Mastering Market Volatility with Insights from Financial Titans and Innovators

January 22, 2024
Season 6, Episode 4

Unlock the wisdom of legends and get a grip on the pulse of the financial markets; our latest podcast episode is a treasure trove of insights from the likes of Nick Saban and Warren Buffett that you can't afford to miss. We chart the course of the S&P 500's thrilling climb and delve into earnings reports from heavy hitters like Netflix and Tesla, all while keeping our finger on the pulse of geopolitical tensions and U.S. political shifts. The stakes are high, and the moves you make now could shape your financial future, so let's navigate this tumultuous yet opportunistic landscape together.

The seesaw of market expectations sets the tone for our deep dive into the Federal Reserve's interest rate policies and the painstaking balance policymakers must maintain. Our analysis isn't just about the numbers—it's about understanding the story behind the figures, from shifting consumer sentiment to Federal Reserve Governor Waller's prerequisites for a rate cut. As the presidential election looms, we dissect how political currents could turn into economic waves, ensuring you’re equipped to weather any storm on the horizon.

Biogen's breakthrough Alzheimer's drug Laquembe and BP's strategic maneuvers are hot topics we tackle, providing a primer on the disruptive forces at play in healthcare and energy. And let's not forget the invaluable perspective of our guest, Keith Lantham, whose financial acumen adds depth to our exploration of risk and reward in today's investment climate. Whether you’re a seasoned investor or just getting started, this episode is your guided tour through a landscape of innovation, economic intrigue, and strategic mastery.

** For informational and educational purposes only, not intended as investment advice. Views and opinions are subject to change without notice.

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Transcript

Alan Eppers: 0:00

And now introducing Mr Keith Lanton

Keith Lanton: 0:08

Even the south Florida is cool. Today is Monday, January 22nd. Last week we saw the SMP hit a record high, so we will talk about the financial markets, federal reserve portfolio construction and we will also talk about a few different individual equity ideas. So we are going to start this morning out with some words of wisdom from two oracles, from two different disciplines. One from the sports arena, nick Saban, who is retiring as the head football coach at the University of Alabama, and what he would tell his players is if you want to be happy for a day, play golf. If you want to be happy for a week, buy a new car. If you want to be happy for a month, get a dog. But if you want to be truly happy, answer this Is anyone going to miss you when you're gone? Next up, some words of wisdom from Oracle. This is the Oracle of Omaha, Warren Buffett, who says three choices in life separate those who achieve from those who dream. Number one we have talked about this in the past before Condition yourself to say no to most things, he said. The difference between successful people and really successful people is that really successful people say no to almost everything. Number two choose people operating on integrity. Integrity is a non-negotiable aspect of Buffett's business practice and he vows to only hire people who he believes possess it. And here's what he said if you're going to get someone without integrity, you want them to be lazy and dumb. And number three is build up your knowledge daily. According to Buffett, the key to success is to go to bed a little smarter each day, what he calls the Buffett formula. And here's Buffett from years back Read 500 pages every week. That's how knowledge builds up, like compound interest. The idea of reading 500 pages a week might sound daunting, but the essence lies in the compounding effect it has on your intellect, much like compound interest in investing. So, with those thoughts as a backdrop, we will take a look at what's going on this morning and we will talk about financial markets.

Keith Lanton: 2:34

So, first off, what's going on this morning. As we are seeing some continued strength after the S&P 500 hit a record high on Friday, dao is also touching record highs and the NASDAQ has come roaring back, although some ways away from all time highs. We are seeing S&P futures right now up about 19 points above fair value, nasdaq futures about 119 above fair value and DAO futures are up just about 90 points. Pre-open action for the market has seen the markets building upon the close on Friday. Ongoing strength in tech stocks has supported the positive bias this morning in front of a busy week of earnings and economic data. This week we get earnings from United Airlines. Verizon, procter, gamble, netflix, tesla, intel and Caterpillar are among the notable names reporting this week. On the economic calendar, the first reading of fourth quarter GDP will be released on Thursday, followed by the December personal income and spending report on Friday, which features the Fed's preferred inflation measure in the form of PCE price increases and, interestingly, the expectation is that will come in around 2%, which is the number that the Fed has been guiding us towards as their goal for inflation. Of course, one reading is not enough necessarily to satiate the Fed, but it certainly is a step in the right direction.

