybe the unwind of that we don't know yet necessarily but one of the things that they're saying at least as of the nd yesterday was um the nasdaq's down 15 plus percent from its its all-time high this year um that's already getting close to like official correction territory right so they're sort of saying look it's it's in process right it's not it's not that we're we're trying to you know make a prediction of what's going to happen tomorrow we're looking in the rearview mirror now and saying look enough damage has been done here that we're starting to say that you know we're official corrections not too far away what's your thinking about that you're thinking on that at
Speaker 1edward jones we believe rich is more than caring about the latest and greatest it's also taking care of what gives your life meaning that's why your dedicated financial advisor meets you where you are with personalized financial strategies that help protect what matters so you can preserve your progress while creating a path forward the key to being rich is knowing what counts let's find your rich together edward jones member sipc
Speaker 2ukg is the workforce operating platform with unified hr payroll and workforce management built to solve the unique challenges of frontline work powered by people first ai and decades of labor data ukg turns workforce intelligence into real-time decisions around staffing pay compliance and productivity enabling every worker to confidently take action as work happens because when work works everything works learn more at ukg.com slash work ukg hr pay and workforce
Speaker 3management have earnings have earnings forecast collapsed have they changed no so you know you could say it was overbought technically and and it was we got a correction uh but i don't you know first of all you have to when you you can't just say okay it's down 10 15 20 percent it's in a bare market right because if you take a utility stock down 20 percent with a very low beta that's a lot more meaningful than intel which is up what were they up three four hundred percent for the year down fifty percent so you know the the the nasdaq is much more volatile than the s p than the dow then then the utility or staples sector so fifteen percent for the nasdaq is meaningful but it's not the end of the world it's not necessarily a correction it's a consolidation so okay i think what they're saying is is you
Speaker 4know we're getting growing confidence the top is in on this this mega trend and you know we'll see what happens from here but again some people are are sticking their necks out and saying hey you know we're not gonna we're not gonna make a new high here obviously nobody knows exactly what the future lies it sounds like you you're not at this point willing to entertain anything like that at least until you see earnings estimates start to get compromised is that a fair assessment
Speaker 3or or if to your point that they like there's new legislation that the senate the house and the president are all agreeing on that would slow down data center growth or you know some other news event that we don't know but right now this just really just feels like the market doing its thing and everyone wants to assign some kind of narrative to it uh everyone you know so many people want to say ai is in a bubble and there are certainly some stocks that are in a bubble um but these companies these hyperscalers can't can't make they're making so much money um outside of ai they can support this um that doesn't mean every company will make it a lot of companies won't make it but when you want to call the top on that right now it seems a little premature but again you know this is why we use technicals if we're wrong we'll see more technical breakdown we will take action for our clients portfolios but right now there's very little to see other than a short burst of volatility
Speaker 4okay so um one of the things that is defined this year has been the rotation of capital between growth and value and that's something that you and lance have talked a lot about on this channel and you've you've been trading you know uh based on that when you think the pendulum gets too far one way you start lightening up and then adding up on the other side anticipating the swing back one of the things i found interesting about yesterday was i thought it was going to be um you know the tech sector really driving all the action there's some concern about tech that was pulling everything down and obviously the tech names got totally you know battered but when you looked at the equal weight index it got pretty battered too yeah i think the s p was down a little before like i said but i think the um the equal weight sorry the market cap s p was down a little over four percent but the equal weight s p was down over three percent i think or close to that um what do you take from that that it was kind of a broad-based sell-off versus just a tech sector sell-off
Speaker 3it was so you're right in the morning it was all tech so the the heat map was half green half red but you're right as the day went on as losses became greater the those greens turned red and tech led the way value outperformed versus the s p but they were all down by a good amount i think the dow was down three percent uh so you're right and then you were kind of talking smack
Speaker 4about gold not doing much but in the day where there wasn't really any other place to hide flat is better than down three percent
Speaker 3no and my point about gold was if this if this is the beginning of something real i i think it would it would be either grab it a lot of money would gravitate to it like bonds i would have expected gold and bonds to be up decently because you would have expected a
Speaker 4flight to safety capital just rushing for correct and
Speaker 3the dollar too and we didn't see any of that but but to your point and this is kind of the first time we've seen the heat map all red it's either half green half red on one side or the other um so that is something to take away from that but one day certainly does not make any kind of trend especially after a big event and with all that positioning that went into it for months beforehand agreed but i'm just curious
Speaker 4what do you think does that tell you anything about the state of the market um if everything sells off on a day when everybody gets spooked
Speaker 3one day doesn't one day is one day i think i think people got spooked market you know markets holding in today s p's up uh you know almost a percent nasdaq's doing better dow is down or flat or whatever it is so you got a little bit of a reversal let's see how it does monday tuesday it's quite possible we come back come in on monday and it just starts selling off again and if it's selling off where it's all the whole market's selling off that may start to tell us that there's a regime change and that you know we need to keep an eye on our because we're sitting at the 200 day moving average that's a key level so you know if we come in down decently monday we're breaking through the 200 that may change the way we approach the market especially if everything is red versus the old half and half that we've become used to.
Speaker 4Okay. And look, I'm not trying to sell a narrative or an outcome here. I'm just probing to try to get a clearer sense of how you see it. And I will say a number of people that I've had on this channel, even those that are maybe kind of quite bearish for 2027, but I would say the majority of folks that I've interviewed recently think that things are more set up for a strong end to the year. So I don't think it would surprise folks like that to see that today was sort of a one-off or there's not too much follow-through. And then for a variety of reasons, stocks start to power higher into the end of the year, especially because we have the uncertainty of the elections now behind us. So again, I'm not trying to force you to say, oh, I think things are going to hell in a handbasket right now. I'm just trying to clarify.
Speaker 3No, in general. A lot of buybacks need to happen, rebalancing. There's reasons for it to go upward. I'm more worried about next year than the next couple of months. Next year is when the interest rate increases we've had over the last five months start having a bigger and bigger impact. But, you know, but right now I think the trend is generally higher, but we're sitting on a 200-day moving average and we need to pay attention to that and what that tells us. Like you said, I think it's important to note that everything was red yesterday. So is that just one day blip or is there more to it? Those are the things we'll pay attention to over the next week or two.
Speaker 4All right. I think I, I heard you intimate this at least, but let's just clarify it. Nothing that you saw yesterday or even this whole week has caused you at RIA, you and Lance portfolio allocation wise to make any, you know, immediate changes to the portfolio, correct?
Speaker 3Well, on Monday, we did make changes to the portfolio.
Speaker 4We shifted. That was in advance, obviously, of the election results. In advance. What happened.
Speaker 3In advance. No, right now there's, there's really nothing that we're, other than adjusting exposure to tech, to value, or just reducing exposure or adding exposure, kind of more broad macro portfolio management. There's nothing in particular that we're really focused on that we want to make sure we add or subtract exposure from, you know, individual sectors or companies related to the election.
Speaker 4Okay. So I just want to put some words in your mouth and change them if you don't like them, but to somebody who looked at yesterday and is still kind of triggered and freaked out about it all, you would say, take a breath, take a beat. We need to see more data before we can make any major conclusions here. And we at RIA aren't panicking or making a bunch of radical decisions.
Speaker 3Yeah. And I would add to that, look, you're in a market, you're in investments that can move multiple, you know, a few percent a day. This isn't a bond investment, you are in stocks. And this is what comes with 10, 15%, 20, you know, 20% gains year after year, there is volatility and you have to be able to watch the volatility, have a rational mind about it, know when to reduce, know when to just say, okay, let's just see how this plays out. It's usually dangerous when you have an event to react, to react, you know, unless the event is decidedly different from what was expected, or it's an event that no one expected. It can be very dangerous to react to it because I mean, look at the night Trump won in 2016, the market, when I went to bed, the S and P was down seven, 8%. They were stopping trading for periods of time. I wake up and the market's on its way to be in flat. And I think it closed the day flat, right? It was the end of the world because Trump was going to win the night before. And the next day, everything was glory. And for the next month, the market just rallied. So you have to let, let all these things kind of sort themselves out over a few days and then reassess the market. So we're still in that period, right? The election just happened. There were some big flows, trades that happened, big reactions. Let it settle out a little bit and not get too sensitive to losing a few percent in a day because the market's still up decently this year.
