JD DURKIN: Thank you all for being here. My name is JD Durkin, and I'm the full time host and anchor for TheStreet here every day on the floor of the New York Stock Exchange. And joining me, of course, is the best named man, in my opinion, in the world of finance and stocks, the great Chris Versace. He is the portfolio manager for Action Alerts Plus.
And yes, let's please clap it up for Mr. Versace. And more importantly than just a good analyst and a great market thinker, Chris is a good friend and a good person. Is that most important?
CHRIS VERSACE: Right back at you.
JD DURKIN: Thank you for being here. So we are quickly heading into the second half of 2023. I don't know how it's already mid-June, but here we are.
CHRIS VERSACE: I know.
JD DURKIN: Are you prepared, Chris Versace, to join the chorus of voices who are saying we are officially in a bull market? What say you?
CHRIS VERSACE: Are we in a bull market today? I do not think that we are, no. I think that we've kind of-- just take the trading ranges that we've been in and step them up a little bit in the near-term. I am a little nervous about the near-term outlook for the market.
You look at where the S&P 500 is trading on a PE basis, vis a vis where we've been, I don't see a lot of tremendous upside. I think there is some concern, despite what Mr. Lee had to say about the second quarter earnings expectations, that we might see some incremental downside in those numbers. So to me, when does the bull market begin?
I think that's more likely to be when the Fed starts cutting rates, probably sometime first half of 2024. And when we start to take a look at the dynamics there, China is already starting to add more stimulus. At some point, the European Central Bank will join the Fed in cutting rates, and then the Fed will be cutting rates.
And when we've seen the Fed cut rates, we've seen, believe it or not, the market multiples start to expand, something Tom was alluding to earlier. So as I start to think about that, that is when the real bull market would begin. So for me, it's going to be the next, call it 6 to 9 months of waiting and seeing. But we'll be positioning the AAP portfolio as we get ready for that, because you can't wait to the last minute.
JD DURKIN: This is very true. But hold on, I'm going to push back about something. We've got some viewer here in the room who's watching the conversation or at home streaming live, who's saying, well, hold on. I thought we hit a bull market as soon as we're 20% off of the lows. We had those lows in October.
On the technicals, on the definition, they're going to say, we're in a bull market. I see the headlines. Why is that sentiment wrong?
CHRIS VERSACE: I just-- I got to be honest with you. I just don't see the sustaining factors. Are we able to move up? Yes. Are we going to have to retest that? Absolutely, we will. But to me, it's what gets us up that level on a sustained basis, JD, and I just don't see the drivers there.
JD DURKIN: Bull markets, historically, are longer than bear markets. Since World War II, the average bull market between four and five years. You talk about the importance of that sustained nature. If and when we do hit one, would your expectation be that we could be in for a similar time frame in terms of what to expect?
CHRIS VERSACE: Those are averages, right? So you really have to look at what's unfolding in the economy, monetary policy, at that time. So am I going to go out on a limb and say, hey, it's going to be four to five years? 2028? No, I'm not. I'm not going to do that.
JD DURKIN: OK, let's talk about the Fed. You may have known it's a busy Fed week.
CHRIS VERSACE: It was.
JD DURKIN: Everyone will play this game of Will They, Won't They. First of all, I want to get your sense because we had a-- I think this is the technical term-- a rip your face off rally across the indexes yesterday. They teach you that in business school, I'm pretty sure.
But we had this remarkable thing. And they've been doing this for a while, where the chairman of the Federal Reserve, Mr. Powell, comes out and says, folks we're raising rates. We're going to be doing it several more times this year. And the markets go, eh, maybe they're not going to raise rates. What do you make of this discrepancy, and which one is right?
CHRIS VERSACE: So I think the initial reaction, if you remember on Wednesday, didn't raise rates. And then everybody saw the dot plot. 5.6% for the Fed funds rate at the end of the year, not what anybody was expecting.
But they also revised the expectation for GDP up to 1% from 0.4%. So the economy is hanging on, I think, stronger than expected. Candidly, I was one of those folks who earlier in-- not earlier in the year but towards the end of 2022-- that I was concerned. And that's why we rotated into some more defensive names.