Keith Lanton: 3:57

In other news, houthi rebels are seeking more weapons from Iran, according to Politico, but this morning's price action does not indicate that the market is too worried about a larger issue in the Middle East. Despite continued fighting between different states and the oil and gas drill over the weekend took out, some Iranian forces and leaders in Syria and Iran had vowed to retaliate, markets choosing not to focus on those events, at least this morning. In fact, oil not responding much either, up only about 20 cents a barrel this morning and we are seeing a reduction in Treasury yields this morning. The 10 years down six basis points to China after a big run up last week to 415. Two year yield is down three basis points to 438. Separately, the People's Bank of China made no changes in their one in five year alone prime rates, but there is ongoing speculation that some easing in China will be announced. On that front we did see weakness in Chinese markets hang sing down 2.3% and the Chinese composite down 2.7%, and international investors continue to lose confidence in investing in the Chinese markets. Notable that Japan, one of the other leading Asian markets, was up about one point six percent. India closed for a holiday In some individual corporate news.

Keith Lanton: 5:24

Boeing this morning is down after the effort a provided updates on grounding of Boeing seven thirty seven max nine aircraft stock is down about three points one and a half percent. May see the responded to unsolicited, non binding proposals to acquire all the outstanding shares of the company for twenty one dollars a share, saying that they feel that it is not representative of the value of Macy's jet blue and spirit Airlines have filed a notice of appeal after the Justice Department and a judge rejected that they're seeking to come together in a merger on any trust grounds. Solar Edge symbol S E D G announcing a sixteen percent global workforce reduction. Home Depot and Lowe's both downgraded to market perform from outperform at Oppenheimer. Marriott. Symbol M A R announced the record year of global signings and strong net room growth. Room growth up over fifteen percent over the previous year.

Keith Lanton: 6:23

Some general geopolitical news according to Reuters, chinese banks taking measures to support the currency amid stock market declines. Wall Street Journal reporting the U S, egypt and Qatar want Israel and Hamas to join a phase diplomatic process. Over the weekend, ron DeSantis announced that he was suspending his presidential campaign and endorsed Donald Trump. At least Nikki Haley is the sole candidate taking on Donald Trump in the next Republican face off, and that being the primary in New Hampshire and polling showing that President Trump's lead is widening after DeSantis has stepped out, and now his lead, at least according to polls, is up to Seventeen points. That Trump is leading over Nikki Haley this week.

Keith Lanton: 7:15

As I mentioned, the first quarter earning season kicking into high gear. Johnson and Johnson, netflix, proctor and Gamble Tuesday. Abbott Labs, asml, tesla on Wednesday. Intel, t-mobile and Visa round out the week on Thursday and, as I mentioned earlier, gdp is coming out on Thursday as well, and Friday is that important price PCE report on prices. So last week markets hit a lot. Markets hitting a high, as based on the S&P 500, and the Federal Reserve was out with commentary. That wasn't what one would expect, given the markets hitting all time high, suggesting that they may not be cutting rates as quickly as the markets had expected. So that begs the question what gives what's going on? We'll try and dive into that and provide some clarity. So the stock market might not get what it wants from the Federal Reserve, but it may get what it needs from a US economy that simply refuses to quit.

Keith Lanton: 8:23

As per barren Beginning of last week, it didn't look like we were on our way to record highs. The rally that ended 2023 was predicated on the idea that the Fed, whether it was ready to or not, would start cutting rates in 2024. And that outcome seemed even more likely after the Fed's meeting on December 13th, when Chairman Jerome Powell hinted that the central bank had reached the end of its rate hiking cycle. The S&P 500 gained 14% during the last two months of 2023 and the 10 year Treasury yield fell all the way down to about 3.85%. Since then, fed governors Christopher Waller and Rafael Bostic have pushed back on the timing of rate cuts and the economic data that were released last week have come close to vindicating them. Last week, we saw retail sales jump 6 tenths of 1%, the largest increase since September of 2023, and first time jobless claims last week fell 18,000 to 187,000. That's the lowest number in 16 months. What's more, the University of Michigan Consumer Sentiment Survey for January, which was released on Friday a coincidence with the big rally that we saw in the S&P Well, that survey showed a jump of 9.1 points to 78.8.