Speaker 4Yeah. I just checked. It's up about eight and a half. The S and P is up about eight and a half since the beginning of the year. Okay. So, you know, if you're, if you were freaking out yesterday, Michael says, just take a beat, take a breath. Don't panic. I don't think this is the case, but are you looking at any, um, assets after yesterday's, two days, bloodletting saying, Hey, we really want to get into these now because it's a better price. So
Speaker 3last night, Lance and I were talking, this was well after the market closed and we both kind of wanted to jump into a couple of the tech stocks that had really gotten creamed. Um, we said, okay, let's talk first thing in the morning before the market opens. And those stocks were opening up eight, 10%. So we kind of blew our opportunity. Uh, we weren't going to add much, but we were just going to add on the margin. Um, so we thought more, you know, from the perspective of this, again, it's not political, not fundamental. It was just, let's take advantage of what just happened and buy stocks that are already cheap, even cheaper. Um, we did nothing today because the market had already gave back half of those, uh, losses from the day before. For those stocks, not,
Speaker 4not for the overall market yet, at least, but yeah.
Speaker 3Right. Right. And, um, you know, we're still in that mindset. It's let's just give this a few more days. Let's just see how this works itself out. Um, before we do anything bigger than just trying to, I mean, we were just going to cherry pick some gains, nothing, you know, if it went wrong, it wasn't going to be enough to really matter. Right. But, um, that was, you know, a little insight into. Uh, how Lance bugs me at six, seven o'clock at night. Six, seven o'clock at night.
Speaker 4That's pretty much when Lance goes to bed. Right. I must've been, as he was getting in bed, he called me. Yeah. Yeah. Um, all right. Uh, and I, again, I, I really appreciate you, you know, sharing that transparency, but also just the thought process, cuz that's the real value of having you guys on here is that people can see how, uh, a quality portfolio manager thinks in real time, especially when things are, are, you know, um, emotional. And Adam, that
Speaker 3was, that's kind of the trader in both of us more so than the, uh, portfolio manager. We just recognize things got very cheap again. Doesn't mean they can't get cheaper, but the skew of returns at last night seemed much more positive to the upside.
Speaker 4So that's the trader in both of us. Okay. Um, so today, Michael, the second thing that everybody's talking about beyond what the heck just happened. Yesterday. Um, was the new jobs data, which was really good. Um, it, they came out beating, I think every estimate on the street, it was one of these sort of five Sigma beats. Um, and kind of every job number was good. Um, everything from, uh, hiring to, um, uh, wage growth, um, the unemployment rate came down. So, you know, definitely seems to, to show, uh, Hey, there really aren't any problems in the, in the, in the job world. And, and even the sort of no hire, no fire economy, there's some hiring going on. Um, so it's not a zero hiring economy anymore. Um, now, you know, you can take some comfort out of that. All right. You know, the economy, uh, should, should do better potentially as a result of this at the same time, a lot of chatter that it's going to give the federal reserve a lot more air cover. Uh, to hike. So the, the probability of, of, um, rate hikes are going up. Um, that's probably one of the things that's weighing on gold today, uh, because when, when real rates go up, uh, prices, metals go down a bit there generally. Um, so how material is this? And, um, do you guys expect any sort of, you know, implications investing wise coming out of this, this news?
Speaker 3It's immaterial. One month does not make a trend. These numbers have been revised so much lower over the last couple of years that you can't put stock into one month. Even if they have been revised, it's one month, right? You want to see a trend. If we get good job growth for three or four months, if ADP, if jolts, if the, the ISM surveys start and the federal, the regionals fed surveys start telling us that employment growth is getting better, then yeah, there is a, the labor market's improving, but you know, fool me once we've seen very good job numbers get, go negative in, in, you know, as it gets revised with future right down to and look even if right again but again there is volatility in in jobs numbers and there's a seasonal aspect and the way they account for the seasons can be very screwy and and this year is different from prior years so you know again if we see it for a few months i'll change my tone but right now it's a very stagnant labor market no hire no fire which is fine but if people start getting laid off there's really no cushion because no one's hiring um so you know again i i don't put put much stock into it you know the the one thing though is it gives the fed a little more rationale to raise rates at the december i think it's ninth meeting right and again but there is another unemployment number before then and there's cpi next week and cpi comes out the day after the fed meeting my guess is they will know that number when
Speaker 4they're talking okay um so let's let's just assume for a moment that the data that they get reaffirms this sort of you know continued strengthening of the jobs market um if that makes them more likely to hike and they do do you expect much to change in terms of asset prices as a result or do you think it'll
Speaker 3all be priced in by then priced in now so you know the market it's like what an 80 90 chance the fed's gonna hike so you know barring something big changing price of oil drop into 70 um the unemployment being revised much lower and next month's unemployment negative i suspect they will hike that's what they want to do um they made that pretty clear why they didn't hike in october i don't know i don't agree with them first of all but if you're very concerned about inflation i'm not sure why you hike and then you take a month off waiting for a hike that can take many months to impact the economy so i think they do hike again unless there's something between now and then that that goes the other way and that could include if yesterday was a hard time for the fed to hike and then they take a month off waiting for a hike if yesterday was a harbinger of things to come and the market really starts tanking fed's not gonna
Speaker 4hike um so i got two questions on that one is let's say the fed does hike as expected um obviously that brings up short-term rates a little bit what do you think if anything it would do to longer term rates like the
Speaker 310-year i think brings them down brings because the the fed is basically pushing the it's increasing the odds of disinflation and lower economic growth so i think we've gotten to the point where the long end is cheering on the fed to make a policy mistake to keep raising rates the short end is saying no don't don't don't just stay where you are and you have this kind of like an animal house a devil angel scene uh where you have one side of the market you know begging for the fed to make a mistake and the other side saying please don't um so i you know again there's a lot of narrative built into bonds so if the fed keeps hiking bonds could keep rising but that would be my bet is that and we've seen it already that bond the long run has really reacted positively to the last fed hike and you know continued expectation that they do one
Speaker 4or two more okay so um you mentioned yesterday that you would have expected to see more money go into uh into bonds um and you didn't see as much but uh yield still went down 10 years still went down and i think it hit a new low for the year if i'm not mistaken um not for the year not for the year okay but new low for at least a number of months right so it was down to like 4.8 and a half or something like that i was gonna say a little lower but sure okay and maybe even a little i'm doing this from memory um so there is a fair amount of talk now that you know the peak is in for yields and that um you know the trajectory going forward is going to be lower for yields not higher which i think is a song sheet that you and lance have been singing from you know much of this year um i mean in the immediate term could we see a jump back up sure for a little bit but but a lot of folks saying the trajectory is going to be downward and yields and again i believe you feel the same and i just want to put up a chart here real quick um i'm just going to see if i can do it in real time while we're talking here um okay yeah here it is um here's the um price of the 10-year so remember that price is inverse to yield so as price goes up yields go down you know you can see here that things really that really does look like we put a bottom in in october and um you know pretty definite i don't want to call this a cup or whatever um how confident are you starting to feel that the bottom in yields is in buy stocks to sell you might be missing the opportunity
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Speaker 3so just looking at this graph right here you could see that this thing was steadily downward trending until a couple months ago and then that trend uh became much more severe right downward so all we've done with this rally is kind of get back to where that trend would have taken us so i'm not i'm not convinced that we've seen a bottom or a top in yields but it is uh the tone of the market has changed we don't hear about deficits anymore we don't hear about the dollar going away as a reserve currency some of that negative narrative is starting to fade a little bit and you know we've talked about it before that term premium is why one of the one of the big reasons why yields spike so much the underlying break-even uh inflation data wasn't responsible for nearly that much of a yield increase so you're you're you're kind of almost asking a little bit of a psychological question has the market gotten over that narrative are deficits no longer in this in the spotlight um i i think we may have bottomed in price topped in yield but i'm not really overly sold on it yet yet and we could look we could be on our way to two percent yields but we get a double bottom double bottom is a very in that graph you showed or double top in yields that's a very common technical signal and very sturdy signal so you know i'm not waving a victory flag it looks certainly looks favorable and you know the other part of it is that we've seen the impact of high yields on the hyperscalers for instance they're they're starting to issue equity instead of debt um we know there's a big wall of debt coming corporate debt common in the next year or two will they issue more equity over debt so that's alleviating supply in the you know the long end whether it's corporate debt or treasury debt there's less supply because they're issuing equity which is also showing you that as yields rise it has impacts on the economy on other on the way companies finance themselves that higher yields beget lower yields so i think we've started to see some of that um but i wouldn't rule out that we're done here that this is it's all gravy from here okay so we're going to move on to the next question and we're going to move on to the next question and we're going to move on to the next question and we're going to move on to the next question and we're going to move on to the next question and we're going to move on to the next question and