And now they're kind of-- they're lagging. We're trying to figure out, OK, what is our next move with some of these names, like a Verizon, for example? But I think when you start to look at the data, we hadn't seen a lot of progress on the core CPI. Now we're starting to see some. The first four months, it was really rangebound, and now we started to come down.
You take a look at the most recent employment report, the wage data, started to tick down. Now, that's encouraging. But we still have a long way to go. We're very far from this mythical 2% number.
JD DURKIN: Right, the mythical 2% number.
CHRIS VERSACE: Well, yeah, because people are always asking, could it be 2, 2 and 1/2, 3?
JD DURKIN: But we've made a lot of progress from 9.1.
CHRIS VERSACE: We have. But again, if you look at even the core PCE number, high 4s. Still a ways away from 2%. So I do think the Fed has more to go. I just don't know that they're going to have to do up to 5.6%.
And the other thing that I'm personally waiting on is the next iteration of the SLOOS report. You and I have talked about this in the daily rundowns. The Fed Heads, as I like to call them. The banking system is fine. Are they not going to say that because they have to be a cheerleaders, otherwise they scare the bejesus out of everybody?
So I want to see what that report has to say. If you remember the timing of when Silicon Valley Bank and Signature Bank kind of went under early mid-march, we may not see the full impact in that April SLOOS report.
JD DURKIN: As I always like to tell you, it's officially a party as soon as you get your first SLOOS report reference into an interview. So I do appreciate that.
CHRIS VERSACE: It's not the Buzzer network, but I try.
JD DURKIN: But you try. And you do very well. I want people to walk away from this conversation more informed and more prepared to do their own research.
As always, we always practice the importance of understanding the investments that you're personally getting into by doing your own research. What is the actual inflation data that you think is going to be very important for the-- I don't want to call it mythical Fed pivot-- but we've been talking about a potential pivot for a long time. What are those data points that you're following that you think members should be able to take away as well?
CHRIS VERSACE: So it's without a doubt going to be down the core side, right? Food and energy-- I don't understand why they're stripped out, but that's a whole other story. So the data points that we always look at are going to be, of course, the core CPI, we're going to look at a little bit on the core PPI but really core CPI, the core PCE price index.
But the other things that I like to collect throughout the month are other data points out there. You know, Tom Lee mentioned the PMIs earlier. I'm a huge fan of all the data that's inside those PMI reports, particularly the anecdotal commentary on inflation.
And of course, we're going to look at the employment data and wage data. Some of that is in the monthly report, the monthly employment report, but I also like to cross-reference that with what ADP puts out. Because they actually show wage gains on a year over year basis for job stayers and job changers. And the job changers numbers has been low to mid-teens of late.
JD DURKIN: What has you optimistic about 2024, Chris Versace?
CHRIS VERSACE: The opportunity for rate cuts, believe it or not. I also like the opportunity ahead as some of these infrastructure bills really start to ramp even further. We've seen and done very well in the AAP portfolio with United Rentals, Vulcan Materials.
One of those infrastructure names, as you well know, has lagged a little bit. But I think as we go through the balance of this year and into next year, a lot of that EV charging dollars will really start to flow. And then our thesis will pan out for that particular name.
JD DURKIN: I don't know how many people started the year of 2023 and would think that by June 16 the indexes would be as high, year to date, as they have. To the degree and overall conversation about outperformance, if we do hit a rate cut cycle, which I know many people are eagerly hoping for, if not anticipating, is it your expectation next year could even be better than this calendar year?
CHRIS VERSACE: So if we define better as the S&P 500 being even higher, then I think the answer is yes. I say that because if you take a look at-- and I think Doug mentioned these numbers earlier-- S&P 500 consensus earnings for 2023, they're around-- I think, Doug, you said 218. I've seen numbers of 221, plus or minus. And the mythical numbers, I think Tom Lee said something earlier that automagically, the forward year is 15%. I think next year it's around 11.5%.
JD DURKIN: Is there a psychological number you're looking at? Because we followed the 4,300 level. We've pushed now well past it.
CHRIS VERSACE: Oh, yeah. Yeah, so I'm getting there. So depending on what the tone of the economy is, where the Fed funds rate will be throughout 2024 because we'll see that multiple expansion, we could see a number of 4,700, 4,800, possibly even higher, depending on a few other factors.
JD DURKIN: All right, you want to talk about EVs?
CHRIS VERSACE: Um, sure.