Keith Lanton: 9:42

The largest increase since 2005, which driving consumers to feel so much better, is that inflation by many measures that they are looking at has been coming down, and that has also affected their inflation expectations, which have fallen to their lowest level in three years and expectations for better financial conditions increased. We've talked about this before, one of the big drivers for consumers in terms of their feelings on inflation and inflation expectations, and as simple as what is the price that they see when they drive by gas stations and what is gasoline selling for, even if you have an electric vehicle. It seems to be something that drives your expectations. Those numbers are coming down. Consumers are feeling a lot better and by the end of the week we saw that the chances of a March rate cut because of the fact that consumers are feeling better, the economy is holding on to a stronger trajectory than expected and the probability of a rate cut has gone from 79% to 52% in just the past week. That in of itself could have been the end of the stock market and at first it looked like the fact that the Fed may not be cutting rates as much as expected. Look like that was what was going to happen.

Keith Lanton: 10:48

The S&P dropped 1.1% the first two days of last week. However, as mentioned previously, by Friday the index had gained 1.2% for the week and closed at a record high. Not even a spike in a 10 year treasury yield to 415, its highest level in more than a month, was able to coax investors out of the market. Market of Internet. None of this makes sense if the fact is driving the market now are the same ones that cause the market to skyrocket or move up significantly at the end of last year, the fact that the market is holding up as well as it has demonstrated.

Keith Lanton: 11:18

Something is starting to shift, at least underneath the surface. The market is starting to price and more economic growth and fewer rate cuts. While that's been painful for some of the more defensive sectors which expected to be the better performers this year, like utilities, which are down 3.7 last week, and real estate, which has been down 2% last week, the overall effect for the market has been more than positive, as the market participants have chosen to dive back into what works or what's been working, and that is technology stocks, specifically the magnificent Seven speaking about the Federal Reserve, which obviously still remains very important, even if they're not going to cut rates which who knows if they will or they won't as much as at least the markets were expecting. Barron's ran an article entitled the market is expecting rate cuts, and that needs to provide clarity, and the task before the federal open market committee at their next meeting, which is at the end of this month, will be to reconcile the big gap between market expectations for rate cuts and the panel's own projections for policy for 2024. While it's all but certain, there will be no rate moves at the end of the two day meeting on January 31, so in about nine days. Market participants will be eager to hear how Fed chair Powell explains potential future cuts.

Keith Lanton: 12:36

Present condition shows steady economic growth highlighted by low unemployment, inflation still above the central banks targets and a marked easing in financial conditions, highlighted by tighter credit spreads and high equity valuations. Of course, also in the background we have the looming November presidential elections. Federal fund futures, though, continue price in up to six rate reductions at 25 points apiece by December. The market backpedaled on its expectations for the first cut coming as soon as March following comments last week by Fed Governor Waller suggesting no rapid Easing is needed. And wallers comments are especially notable because late last year he was the one who helped trigger the speculation about rate cuts which sparked the huge rally in stocks and bonds in November of last year. So the futures market remains with meeting the market in terms of, in terms of expectations, is priced by the futures and what the futures are saying about interest rates going forward. Futures market remains well ahead of the Federal Reserve. Based on their most recent summary of economic projections, which was released at the December meeting, the Federal Reserve calls for the equivalent of 325 basis point cuts by the end of next year and, of course, markets looking for six of those cuts.

Keith Lanton: 13:51

Now we're just talking about Governor Waller. Christopher Waller, who is an influential voice on policy, as the former head of Research at the Federal Reserve Bank of St Louis, said this past week that rates would have to start to come down to the come down once the FOMC is convinced that inflation was sustainably Near the 2% target. So key word there from Governor Waller sustainably near 2%. And he's saying that that has to be measured over 3 and 6 month spans, which indicates that perhaps he's on hold for longer than the market. So we're previously anticipating.

Keith Lanton: 14:25

The concern is that failing to lower the Fed funds rate would amount to an inadvertent tightening from the rise in the real rate as the pace of price increases wane. So what does that mean? So some are concerned that if the Fed does not cut rates but inflation comes down, what that means is that the real rate will remain high, meaning that if you keep a Fed funds rated five and a half percent, inflation comes to two percent. Well, that makes it that the real rate of return on short-term debt let's call it the short-term treasuries is close to three to three and a half percent, making those securities look really attractive when you have such a high real rate of return and therefore that is something that would create tighter financial conditions, perhaps encourage more money to move into those investments and therefore have an impact on the economy that perhaps is more tightening than the Federal Reserve intends.