Speaker 4we're going to move on to the next question and okay so you know a big question that folks are okay so you know a big question that folks are okay so you know a big question that folks are asking right now is if the peak is in for asking right now is if the peak is in for asking right now is if the peak is in for yields yields yields you know do we scramble to lock these in you know do we scramble to lock these in you know do we scramble to lock these in right do you try to lock in a near five right do you try to lock in a near five right do you try to lock in a near five
Speaker 3percent yield if you yeah if i knew if i percent yield if you yeah if i knew if i percent yield if you yeah if i knew if i knew the peak was in i'd buy as much as knew the peak was in i'd buy as much as knew the peak was in i'd buy as much as i could yeah but you know nobody i don't i could yeah but you know nobody i don't
Speaker 4i could yeah but you know nobody i don't know that nobody ever knows for sure know that nobody ever knows for sure know that nobody ever knows for sure but as a capital manager you've got to but as a capital manager you've got to but as a capital manager you've got to place your bets to a certain extent so place your bets to a certain extent so place your bets to a certain extent so the spirit of my question was just are the spirit of my question was just are the spirit of my question was just are you guys increasing your bond exposure you guys increasing your bond exposure you guys increasing your bond exposure in anticipation of lower rates over the in anticipation of lower rates over the in anticipation of lower rates over the next you know couple years now or you next you know couple years now or you next you know couple years now or you are you waiting and seeing
Speaker 3are you waiting and seeing are you waiting and seeing well we did a little bit a month ago well we did a little bit a month ago well we did a little bit a month ago whenever that was we bought the five whenever that was we bought the five whenever that was we bought the five year year year new treasury issuance whenever it went new treasury issuance whenever it went new treasury issuance whenever it went at issuance actually at five percent so we did do that. We're waiting to see, though. We may add more, but we'll see. You know what? Yields at these levels are very attractive to pension funds, endowment funds, insurance companies. They're also very important for individuals, and I'm going to go off on a little tangent here, but I was watching a few weeks ago the Cowboys. I wrote about this in my article. Actually, it's my article to come out next week, but I'm watching a football game, and the Buccaneers are beating the Cowboys by two touchdowns, 14 points. They have their ball on the goal line getting ready to score. It's fourth down. The question is, do you kick the field goal and go up by 17, or do you try to get a touchdown and go up by 21? So it's kind of a question of how much you want to guarantee the win versus letting the Cowboys back into it. They went for it. They didn't get it. The Cowboys score. There's still like six minutes left. The Cowboys easily could have scored again and won. A lot of that was because the coach didn't just take the easy three points and almost guarantee himself a lead. He tried to be a little more egregious and get seven points. Just changes that percentage of victory a little bit, but in doing so, he let the Cowboys back into the game. The Buccaneers won, but the point is, if you're managing your retirement and you know that if you can make, pick a number, six percent on your money, why not add or at least have some exposure to bonds that pay five, five plus percent, kick the field goal. Stop worrying about winning. You know what the market's going to do. There are times when it's okay to just kick the field goal, focus on your goals. And that's what, that's where yields are. I think for a lot of people, it's like, why, why, why not reduce a little bit of my risk and just lock in a yield that I know gets me to where I want to be or where I need to be. So we did a little football there, but that's how yields, I think we've seen strong buying. We saw incredible 10 and 30 year auctions about a three, four weeks ago when I'm trying to buy municipal bonds half the time. So I'll get an email says, Hey, we got, you know, whatever Minnesota state bonds at this level. I'll write back or I'll call back. I'll say, Hey, can I get, you know, get this many for a few accounts already gone. We were getting a lot of that where I just can't, I couldn't buy bonds. I wanted to buy. Um, so there's definitely a strong demand when you get over 5%.
Speaker 4So I think it's a really good, um, emphasis of the point I'm trying to make here, which is, let's say regular investors watching this and they don't have a ton of allocation to bonds right now. And we've, we've talked in the past about how, you know, right now this year has been the record level year for equity exposure in all portfolios, especially older peoples. Right. Um, and we've talked about how that's, that's not super prudent. So, you know, people have the opportunity right now to do something about that if they want to, while yields are still pretty high. Now you said, Hey, maybe we go back to a double top, um, or in yields or who knows, maybe you'll just go even higher than that. Um, but we don't know that for sure. Like you said, and in fact, the trajectory right now seems to be lower yields and you from your. Strategic outlook. Okay. Yeah. Yeah. are expecting lower yields over the next couple of years. So, you know, is this a potential sign that says, hey, look, the train may be starting to leave the station. We may not get another shot at 5% yields. So if you don't already have enough bond exposure in your portfolio, at least give some allocation to it now. And if it goes up, if yields go up even higher, great, you can add to it and lock those in. But if they don't, at least you've locked in an around 5% yield on some of these instruments to help you, in your words, kick the safe field goal. And don't worry too much going forward. As long as you can hit your financial goals by the time you want to hit them, don't try to beat the market every year. Just try to increase your odds of making sure you hit the goal by your deadline. And then, you know, enjoy the rest of your life. Don't worry, you're taking on less risk.
Speaker 3That's why we invest. You go to the horse track or you bet on sports to try to make a quick profit. You invest to make a quick profit. You invest to your financial goals. So there are times as safely as possible. Right, right. So there are times where I'm not saying go all into bonds at 5% and call it a day. What I'm saying is add a little exposure. Think about how it's nice to have that steady rock earning 5% in a portfolio. It just reduces the risk of the other part of the portfolio. A little math here, Adam. If you let's just we'll round numbers. If you had bought the five-year bond at 5%, if yields go up to about 610, 620 in one year, you're break even. You get the coupon, you'll lose in price. You'll basically earn zero. If yields drop to 4%, you'll get your 5% coupon and you'll make four, four and a half percent. You'll make call it 9%. So your risk reward was on a 1% move, 9%, 0%. Or if it goes nowhere, about 5%. So that's a nice skew. But now consider that if yields go to 6%, the economy is probably toast. We're probably looking at disinflation because the economic demand will start really becoming problematic. You're talking about more financial pressures on these companies that have to borrow money. So 6% begets 4%. So even if you have that year where you make nothing, you're still going to have to borrow money. So 6% begets 4%. So even if you have that year where you make nothing, you're actually in a good position to get it to a better position for it to reverse.
Speaker 4Right. And even more so, while it is starting to reverse from 6% because it's weighing on the economy, the equity market's probably not doing very well. That's a great
Speaker 3point too. So as the bonds
Speaker 4start recovering, you're recovering, collecting your income, and you're watching all the equity holders around you take it in the shorts.
Speaker 3Right. And the other side of it, let's say yields go to 2%. You do really well on your bond. My guess is stocks are really struggling. There's something going on. The economy is really, really getting hit. Earnings are probably getting hit. Stocks are probably getting hit. You can sell your bond and you can buy stocks that are now on sale. So you put all that together and yes, yields can rise. But again, even if they rise, they're not going to rise. So you're going to have to put all that together. So you're going to have to put all that decent probability of earning a decent return. You're not going to earn 30%, 40% on a five-year bond. But if you can kick off 5%, 6%, 7% between coupon and price, that's a nice bedrock for a
Speaker 4portfolio. Okay. So just to make this meaningful for folks. So for better or worse, a lot of investors don't have nearly as much experience bond investing as they do in stocks. For a lot of people, it's, well, bonds require some math. And when it gets mathy, I start to not really be able to understand it, which I get. But at the same time, the math isn't really that hard, folks. We're still talking about, you know, addition, subtraction, multiplication, division. It's not calculus here. But if somebody just wants to sit down with an expert to say, hey, look, just walk me through what would make sense for me right now, given my goals and my specific situation. Obviously, that's something that you and the team at RAA can do for them, right? Absolutely. Please give us a call. We'd be happy to talk to you about it. All right. So obviously, folks, if you want to do that, just fill out the very short form at thoughtfulmoney.com. And the team there at RAA or whomever you're matched with will be happy to help you walk through all that. And then just lastly on this, we don't know where yields are going. But you basically just outlined that the downside risks from here seem not nearly as much as the potential safety and potential upside that you could see here. So the spirit of my question was sort of like, is this one of those you're hearing like the whistle at the train station that the train might be leaving soon? So if you're not already on it, at least get some, think about getting some exposure now.
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Speaker 3Possibly. Again, with that risk-reward skew, it's not the end of the world if you get on the train now and it goes backwards a little bit.
Speaker 4And you can even add there if you have, you know, some more drive powder at that time.