JD DURKIN: Yeah, well, that's the next topic. So I hope you are because that's where we're going. The crown-- they say heavy is the head that wears the crown. That's more or less a quote from Shakespeare if I'm not mistaken. The crown is currently on the head of Elon Musk and Tesla, so say many out there. Does the crown stay on the head of Elon Musk?
CHRIS VERSACE: So if the question you're posing to me is a rather direct one that says, do you think Tesla's best days are ahead of it or behind it? My answer would be behind it. And we can say, yes, EVs are all rising, and rising tide lifts all boats.
But when I look back in history at various industries, when there is a flood of competition coming in, and the leader has to adjust how they compete, they might have to compete at lower price points, margin pressure, these sorts of things-- when an entire industry is coming for your business, which is what's happening with Tesla, it's going to get bumpy past a certain point. So I would much rather take a look at the names that are moving into the space where you have that transformation, unlocking of value in terms of the P/E expansion, to me that's far more interesting than Tesla.
JD DURKIN: Who are those names?
CHRIS VERSACE: You know, there's a whole host of them out there. It could be Ford. It could be General Motors. It could be some of the key suppliers that you have into the food chain.
Back when I got I started, I broke down the entire-- sorry, started on the sell side as an equity analyst at Salomon Brothers, and then DLJ. I covered the mobile phone industry soup to nuts, everything. And I learned the power of using information across the food chain, up and down, to get all sorts of information and insights.
So I really like using that second derivative play, if you will, from time to time. And that could be a way to do it as well in EVs. And I'm not talking lithium, either. I'm talking more key component suppliers, that sort of thing.
JD DURKIN: You mentioned some of the legacy names. How would you gauge that a Ford and a GM are doing in terms of trying to compete now in the EV conversation? It sounds like a bit of optimism from where you sit.
CHRIS VERSACE: I think there is some optimism there. I think that the key, though, is, at least in the near term, where if interest rates do go a little bit higher and borrowing costs for autos go a little bit higher, how are they going to transition their business to EVs when they're investing as well? I have some concern about maybe some of those earnings expectations.
JD DURKIN: You like a [INAUDIBLE]?
CHRIS VERSACE: At least in the near term. But then longer term, as that transformation happens and it really starts to whip, the question you have to ask yourself is, are you likely to see their valuation multiples expand and Tesla's come down? And I think that's what's going to happen, ultimately.
JD DURKIN: Are you in the camp of people who have said that Elon Musk is personally far too distracted with all the other shiny things on the man's plate right now to really focus on Tesla? And if so, is that a headwind? Is that a major challenge for Tesla moving forward because he does get very acquisition trigger happy as he moves forward and sees new things?
CHRIS VERSACE: I'll answer it this way. We have 30 stocks in the APP portfolio. And that is pretty much a full time job.
And AAP is a piece of the Street. So I can't imagine running the Street and two other businesses at the same time, and being on point all the time where I need to be. So I do think he's distracted.
JD DURKIN: How do you view a name like Rivian in the EV conversation? That's top of mind. We see a lot of headlines about it. People pretty familiar with how it's moved in this conversation, but give me your take on that.
CHRIS VERSACE: So my personal view on some of these-- I like the concept of Rivian because I think that a lot of folks are focused on EVs as passenger cars. And I think that's true. But there's a much larger EV transition going on out there whether it's buses, trucks, so companies like Navistar, PACCAR, Freightliner, for example, these medium duty, heavy duty trucks, UPS trucks, for example, too. They're all transitioning.
We're starting to see transitions happen in other categories as well in boats and in believe it or not, starting to see it happen in small aircraft as well. So I think there's a lot going on there. Rivian, you have to ask the question, can you compete against the big boys who are trying to eat your lunch when you're popping out dozens of vehicles, not thousands of vehicles.
JD DURKIN: Is it concerning to the EV conversation if there's any pushback from consumers if the overall EV climate focused lane continues to come under pressure, even if it gets unfairly conflated-- not to get necessarily into the personal politics of people, but this is an issue that corporate America is dealing with, right? They try to make what they think is the right steps. And a lot of consumers have this backlash to wokeism or whatever it is. Is there any concern from where you sit that the EV lane may be unfairly kind of grouped in with that, and people may say, oh, I'm just going to stick with my old school gas guzzler because that's the American thing to do?