Keith Lanton: 15:21

But the counter argument is that there is easing going on at the same time as there is that tightening and they are perhaps offsetting each other. So one of the big easings that's going on is the fact that the equity markets are moving higher and therefore that's indicative of financial conditions that are easing. Currently the markets are at 22 times estimated earnings over the next 12 months and that is a rich valuation when the Fed still has short-term interest rates pegged near five and a half percent. So if you put that into perspective, if the interest rates are where they currently are and you look at the PE ratio relative to historic metrics, then it can be argued that the markets, at 22 times earnings, are trading significantly above where they would be if you have a Fed target rate of five and a quarter to five and a half percent based on historical precedent, and if that rate's not coming down, then perhaps the market PE ratio would have to drop in order to justify those higher rates. So, of course, over the next several months we will see who's right, who's wrong and we will have more commentary as things unfold.

Keith Lanton: 16:32

So, talking about some individual stocks and some individual ideas, barron's I mentioned last week held their round table and the conversation continued this week and it remained the cover story of Barron's as this group of market professionals gathered to outline some of what they see going forward and some of their ideas. As we talked about last week, this group was very cautious for 2000 and 24, expecting the market range to be anywhere between down five percent and up five percent, meaning the S&P to be in a very tight range in 2000 and 24, at least in terms of where it closes. And perhaps these folks will be correct and perhaps they won't. But what we did see is that, as they gathered, we saw the market gain a significant amount and we saw the markets take off to all-time highs, as judged by the S&P 500, and once again, these gains being led by the Magnificent Seven, something that this group did not anticipate continuing. And of course this group may be correct, but at least at the outset, here they are swimming upstream, so to speak, as the strength of what worked last year continues to work in 2000 and 24, at least so far. But this group did have some other ideas and I will share a few with you.

Keith Lanton: 18:01

David Giraud, who is with T-Raud Price and has a fantastic long-term track record, mentioned a few different stocks and I thought he had some interesting ideas and I thought I'd share some with you. One of which is RTX, also known by some as Raytheon. It's trading around 85, has a market cap of $123 billion. Valuation is 15.9 times 2024 earnings estimates. Rtx's business is about 50% defense, 50% commercial aerospace. The reason the stock is trading in tract of multiple is because the stock has sold off in the past 12 to 18 months. One reason is the company set some aggressive targets and had to walk them back. But perhaps a bigger reason is more recently the Pratt and Whitney division of RTX had a problem with its geared turbo fan, which is a component on these engines, and that is forcing them to remediate the hundreds of engines and get them maintenance before their scheduled maintenance and this problem is going to cost RTX about $3 to $3.5 billion. After that came out, the analyst jumped on the downgrade van wagon and at one point Raytheon had lost about $35 billion in market value, or about 10 times the cost of addressing the issue.

Keith Lanton: 19:29

But David Jero feels beyond 2025, the impact of these problems on future cash flow is relatively minor. He says what really matters is the defense business, a third of which is tied to missiles Probably the one thing in the defense budget, he says, that needs a massive increase in production. He also says in two to three years the turbo geared, turbo fan issue will go away and free cash flow will increase massively. And he estimates that RTX will earn about $7.34 in 2028, excluding its pension expense and you put a multiple on that and he says the stock could have a compound growth rate of 14 to 15%.

Keith Lanton: 20:10

Next up on his list that I will share with you is a biotech stock, now sort of a mainstream pharmaceutical company known as Biogen symbol boy, ida Bravo. Before this article was published it was trading around $260 per share, market cap of $39 billion. Company has $10 billion in sales and trades for 16 times 2020 for earnings estimates. In November of 2022, the company brought in a new CEO. He put in place an $800 million net cost cutting program that will add $5 a share to earnings by 2025, off of a $15 base in 2023. In addition, biogen has completed the acquisition of Riyad of pharmaceuticals, which makes Skylaris may have seen those commercials for the treatment of Friedrich's Ataxia, which is a rare neuromuscular disease. Looking out three to four years, that could add $5 a share to earnings.

Keith Lanton: 21:09

But what really gets David Jiro excited is the Alzheimer's drug product that they have, laquembe. Biogen owns 50% of the economics. Japanese biotech company Isai owns the rest. Laquembe provides a 27% reduction in the rate of cognitive decline of Alzheimer's, equivalent to a two-year delay in production. He expects the drug to generate about $2 billion of revenue in 2028 and $4 billion by 2033. But he says that could be upside to those numbers. He says there are three things to note. One, they assume a 60% market share for Biogen versus Eli Lilly, which has a competing drug, but he says this could be a conservative estimate because the Biogen drug has a better safety profile. Second, both the Biogen and the Eli Lilly products will be approved for intravenous infusion, but Biogen is likely to have a subcontaneous version in the fall that could be administered at home.