Speaker 3Absolutely. So it's, look, I'm not definitively saying, that yields have peaked. And they certainly could go higher. But again, higher yields beget lower yields. So, and if, look, if yields keep going to 7%, 8%, we got much bigger problems. Yeah. The economy, right? So again, that can happen. Highly doubtful. Then you start talking about disinflation, deflation, and your real yield is unbelievable. The Fed probably, steps in the treasury does what they can do. So there, there is downside, right? I'm not saying they're signed. If you hold it to maturity, you're going to make 5% a year.
Speaker 4So. But I hear you saying through all this is just the outlook for bonds looks pretty good for all those reasons. Um, and, um, so yeah, if you don't, if you don't have exposure to them right now, do so. But yeah, I mean, if, if the Fed, if it goes up so high that we're having all those issues that you're mentioning, um, you know, the, the great part about these bonds and right now too, is you don't have to go out to 30 years in duration, right? You can, you can go out to, you know, three years, five years, and still get pretty close to what the 10 year or more is offering. And let's say it goes against you, right? Well, you just told it to maturity. It's like, you're, you're going to get your money back and you're going to get paid. So you're not going to be losing. And if we get to the point where it becomes calamitous, um, and we get a big central banker response, you know, there'll be the flight to safety and then yields might get pounded down to three, less than that. And if so, not only are you getting paid a very attractive yield, given what yields will be doing in that environment, but you'll be getting a really material price appreciation on these things. So it kind of seems if you play this smartly, your worst case scenario just might be, all right, I got to wait three years or five years to get my principal back and get paid along the way. Field
Speaker 3goal isn't always sexy,
Speaker 4but if it wins the game, it wins the game. Right. A Superbowl rings, a Superbowl ring. Doesn't matter how you win it. Right. Yeah. Yeah. Okay. Um, last thing on bonds. Um, you know, I, I had been talking a couple of weeks ago about, um, how muni bonds were, were starting to look pretty attractive. And I was asking around who I should interview for muni bonds. And Lance said, oh, you should get Mike Labowitz. He's like the master of munis. So two questions for you. Can you give us just a high level, um, take on, on what you see right now in terms of the opportunity? Munis. And then secondly, is that enough? Or is this a topic that we could do a full standalone video on?
Speaker 3Mike? Yeah, I fully, like I've traded bonds. I've managed big institutional bond portfolios. I understand bonds inside and out. The only difference between a muni bond and a corporate bond is the, there's a lot of differences, but at the highest level, it's just the issuer of the bond is a, is a municipality, whether it's a state or a. Town or, uh, you know, some other entity, um, when you trade them, they're a little different because they're tax deferred. So if you really want to get into the weeds on municipals, I would talk to someone that really trades them inside and out, but you know, from someone that fully understands the market, you can pick up additional yield over treasuries, just like corporates. The one thing you have to be a little careful. On is it's much easier to sell a corporate bond than a municipal. It's not hard to sell a municipal bond, but there's a wider bid offer spread. So it means when you go to sell it, you may not get the price you want on a municipal bond. The it's a much tighter bid spread on corporate bonds. You'll get very close to the price you want and treasuries. There's almost no bid offer spread. So there's a little bit of illiquidity in municipal bonds. Uh. Um, but you know, like corporate bonds, you know, so you can take a treasury at 5%. Maybe you can buy a high grade corporate bond at five 30 or municipal bond. When you add in the tax benefit at five 30, five 40, they're all worth considering. Um, but you're also taking credit risk. And by that, I'm not saying that the corporate bond or municipal will go bankrupt, but if corporate spreads widen, so if the difference between a muni and the treasury or the corporate and the treasury widen out, it could widen out like this treasury yields, go down, municipal bonds, go yields, go up, may not. It may, you may be right to be in bonds, but in the wrong bonds. So that's where credit spreads. And, uh, we've been talking about that more and more recently are incredibly important to follow.
Speaker 4And they have been hip and wide. in general recently, correct?
Speaker 3They have. And I can show it in a little bit when I start sharing my screen. But munis tend to track corporates to some degree. So a lot of people look at corporate spreads as kind of a proxy for municipals, for bank loans, for other sources of credit to understand what's going on with yields at the actual. So from an economy point of view, who cares where the 10 year yield is? I want to know where mortgage rates are, where auto rates are, corporate loans, bank loans, you know, that that's what drives the economy. So that's where the spread is important. You know, five year treasuries at five doesn't tell me where IBM can borrow or where Montgomery County, Texas can borrow or where, you know, pick the issuer can borrow. So that's where that spread is so important. And that spread can tell you a lot about our financial conditions getting more restricted or more or easier. So we pay close attention to that. And it's also a gauge of liquidity. And actually, if you want, we can just why don't I pull that page up? Yeah, share that page. And so what I am going to show, you here is coming from our new simple visor, we updated it, I'm not sure you've seen it, Adam.
Speaker 4Lance has shown one or two, like deep views of it, but we haven't spent much time with it yet.
Speaker 3Okay, so maybe we'll go through credit spreads, I can show you a little bit about what's going on in the markets in general afterwards. So this is corporate credit spreads. And this is an index. So where I'm at now are triple B bonds, everything above triple B, triple B and above is considered investment grade, below it is considered high yield or junk. Triple B is kind of like the S&P 500 or the corporate bond market. That's, you know, if you had to go to a desert island and only had one piece of corporate bond data, it would be triple B. So what this is showing us is that the spread over the treasury, same maturity treasury as the index, it's about five years is 1.16%, 116 basis points. So to the right, we can see what that alone means nothing, right? We need it in context. So over the last three months, it's in the basically the upper end of the range, the 98 and a half percentile, it's about as high as it's been. But when you scroll back over time, over five years, it's about average, it's about in the 50th percentile. And going back 20 years, it's only in the it's in the bottom 15th percentile. And we can I'm sorry, I was Yeah, so let's click on that. And we can graph these. So here's triple B. This is the spread over the last three years. And you can see they to your point, they've been rising, they were 95 in September, and now they're 116. So they're up, you know, 20 basis points or so. But when you look at that graph, that short term graph, it's like, okay, they're up. But even just back in, you know, with the tariffs, they got up to 140, 150 ish. Now, if we look back over time, on the right, you could see that you need you need a microscope here to see that it's even ticked up, right? Now, a lot of that is because the whole y axis is so skewed from from the financial crisis. So if we let's just look at 10 year, that backs that financial crisis out. You can see it is increasing, but this is nothing to be concerned about yet. Kind of a normal variation. We should keep an eye on it because it is increasing. What is a little more disturbing is triple C. So this is the junkiest of the junk. And to be fair, it's not the most liquid. There aren't that many bonds in it. And a couple of bonds have a problem. It can skew the whole index. But you could see that we've had a significant increase in triple C yields. That's been materializing actually for a while here. And even when we look at over 10 years, it's not just you don't need a microscope. You can see it pretty clearly.
Speaker 4Yeah. I mean, it's basically the second highest in the data set, more or less. Right. Since COVID.
Speaker 3Yeah. But again, you back at the financial crisis. And you can see these spreads could blow out a lot more. And, you know, 20 years, it's in the 88th percentile. So it's pretty high.
Speaker 4And Michael, sorry to interrupt. But so, you know, we looked at triple B, not a problem. And who knows what's going to happen from here. But is it generally with credit spreads, a contagion effect where it's the worst debt that starts failing? You're reading my mind.
Speaker 3So what I was going to show next is if this is a problem, you'd start seeing it rise from the bottom up. So single B, double B, you would start to see those spreads rise. And if you look single B, you know, again, it's in the upper, it's basically at the highest range in the last year. Five years, it's a little above average. And 20 years, it's 26 percent. So it's in a lower quartile. But when you look at, you know, the three year, it's this looks a little different than triple B. It's rising more. And you can see it here on the 15 year graph, whereas on triple B, you couldn't really see it. The other way to look at it is here. These are the spreads. So to make it easy, this bottom twelve seventy two, that's the spread of triple C over triple A, not treasuries anymore. Now we're comparing bonds to bonds to see how that contagion is happening. Are those lower credit qualities increasing more in yield than the higher credit qualities? So if you look over here, you can see over the last four weeks, CCC has gone up. Let's just look at this. First, BBB has gone up 54 basis points. But what we've just started to see over the last week or two is that now single B is starting to have to increase. About two weeks ago, these numbers were all low single digits. So we're starting to see a little bit in single B territory. You can see BBB still negligible. So that's something we're keeping a close eye on to see if this is spreading. That's a concern. And it feeds liquidity. It's a gauge of liquidity. So from there, I want to take you to, we created a new liquidity gauge, which is right here. And right now, it's slightly towards tighter liquidity, not very concerning. But what we do want to note is that you could see a month ago down here, it was 523. So it's moving to the left.