CHRIS VERSACE: [LAUGHS]
That's kind of a demographic question of sorts. I think there are folks out there who will never buy an EV. But I do think that as prices come down, they become more competitive, I think you'll see at the margin people start to tip over.
What's fascinating though, when you talk about demographics though, is something longer term. And I didn't think we were getting into this. But you asked the question, which is that if you look at younger folks, and there are some family relatives, right, 26, 27 years old don't have a driver's license, which to me is mind boggling. Because when I was 16, I had to get those keys and get going.
JD DURKIN: The day you turn 16 I'm sure.
CHRIS VERSACE: As soon as I could. Maybe a little before. But--
JD DURKIN: We're off the record. No? Yes.
CHRIS VERSACE: The license, yes, 100%. But what's interesting if you think longer term, there's this two paths if you will, in the automotive industry that make it kind of fascinating. On the one hand, you have EVs. But you have the path for semi-autonomous and autonomous driving.
And like any type of-- my favorite word-- opium out there, things tend to take a little bit longer. But we will see ultimately those two converge. And when that happens, there's going to be all sorts of disruptive structural change in the automotive industry because you may not need to buy a car anymore. You might have fleets of cars. You could see Hertz, Avis being responsible for fleets of cars.
The way they're going to design your home because you won't need a garage anymore will be different. And when you think about-- who was I talking with? Was it-- I think it was Marriott. The way they're designing their buildings because these are structures that are around not for a few years, for decades. They're already putting parking lots in the bottom that when autonomous fleets are here, they can convert those to other facilities.
JD DURKIN: Very cool. Speaking of opium, we will get to AI in just a moment. But if the day ends in why, which I think today does--
CHRIS VERSACE: They all do.
JD DURKIN: --you and I will talk ChargePoint. How does ChargePoint play it part of this conversation?
CHRIS VERSACE: It's very simple. The more EVs we have on the roads, the more charging stations we need. So I think that there's been a knock on that stock, one, because it's a small cap stock. Two, because there is some confusion over Tesla and GM and Ford. And at the time I had said, wow, they're really re-architecting the industry standard.
Whenever industry standards get set, that's a good thing. It allows the industry to develop. ChargePoint quickly came out, as did EVgo, as did Blink and say, oh, oh, we will make connectors on the Tesla standard. And then all of a sudden we're back in the game.
JD DURKIN: Sure.
CHRIS VERSACE: So I think that pain point investing is-- it's not really-- there's no textbook for pain point investing is there, Doug? No.
JD DURKIN: Is there a book? Not yet. Someone has to write it.
CHRIS VERSACE: But--
Well, what I mean by pain point investing is whenever there's a problem, a major problem, a significant problem, companies will find a solution for it. And as an investor, you really want to capitalize on that. And I think this is exactly that type of event.
JD DURKIN: All right. We got to hit AI. For people that are seeing this, they don't want to be left on the sidelines, where are the opportunities to make money now? I want to make my AI money now. Where do I go?
CHRIS VERSACE: So there's the direct and indirect, right? We've seen a handful of stocks, Nvidia, Microsoft, Google really explode. So that's happened. And I think there's Some question as to what are the benefits-- sorry. Will the hope of AI be realized in the near term? Is it all baked in the stock prices?
I think that's the case. I think it's a little out over their skis. So you have to go elsewhere. You have to think differently. You can't follow the herd. So when I think about it, I sit there and I go, well, AI is going to create a tremendous amount of data, right? I have this view of this wheel that turns of data creation, content consumption, OK? And it just wheels and wheels. And AI is going to accelerate that wheel, as will mixed reality, as will some other applications even as we continue to see higher broadband speeds across the world and more streaming, yadda yadda yadda.
So for me, AI is going to help turbocharge the need for incremental digital infrastructure. So I would say names like we have an AAP portfolio like at Marvell, that's the way to play it.
JD DURKIN: There we go. Now you guys, it's not a conversation at the New York Stock Exchange or anywhere if you don't include AI, right?
CHRIS VERSACE: I would say so.
JD DURKIN: That's the way it's going to be. Folks, give it up for the portfolio manager of AAP, Mr. Chris Versace. Thank you so much for being here, my friend.
CHRIS VERSACE: Thank you, JD