Keith Lanton: 22:09

And, perhaps most excitingly, doctors are saying that there is a potential to treat Alzheimer's before the disease ever shows up. Amuloids which are implicated in Alzheimer's tend to accumulate 10 to 15 years before symptoms show up. Many treatments failed historically because they were given to people in later stages of the disease when the plaque removal didn't help. In three to five years, he thinks, when diagnostic tests for amyloid are better, a 50-year-old might get tested as part of an annual physical and given a small dose of Lequembe if plaque is present. Assuming the process is repeated every few years, we can see a significant diminishing in the number of Alzheimer's cases by 2020, 2040. If Lequembe works, sales could be many times of multiple of their 2033 forecast of $4 billion. Every incremental $1 billion in sales could be worth $3 to $3.50 per share. He also thinks that Biogen, as a result of these two exciting drugs, could be an attractive acquisition candidate for Big Pharma, which is facing a patent cliff. Companies like Merck, amgen, pfizer and Bristol Myers will all have to replace lost revenue. Biogen, with two growth products with patent lives into their mid-2030s, suggests that their interesting pipeline could be one that is attractive to Big Pharma. He also thinks that there's very little overlap with existing drugs that these big pharmaceutical companies have in their pipeline, therefore making a probability of approval of a merger more likely than not.

Keith Lanton: 23:50

One stock I'll share with you that was mentioned in Barron's. Not part of the roundtable discussion is BP, formerly known as British Petroleum. Barron said it's been ignored for too long and it's time to buy. Bp made no investors happy after it said in 2020 that it would seek to cut its hydrocarbon production by 40% by 2030. The climate-focused Europeans still sort of didn't. Traditional energy company in state away and american investors, who are made committed to core oil and gas businesses, felt that the Chevron and exon mobile would be better candidates who are devoted to a traditional energy production. So bp was ignored both on both sides of the pond. But the barren saying bp is getting back to what it does best.

Keith Lanton: 24:44

Bp has had a change of heart. The company is refocused on its oil and gas business, particularly it's attractive us oriented operations that are perhaps underappreciated on both sides of the atlantic. Bp is one of the two largest oil producers in the Gulf of Mexico and has strong position on shore in the permeant, heensville and eagle ford regions of texas. By two thousand thirty bp, the boost is american oil and gas production by more than fifty percent and get half of its projected output of two million barrels a day from the united states Barren, saying the market has not noticed this shift yet. Companies us listed shares trading around thirty four. After hitting a fifty two week low last week. They fetch just seven times two thousand twenty four earnings of five dollars a share, which is cheap even for big european energy companies which trade inexpensively burst their us peers. Bp five percent dividend is the highest among major oils and the dividend remains a top priority. Company aims to boost it by four percent annually even if crude oil prices were to fall from the current price of about eighty dollars a barrel to sixty dollars a barrel. Company also has an active share repurchase program. It probably bought back about eight billion dollars a stock in two thousand twenty three, or about eight percent of the market cap at the time, and is expected to repurchase another four to six billion in two thousand twenty four. Bp is expected to report earnings on February six.

Keith Lanton: 26:10

Burnstein analyst Oswald clint saying there is so much value in bp that is not being priced in.

Keith Lanton: 26:16

He did some of the parts analysis that came up with a value about double the current share price in order to, in order to underscore its commitment to the traditional energy business, bp held an investor meeting in Denver in October to highlight its onshore us energy footprint. It plans to double production to six hundred fifty three thousand barrels a day by two thousand thirty and to quadruple annual free cash flow to four billion dollars. The company also has plenty of oil and grass in the ground. Bp puts its currently recoverable resource baited base at eighteen billion barrels of oil, equivalent to about twenty years of production At current levels. That's first and average in a large integrated energy company with an expected life of nine to thirteen years. So there are a lot of things that could go right up bp, and not a lot of it, is factored into its depressed stock. So says Barron's, with a pretty secure five percent dividend yield, saying it's a low risk way to play the future of oil and perhaps a lot more.

Alan Eppers: 27:16

Thank you for listening to Mr Keith Lanton. This podcast is available on most platforms, including Apple Podcasts, Spotify and Pandora. For more information, please visit our website at www. heroldlantern. com.

Sophie Cohen: 27:36

Opinions expressed here in our subject to change, and not necessarily the opinion of the firm. Past performance is no guarantee of future results. The information presented here in is for informational purposes only and is not intended to provide personal investment advice. It is important that you consider your tolerance for risk and investment goals when making investment decisions. Investing in securities does involve risk and the potential of losing money. The material does not constitute research, investment advice or trade recommendations.