Speaker 4And as credit spreads blow out, you would expect it to move further to the left, correct?
Speaker 3Potentially. There's eight factors in there. It's things like credit spreads. It's overnight borrowing rates. So there's these financial banking. It's reserves. It's banking issues. And then some market issues. Bond yields, dollar price trends, and volatility of the dollar and bonds, along with kind of that banking financial aspect.
Speaker 4Okay. But all other things being held even, if credit spreads rise, it pulls it to the left.
Speaker 3Okay. Yes. So when we diagnose, why has this been weakening? This really all comes more towards the financial banking, the financial plumbing of the system. Yeah. This is not alarmist, but showing some signs of liquidity strain. So for instance, bank reserves have dipped below $3 trillion, which is the level of comfort for the Fed. Not much below $3, but it has dipped below. So bank reserves are a little weak. And that just means banks are not as easily able to make loans as they were. That has an economic impact and a financial markets impact. So the overnight, there's kind of two overnight borrowing rates. One is which the Fed targets, the Fed funds rate, and the other is the SOFR rate. It's the old LIBOR rate. And SOFR is collateralized borrowing. So you have treasury collateral backing a loan. In theory, a bank would rather take a SOFR loan because that's collateral than a uncollateralized Fed funds rate. And because of that, they tend to take a SOFR loan. And so they tend to take a SOFR loan. And so they tend to trade at the same level. Recently, the collateralized rate has been five to 10 basis points above the uncollateralized Fed funds rate. Not a big deal, something we're watching. So you're starting to see just a little bit of a liquidity squeeze, which should be, that's kind of what the Fed is engineering. They're trying to take some liquidity out of the market, trying to take some liquidity out of the market. But again, this is not, doesn't keep us up at night. Credit spreads don't keep us up at night. But I guess the way to say it is I look at it every day now versus just checking in on it once every few days or a week. It's just, you know, a something to watch.
Speaker 4And Mike, let's just say the contagion all of a sudden really starts ramping up. What would that influence you to do?
Speaker 1That's why your dedicated financial advisor meets you where you are with personalized financial strategies that help protect what matters so you can preserve your progress while creating a path forward. The key to being rich is knowing what counts.
Speaker 2So this is part of
Speaker 3what happened in 2019, right? When we talk about those. Lance and I had a good analogy. We said, some guy comes to our house and says, Hey, can I borrow $10,000? And you say no. And then he says, I'll part with you. park my Maserati in your driveway and it's all yours until I pay you back. And you say, absolutely. But the way the market was treating that is they were saying, well, we want to charge you 7% instead of what should be 5%. There's something wrong. People just don't have the money to lend. And that's where you have to be careful. And in 2019, we saw that happening. We were reducing our equity exposure. We weren't smart enough to know that COVID was a thing, but we did see that liquidity in the system was drying up. We watched how the Fed lowered Fed funds, instituted a QE of sorts to try to fix that liquidity problem. So, you know, these things seem very mundane talking about collateralized versus uncollateralized borrowing overnight or what's. Single B, you know, single B or double B bonds doing versus double A bonds. But they really provide insight into the foundation of markets. It's money, right? Everything is all about money and the cost of borrowing. We're a very credit-driven society economy. So, you know, just any insight you can get into what's going on there. Are there stresses that are brewing? Are there just things we just need to keep an eye on? Because they're acting up a little. So, yes, it ultimately could impact what we do on our portfolios. But right now, they're just, let's look at it daily instead of weekly.
Speaker 4Yeah. You're not ringing the bell, but you are monitoring more closely and And you shared the key thing, which is if they really started blowing up meaningfully, you would then be thinking about reducing equity exposure based upon the non-conflicts of the higher cost of money. Okay, so we got on this credit spread topic because we were talking about munis. So we can bring it back to munis. I guess just at a high level, does this remain an attractive environment to consider municipal bonds in?
Speaker 3Absolutely. But just be careful. Munis tend not to default. They default at a much lower rate than corporates. But every bond that's on a treasury has default risk. So you have credit issues with municipals. And again, they may not default. But if there's worries or concerns, those yields could go much higher and you may not get the desired price changes. They'll still possibly mature. But, you know, there is some volatility in the price. If you're living in an income where a state like Maryland, where I live with an income tax, you want to buy Maryland bonds or whatever state you're in because you get that benefit as well. So and, you know, most likely I know I certainly know about my county and the financial health a lot more than I do about name a county in Nebraska. Right. Right. Right. Wyoming or a utility district in Minnesota. So, you know, it also goes to that whole just know what you're buying. So, yes, municipals, there are opportunities here, but just know what you're buying. When you look at the yield, look at it on a tax equivalent yield. So you're going to see yields that are about three and a half percent. You say, why would I buy that? But when you you factor out the tax benefit, it gets you to five, five and a half, whatever the yield may be.
Speaker 4Yeah. And so this is the tax equivalent yield, right? You want to be comparing that versus just owning a regular treasury or whatever. So. So, again, just to make sure folks understand, if you own a municipal bond, it is exempt from federal capital gains taxes. Um, and it's sorry, it's exempt from federal tax on your income. Correct. Correct. And am I right about the capital gains or not? I want to make sure I didn't miss like when you sell the bond. Yeah, I think you still have capital gains. You still have capital
Speaker 3gains. OK, but on a state level, you also if you're you live in that state.
Speaker 4Right. So to your point about Maryland, not only if I buy a Maryland municipal bond, not only is it exempt from federal taxes on the income, the income is also exempt from state income taxes. And now somebody who lives, say, in Florida or Texas or Tennessee or in my home state of Nevada, buy whatever you want. Sorry. You can buy munis anywhere. Right. Because you don't have to worry about the state tax part because your state doesn't charge state income tax. So you can really cherry pick. You can you can look for the best of the best. Now, to your point, Michael, about I don't know anything about counties in Nebraska. Can you like confirms like RIA? help you do the research to say, hey, we think these are some of the best of the best out there, and we've looked enough into the risk of this particular municipality to feel comfortable recommending this muni.
Speaker 3We have tools that help us analyze the bonds we own, the bonds that we may buy. But to be clear, it's somewhat opaque. That's why all things being equal on a corporate versus muni, I'd rather buy a corporate. The SEC filing, the documents, just everything is just out there, very easy to get your hands on. We have tools. We use them. We're very comfortable with our municipal investments. We're very comfortable buying them. But it's not as clean a market as corporates. At the right spread, it makes a ton of sense to corporates. At the same spread, because of that bid offer. At the same spread, because of the information, because it's just very hard to track a water district in Ohio. If you live in California, that's why you have to think about all these things before you just say, I'm going to buy a muni.
Speaker 4Right. And that's kind of where I'm going on this is, if there are advantages to owning munis right now, and you haven't invested in them before, you probably want to work under the guidance of somebody who knows how to value this market and do the research. And I think that's a good way to do that. Do the research, given that it is more opaque than just buying, say, a publicly traded corporate bond. So that's kind of trying to get out there.
Speaker 3Yeah, Adam, I'm not dodging your question. Yes, we can certainly help. We have tools. We can do it.
Speaker 4Just give us a call. Right. Or I mean, look, if there's a better solution out there, let's direct people to it. But I think the answer is, is you want to talk to a firm that has in-house expertise in buying these things. It sounds like REA is one of them. Yeah. Yes. Okay. All right. So I skipped from stocks to bonds, but I forgot to ask you to look at any TA if you've got any easy access to it. Just as we're looking at the markets after yesterday, how much technical damage may have been done? What are some of the key indicators you're looking at going forward?
Speaker 3So let's go back. Okay. So here's SPY, for the S&P 500. One of the most important things to note here, this whatever color you want to call that, that brownish box, the market has gone nowhere since early May. Right. We. Yeah. Well, literally now after yesterday. Right. But, you know, even before that, we had these four days in early August where the market had a rally. But if you kind of strip out those four days, this would almost look like a straight line. Now, beneath the surface, there have been a large amount of stocks gaining and falling and then flipping around. I did some work. There have been 60 percent of S&P 500 stocks that at some point this year have been 20 percent below their peak level of the year. So according to some, that's a bear market. Sixty percent of stocks have been in a bear market this year. And the index is telling you nothing. So. As much as you want to pay attention to the S&P, you also need to pay a lot of attention to the sectors and to the stocks and what's going on beneath the surface. I think that this year has been more important than other years.
Speaker 4I just want to pause there for a second, because this is very validating of what you and Lance and many others have been saying on this channel for the past couple of years is that we are highly likely entering an environment where the passive set it and forget it investing strategy that worked great over the previous 50 years. Is likely not going to work as well as an active strategy. And this this box that you've drawn here is a great example of that. Passive investors, your return right now is zero. But if you've been following the active approach of firms like yours, Michael, where you guys have been trying to ride those capital rotations between growth and value, you guys haven't actually been able to get a positive return over that period, correct?
Speaker 3Right, right. And May 7th, we're at the same exact price level today. We were on May 7th on the S&P 500. But going back to this, you can see I'm sure Lance Lance talks about this a lot. These white lines are the Bollinger Bands. They got very tight, meaning there's very little volatility. That's when you expect things to break out to some degree. We had a little bit of that. We're now we're now trading well below two. We're about we're below three Bollinger. Bands, even though I don't show it here. We're sitting on a 200 day moving average, the blue line, the 50 days, this yellow line. So we're at a point where you'd like to see a bounce. We're getting a little bounce today. You can see it zoom in. You see a little more, but it pales in comparison to yesterday. RSI got very oversold. If you go back and look the last time it was oversold was before that four day rally. We got a little rally at this one and we got a much bigger one here. So the market got very oversold yesterday due for a technical bounce. But the question will be, can it hold on to its 200 day moving average? I think that's kind of the key level to keep an eye on going forward, at least, you know, for the next few days to week. Can we retake the 50 day or will we go back up to 50 and bounce off it? Those are kind of your two lines in the sand for now.
Speaker 4Mm hmm. And I just want to note, you know, you look at this chart. When you go outside of the Bollinger Bands, you tend not to stay there for very long. So, you know, looking at March, we were we were out of them for maybe like a month or so, but we were really kind of skirting along the bottom. And then we went back into the channel. In August, we got above it for a week or so. And it's more often than not when you punch through the bands like we have now, you generally go back inside them. So I'm going to guess you would say technically there's a bias to, you know, this market recovering at least enough or going flat. for a while long enough that it gets back in with the bollinger bands were to break the 200 moving day average soon i would assume that would be a really bad sign that would that would basically say there's something going on here that is breaking the the normal relationship would you
Speaker 3agree yes but keep in mind with the bollinger bands like right where my my cursor is the bollinger band expanded so that lower band was declining the market was kind of sticking alongside the bollinger band right to your rule doesn't really get too far below it but the line's declining that's not necessarily a good thing so the question is is this line see a little decline here if this keeps going and we follow it lower right that's the bollinger band isn't necessarily helping you um but yeah we really want to stay above the 200-day moving average but you can see these getting it can certainly be more oversold it's getting decently oversold here along with the rsi and williams so there should be some sort of bounce i guess the question is what happens how far does that bounce take us and what happens if it fades can we hold
Speaker 4on to the 200. yeah okay um well again just to sort of put a bow on this from our earlier conversation um it sounds like you think look yesterday was probably a confluence of some one-off things like some a big firm or two getting caught off sides um markets pretty technically oversold here probably gonna you know bounce back a bit over the next couple of days we'll see but your bias is right now short of any other data coming in you think the market could still pretty much have a decent end of the year
Speaker 3yeah that's my bias again you know bias gets thrown out the window technicals take precedent so bias is nice i look i think my washington commanders are going to win every week that doesn't really get me very far no but i mean
Speaker 4but as a portfolio manager you have a bias of where things are going to head and then you are watching the technicals to see if that's proving out the bias or not right
Speaker 3right right so adam i kind of want to show you this stuff this is pretty interesting so this is a market style grid so you have value core and growth large cap mid cap small cap and we're using etfs to do that so you have value core and growth large cap mid cap small cap and we're using etfs to show us what those sectors are doing today for instance growth is up one and a half percent large cap value is basically flat on the day but let's go back 20 days so look at this large cap growth is down 10 value has been up right it's a that's a stark difference over just 20 trading days and you can see as you go from mid cap to small cap those gains are actually a little better um so you know and we go down here so today technology communications are leading the way staples are really the only red sector a few sectors close to zero um the s p up uh almost a percent but let's back that down 20 days the s p was down five percent if you had put all your money in conservative sectors healthcare staples real estate let's just say putting those three up nine percent for the for the 20-day period if you put it on tech you're down 18 that's why like we said the market's been relatively flat there's been a ton of churn sometimes healthcare staples leading the way sometimes technology leading the way so trying to i'm not saying go all into healthcare or all into technology but shifting your portfolio towards what looks to be undervalued and getting it out of things that are overvalued has been very helpful in managing portfolios for the last few years but it's become more more so this year much
Speaker 4more so this year yeah and i feel like i'm making this video this week's video into a continued commercial for you and your services here but um that's great visual as a visualization of what you've been telling us and you know i think for i think it's really important for us to be able to do what you've been telling us and you know i think for yeah and i feel like i'm making this video this week's video and do a continued commercial for you and your services here but um that's great visual as a visualization of what you've been telling us and you know i think for if if you're a really engaged diy investor this if you're a really engaged diy investor this if you're a really engaged diy investor this simple advisor tool simple advisor tool simple advisor tool super useful in staying on top of those super useful in staying on top of those super useful in staying on top of those flows that rotation and trying to flows that rotation and trying to flows that rotation and trying to position yourself position yourself position yourself on the right side of them for the average on the right side of them for the average on the right side of them for the average person who's person who's person who's you know got a job in a family you know you know got a job in a family you know you know got a job in a family you know like it feels like it's a full-time job like it feels like it's a full-time job to try to stay on top of these capital to try to stay on top of these capital to try to stay on top of these capital flows flows flows that might not be really practical for that might not be really practical for that might not be really practical for most most most regular retail investors but the fact regular retail investors but the fact regular retail investors but the fact that you guys are living and breathing that you guys are living and breathing that you guys are living and breathing this you know you can okay great this you know you can okay great this you know you can okay great outsource that let me let me rely on outsource that let me let me rely on outsource that let me let me rely on michael and lance to be the one to surf michael and lance to be the one to surf these inflows and outflows from these different sectors, and I can get on and focus on my life and maybe focus on making the money to give to them to ride this. But if this is going to be one of the key winning strategies going forward for the foreseeable future, to be on the right side of these capital rotations, having this type of information, again, whether you're going to own it as a DIY investor and watch it all the time, or whether you're going to leverage a firm like yours that is doing that, it seems like a really potentially smart thing to be doing.
Speaker 5from real trading specialists. That's Schwab Trading. Learn more at schwab.com slash trading.
Speaker 6with low prices guaranteed at the Home Depot. Exclusions apply. Visit homedepot.com slash price match for details.
Speaker 3Yeah, I agree. And this, you know, this gives you the tools if you want to do it. If nothing else, it shows you some of the tools that we use to make our decisions. I'm going to show off our wares one more, and then I promise I'll stop sharing my screens here, Adam. No, it's great data. So this is really interesting. So what, by the way, I'm going to show off my screen here. I'm going to show off my screen here. I'm going to five years ago, we created this absolute relative grid framework. When you look at this is at a sector level. So let's just look at XLV Healthcare. What we want to do is compute two scores. So the absolute score, what we're doing is we're taking the stock price, we run it through about 13 technical models. And we basically from all those models, how overbought or how oversold is it? Then we do those same using all those same models. But we say instead of using the price of XLV, let's use the price ratio of XLV to the market to the S&P 500. And we create a ratio. And basically, we run that ratio through the same exact analysis. And what we get is how overbought or how oversold is it on both an absolute and relative basis. And right now you can see health, not surprisingly, healthcare and staples are very, very high. And so we're going to do that. And we're going to do that. XLK technology, very overbought. XLK technology, very oversold. What we have found is, and this is a new feature. We can create custom lists. So I created this one for you, Adam. Thank you. It's large cap value, VTV, and mega cap growth. So it's a very good indicator of the growth value. And you can see value is decently overbought. Large cap, mega cap growth, getting very oversold. What we can do though now is, first of all, we can see, so I just put the tails on it. Where has it been? It can go daily, get sloppy, but on a weekly basis, how have they moved over the last six or seven weeks that I'm on? You could see that mega cap has gone from being very overvalued to being very undervalued. And VTV has almost gone in the opposite direction. We can now get-
Speaker 4And that red trail, just FYI, when I was talking earlier about some people saying, starting to stick their necks out and say that the bubble is over in tech or has burst. This trajectory is a big reason why, right? It's been kind of a relentless grinding downwards.
Speaker 3Right. So let's just focus on this, right? Right now, this is just mega cap growth. On October 1st, it was here. It was very overbought relative to the market and just the price itself. We would have said it's getting overbought here. Probably has a high RSI, high MACD that may have been flipping above its moving averages. And you can see it's just a relative score. And then at the same time, value has kind of done the opposite it's absolute score you know from october 1 started improving and then starting october 8th it really started gaining against the s&p 500 so what we can do from this is and this is really cool we can animate it and you can we're going to go back to september 10th and we can just watch a video of make it daily about you beat the pants out of mega cap tech well watch how they behave notice how they're almost moving in opposite directions when one goes down one goes up one goes the other way that just shows you how well negatively correlated they are yeah um and eventually they're going to end where we just showed them but that's the point you is that they're behaving opposite of each other so ideally you want to buy the one that's most oversold and sell the one that's most overbought and this is hard to see but if you look at the last move this was yesterday for the most part vtv moved to the left its absolute score weakened it traded poorly but it's relatively score increased because it beat the s&p 500 mgk also traded to the left its absolute score deteriorated but it also underperformed s&p so it went downward it downward sloped so i know that's hard to see but just an interesting tidbit
Speaker 4now um so there's a lot you can take from this right one is is the flows from value and tech and you want to be on the right side of them. But another thing is that they don't live in these quadrants for too long, right? Especially the more you get towards the corner of each, right? These are extremes and extremes are called extremes for a reason. They don't last for very long. So I'm assuming here at some point, you're getting ready for this to start switching, right?
Speaker 3Well, on Monday, we traded. We have a model that drives off this same concept that uses a different set of technical indicators, but it told us to buy growth, sell value. And we did that. We have our factor rotation model does that. That's the whole basis for the factor rotation model, but we use it in our equity and sector models as well. Um, in the equity model, it's buying individual stocks or selling other individual stocks that reflect those themes. Same in the sector, but at a sector level.
Speaker 4Okay. Um, I guess you're maybe wishing you'd waited a week before making that switch, just given what happened to growth yesterday, but the day
Speaker 3before growth killed
Speaker 4it.
Speaker 3Yeah. Right. I mean, it was really the mega, especially mega cap growth, Amazon, Microsoft, those guys were up five, six, 7%. So, you know, what we found is that our model can be a little bit early, but it's been incredibly accurate. Um, yeah, I was
Speaker 4just busting your chops, but you know, nothing can top tick, uh, with precision every time. I'm curious though, um, how has this performed this year? Cause this is a relatively new model for you guys, right?
Speaker 3Yeah. So you can go to our portfolios page and, um, we started, this year, it's up 26% this year. The S and P is up seven and a half, 8%.
Speaker 4Okay. So it really has worked.
Speaker 3Yeah, it's really worked. Now bear in mind that it's an a hundred percent stock index. It doesn't have bonds. If we think the market's going to collapse, it's going to still own a hundred percent stocks. It's goal is to beat the S and P 500. If the S and P 500 is down 60%, and this is going to collapse, it's going to still own a hundred percent stocks. If it's down 50%, it did a great job. Okay. You may not be happy with it, but it did a great job because its purpose is to, to just beat the market.
Speaker 4Okay. That's actually a really, a really great clarification where if you like this approach, you shouldn't just say, Oh, I'm going to put all my money in this portfolio. You want to balance this with other strategies in your portfolio.
Speaker 3Right. And that's why we factor it into our equity and ETF portfolios. Conceptually it works, but in those portfolios, we'll, we'll sell stocks. We'll reduce risk. We'll add hedges. We'll add bonds. We'll do other things to protect that downside. The factor rotation model will switch between growth and value when appropriate.
Speaker 4Wow. Yeah. That really is killing it this year, especially relative to the other portfolios that are here.
Speaker 3Yep. Well, remember again, it's all equity. These have bonds in them. This is dividend focused. The other thing is we have portfolios and regardless of whether you invest in them, which you can, they give us a little insight into what's going on in a market. So if you look at the PNL today, I just sorted it. AI growth focus, small and mid caps are kind of leading the way high dividend is down all weather, which is a conservative model is down slightly international is flat. So, you know, these kind of give you a nice, just kind of view as to what. Yeah. Which themes are playing well.
Speaker 4Yeah. Yeah. Energy's doing well, et cetera. Scroll just up to the top for a second. Cause I just want to drive one point home too. So your equity portfolio is 60, 40, right? So 60% equity is 40% bonds, right? So someone might look at this and say year to date 7.1. Yeah. It's doing about as well as the general market, a little bit less. So why would I want to be in that portfolio? And that's just in the general market. And the reason is, is that 40, it's the bonds part of it that are giving you a lot of safety in that portfolio and diversification. Um, meaning you achieved about that portfolio achieved about the same return as the S and P this year, but with a lot less risk, right. Taking, yeah, I'm not going to say
Speaker 340% less risk, but about that.
Speaker 4Yeah. So that's a key. A key thing to keep in mind. And I just, I know we say this a lot, but I can't hammer it enough, which is your goal as an investor is to be able to hit your, you know, life funding targets. Want to retire by this date. I want to buy a house by this date. I want to, you know, support my children by this date with this much money. Your goal is to hit those goals by that date with the least amount of risk possible. And that's why a lot of these diversification strategies are so important and everybody just tends to focus on, yeah, but what did it do last year? You can't just look at that. You have to look at the return versus the risk it took to get there.
Speaker 3The great point. It's called the sharp ratio in financial geek terms. It's basically the return over the risk that you took. So, you know, the return versus the S and P 500 is somewhat similar, but we did it with taking much less risk and that's what really matters.
Speaker 4Yeah. Okay. All right. Well, Michael, um, this whole new simple visor thing is looking fantastic. I got to get back to you. I got to get you or Lance to just do like a full walkthrough of it. And one of the, the upcoming market recaps, just to show everybody the bells and whistles. Whenever you want. Okay. Is it ready? Is it at the point where you guys can tell me?
Speaker 3It's out there already. Yeah. It's been, it's, we, it went public on Monday.
Speaker 4Oh, okay. Great. Well, fantastic. So yeah, folks, if you're interested in simple visor, go check it out right now, but yeah, maybe next week, whether it's you or Lance, we can devote some time to just walking through all the major elements of it for folks to go explore and play around with. And take advantage of, um, okay. We're at the trades part. I think you've, you've already largely told us most of what you've done. I think, right. It's, it's, was basically positioning more to get back into growth. Um, it was this just, um, well, how did you do that? I guess, were you selling the value, uh, names? Were you just taking some cash on the sidelines and putting that more into growth? How are you doing?
Speaker 3So in the sector model, we designate, uh, roughly a third of the portfolio, to two ETFs, one value, one growth. And when our model switches, it switches. So, um, you know, it's, it goes from 80, 20 growth to value to 80, 20 value to growth when it switches. So we, we basically brought growth up. We brought value down. We, we, we sold value. We bought growth in the equity model. We do it more with stocks. So in stocks, we sold, we took profits on, uh, a few of the stocks, the rest, we just rebalanced lower. So over time, when value outperforms the market and outperforms growth, what was 4% of your portfolio can become four and a half or 5%. So we sell it back down to our stated model weight of 4%. So we did a combination of actually reducing weight and taking profits both. And in some just rebalancing. On the buy side, we rebalanced upwards. They had gone below their weights. We bought up and we added a 1% of Palo Alto networks, uh, kicking ourselves for selling it in the first place six months ago, whenever we sold it. Cybersecurity, uh, um looking for an opportunity to add to it um so but another net we added to five or six of the high growth names we're generally sticking in sticking with the big companies the hyper hyperscalers yeah we do have some gev we have some exposure to the build out but an amd with the chips but we're largely a lot of that growth exposure is in the big hyperscalers okay um
Speaker 4all right well thanks so much for sharing that and of course folks we'll we'll keep tabs every week on what rea is doing here um all right michael don't have too much of a rant here to wrap things up with but i got a little bit of one anything else going on in the markets or the decisions that you guys are making at rea right now that we should let folks know about that i haven't thought to ask
Speaker 3you about no i mean we covered a lot of ground today uh obviously the election is top of mind right now and and what that means for markets let it play out will trump work with congress and get things done will he fight him that's a big issue how it how are both parties going to posture because now starting now the presidential election campaign has kind of kicked off so how are both parties going to posture for that will they live up to their campaign plans or will they not live up to their campaign plans will they live up to their campaign promises or is it just hogwash like normal i was gonna say that
Speaker 4that's the easy one to answer which i think on both sides the answer is no right they rarely never almost never do right
Speaker 3so you know i i think they said things that may excite people that may concern people most often none of it gets done so on either side temper your emotions um but no we're just kind of figuring it out how to go to your end keeping an eye on our technicals keep an eye on liquidity credit spreads that kind of stuff um and we'll see how it plays
Speaker 4out okay all right um all right we're very well said okay so let's get to the rant real quick and then wrap things up um so i i i i think especially after you know all the hot emotions that an election can release um you know they drive people emotionally so much they trigger people they make people elated obviously depending on how all the results go but we really don't have any control over that right and so you know my advice to people is um don't get too wrapped up in it and again focus on the things that really matter and as i say often it's not money money is a means to the important things in life but it is not an end in and of itself and the things that really matter are quality relationships purpose and health and um two things happened this week recently that are in the past 24 hours that i've just chosen to put aside all the the drama and the angst of what's going on in the world that i can't control and focus on you know the things that i can control so on the quality relationship side last night i went and had dinner with david haye who's on this channel you know every every so often um who's one of my favorite people to interview you know very smart very well experienced uh investor and capital manager uh but also just one of the nicest guys in this space um i'll say and uh he was he and his wife were passing through the tahoe area and so um i drove out and had dinner with them last night and boy it was just so wonderful you know it's just it's it's so great to spend time with um somebody who already consider a pretty good friend from the interactions that we've had over the last couple of weeks um so i just wanted to say thank you to david haye for being a great friend and for being a great friend of mine and for being a great friend of mine and for being a great friend of mine and for being a great friend of mine and this was you know the first time i was actually you know able to sit down with him and folks he is even nicer uh and even smarter uh in person uh really just a total gentleman a total class act and so uh the return i got off of that investment of time was priceless in my mind i mean far better than what i could have gotten in the markets you know this week um so uh i just encourage people to really lean into investing in in those things that matter you know i just listed off but if it's a a friend you haven't spent time with in a long time or somebody you want to get to learn better get to know better i'm just coming off the high of that experience and of course the monetary cost is tiny compared to the psychic value that you get out of strengthening these quality relationships on the second side that we were actually driving back from dinner um and we were talking to my agent and he said you know i don't think i'm going to be able to do that and i said well you know i don't think i'm going to be able to do that and i said well you know i don't think i'm going to be able to do that and i said well you know i don't think i'm going to be able to do that and i said well you know i don't think i'm going to be able to do that and we were talking to my daughter who's in college she's a design major and she you know went in with a certain type of design that she was interested in and while getting exposed to a whole bunch of other different types of designs there's this thing called experiential design which in a lot of ways is like putting on creating experiences in some ways it kind of bleeds over and then into event production but she really likes bringing people together around some sort of shared experience and she also she's a big musicophile and for those that have watched this channel for any length of time they've probably heard me talk about the johnson o'connor aptitudes test that i highly recommend everybody take but i think it's one of the best things you can do for somebody who's in their later teens or early 20s and helping them understand themselves better so they can make more informed choices about what to do with their lives and one of the things that came out of that that aptitudes testing for her um as they they told her in her her um you get a readout like an hour and a half you sit down with a researcher who kind of helps you understand all the results they said charlotte you are wired for sound it's just people like you you know become audio engineers or whatever they just sound and music is just a huge way in which they process the world around them so she's a big music fan as i mentioned and she's into creating experiences so she's been working hard to create her own kind of music festival around davis which actually is making a lot of progress i'm super proud of her for it but she also reached out to bottle rock and i don't know if you know bottle rock um michael but if anyone lives in the west coast particularly california it's this really big music festival up in napa that happens every year and they get you know just massive names of performers and stuff it's a it's a really fun amazing uh music festival and she just knocked on their door and she's been knocking on it for about a year and a half saying i'm really interested in design i'm really interested in music i would like to help you out in some way shape or form and they finally reached out to her and said yeah you know we've been noticing you and thanks for being persistent and we basically want you to develop the vip experience at this coming year's bottle rock um so she's going to work with their team to to build and design all this and she's again just a junior in college at this point in time it's fantastic work experience for her you know it's really showing initiative uh it's going to look great on her resume but she's just in heaven because this is kind of her ideal thing that she would you know if she woke up in the morning and they said you could do anything today in the world what would it be it would be something like this so um i i'm sharing this because as a parent i'm proud of her obviously but it's a really great example of somebody stepping into that meaning that purpose part of you know the three things that i said were really important um and so um my hope here is that you know if anybody takes any inspiration from that that they like to to reach out and strive to do something that that is really meaningful for them but i know there's a lot of parents that are in the audience here and you know hopefully it gives you some inspiration about maybe a story you can tell your kids and say hey look if you're just proactive and persistent um and you're you're aligning that persistency with the things that you're naturally talented and good at doors start to open in life so anyways i'll end it there but i'm i'm again i'm i'm just trying to emphasize here on folks especially after a really hyper partisan and emotional uh and and maybe kind of you know friction filled time like we are right now try to put that aside and just focus on making investments in the things in your life that matter the most and again investing in quality people investing in purpose or i didn't talk about it this time but investing in your health those all provide outside outsized returns and in many cases you don't have to spend much or any money to get those so that's my rant michael amen amen you want to end it there no i i
Speaker 3when you were i'm not gonna i'll try to keep this quick when you were talking about your daughter i was actually thinking about mike i have three kids two are chasing the american dream they're both in marketing one in chicago one in new york and they're worried about their careers and they're not they they like their jobs they don't love them they're they're worried about you know making money and they're getting caught up in the same trap that we all get you know so many people get caught up my third son is now in paraguay he joined the peace corps uh he's been there for almost two months the kid if he's lucky you know i mean he'll do well you know doing what he's doing but he's not going to make a lot of money and he's probably going to be the happiest of the three because he's doing what he wants to do and i think that's the investment you're talking about investing things that really make life worth living and make you happy and it's it doesn't you know it's hard to do what he's doing i that's not me i can't go to to do that and my older two kids certainly can't and they're you know they're they're all they're in awe of him that he can do this that he can live in someone's house in uh you know in the middle of nowhere and just do this but it goes to the point i think if you can do what what you really want like your daughter she you know whether she gets paid or not to do that she's gonna love it and that's more important than making a ton of money and being glued to the markets and you know just live life so totally
Speaker 4agree look i can talk forever about this stuff so i'll try not to but um you know as i always say if you focus on those three things quality relationships purpose and and health um the money may come the money may go you don't really have a have a ton of control over that. I mean, I feel like you increase your odds of financial success ton of control over it you don't really have a ton of control over it you don't really have a ton of by playing to your strengths. But, you know, sometimes in life, just things happen, right? Bets go against you or things just don't materialize the way that you think. But if you wake up and spend your day living life in the way that fulfills you, when you go to bed, whether you've made the money you were hoping to or not, you know, as long as you can meet your basic needs, like you're winning life. Right. Yeah, exactly. So, um, and look, I mean, it can be a marketing, there's nothing against your other kids. The key thing, you know, that I want to encourage is just, you know, invest in the time to develop the self-understanding so that you can live authentically. You can, you can know how you're wired. You can know what fulfills you and just go pursue that stuff. And again, you're likely to outperform versus everybody else because you are playing to your strengths and to your passions. And again, you know, whether it makes a ton of money or not, that's not nearly as important as you feeling like you're living the life that you were placed here to live. So, um, anyways, folks, I hope everybody takes inspiration from this. And for those of you that, uh, have not heard me talk about the Johnson O'Connor aptitudes test in the past, if you go to, um, uh, the thoughtful money YouTube page and you type in, well, if you get, I, this might've been, I'm not sure if I've done this video since I've been with awful money, But if you go in and type Adam Taggart, Johnson O'Connor, it'll pop up. You'll see me interview the executive director of the testing service, and we go into everything that it provides. control over it you don't really have a ton of control over it you don't really have a ton of control over it you don't really have a ton of control over it you don't really have a ton of control over it you don't really have a ton of control over it you don't really have a ton of no commitments involved. It's just a service these firms offer to be as helpful to as many investors as they can. Michael, my friend, have yourself a great week. Whether it's you or Lance next week, we will have RAA again on here soon, making sense of things for people. Thanks so much for doing what you're doing. You're welcome. Thanks, Adam. All right. And everybody else, thanks so much
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