SARA SILVERSTEIN: Well, thank you all for being here so much. And it's great to get together. And I hope that we can get into a little bit of a spirited discussion. Tom, recently, I saw that you said that the market is actually slipping into an expansion. Can you talk a little bit about that thesis?
TOM LEE: Yes. I think we were really trying to speak to what I think is a very widely held and anchored view by most investors and economists, which is that the US is on a path to a recession. And so, the debate for the past 18 months has been, is it going to be a hard landing or a soft landing? And what we've seen, looking at the bottoms up data and the surveys, is that instead of a recession, it looks like an expansion starting.
And I know it sounds very counterintuitive, and we've spent many, many months getting pushed back, but the reason I think this is happening is that last year's Fed tightening cycle was the most telegraphed in history. I mean, the Fed told us they're going to fight inflation, take rates as high as they need to go, he's going full Volcker, and every CEO we know got cautious.
I mean, the PMIs tanked, companies deferred spending. By the way, when they defer spending, they have to increase hiring because they're really running the same people on-- the same equipment-- more people and the same equipment. And so, now you're at the end of that stringency. I was at a summit a few weeks ago, met a lot of CEOs, and they told us they have to start expanding.
So I think we're actually-- we've bottomed. Economically, I mean.
SARA SILVERSTEIN: And Doug, how do you feel about this? What's your thesis?
DOUG KASS: Before I start, I want to say one thing introductory. It's a pleasure to be here. I haven't seen Tom Lee since I was director of research at Lee Cooperman's Omega Advisors when he was pitching his BS.
TOM LEE: That was probably 2006.
DOUG KASS: 2005/6.
TOM LEE: Yeah.
DOUG KASS: And I just want to mention that if anyone reads my diary, I'd like to integrate pop culture and history because I think history is really important, because if you don't know where we've been, you don't know where we're going to go. And I know that divine, for example, Tom's work and Chris's his work depends upon history a lot. And also speaking of relics, I want to acknowledge one of the greatest investors of all time, who's in the audience, an old friend, George Noble.
Raise your hand.
George was Peter Lynch's assistant for many years of Fidelity. I started at Putnam when we both graduated at Wharton. And then he managed the overseas fund, and it was a top ranked fund in the world. And he's an extraordinary investor. Speaking of history, I just want to mention one thing. I'll answer you later.
SARA SILVERSTEIN: No, don't.
HELENE MEISLER: He's going down that road, Sara.
DOUG KASS: June 16, 2023 is today, right? If anyone can guess where I was this day in 1967, I'll give you my house in East Hampton. Oh, no. Shit. If you know the answer, I'm reneging.
DOUG KASS: So I went to-- I just graduated high school, Rockville Center on Long Island. And I went in June to the Monterey Pop Festival, which started today in 1967. Remarkably 56 years ago. But 26 months later, I did go to the Woodstock, the music festival. And this date, interestingly, June 16, 1990, I was also in California where Rob Barrett, who just spoke, worked for many years at the LA Times.
And I was in a Grateful Dead concert at the-- what was the name of it? The amphitheater in Mountain View, California.
DOUG KASS: Yes, Noah. And I do-- I even remember the encore song was "Baby Blue," which shows you how crazy I am. But there's a reason why I'm bringing this up, believe it or not.
HELENE MEISLER: We'll get to it.
DOUG KASS: So in 19-- seven years later, in 1997, which is 26 years ago, a guy by the name of David Kansas who was managing editor of the Wall Street Journal and did a profile of me. He wrote "The Heard on TheStreet column, which was a very influential column and called me the Bear of Boca-- Sara. And he became the managing editor of The Street-- a new company called thestreet.com. And he asked me to write a column, and June 16-- this is unbelievable-- 1997 was my first column.
SARA SILVERSTEIN: Oh, Wow.
TOM LEE: Wow.
SARA SILVERSTEIN: That's amazing.
HELENE MEISLER: That's very cool, Doug.
SARA SILVERSTEIN: Happy anniversary. This is all for that.
DOUG KASS: And finally--
She's so pissed off, Sara.
SARA SILVERSTEIN: I'm not.
DOUG KASS: Finally, June 2013 I went to another Woodstock. Warren Buffett invited me to be the credentialed bear. I sat on the dais in front of 45,000 Berkshire Hathaway, Warren Buffett sycophants on the dais at the annual meeting in Omaha, Nebraska to the Woodstock for capitalists. So that's--
HELENE MEISLER: Wow.
DOUG KASS: So the world is an interesting place. What was the question?
SARA SILVERSTEIN: Do you agree with Tom Lee that we have bottomed economically speaking?
DOUG KASS: Nah. Nah.
SARA SILVERSTEIN: That Was the whole answer? nah?
DOUG KASS: I don't agree. I think that-- and I have to pay homage to my ex-boss, Lee Cooperman, who invokes Joseph who tells a story about the pharaoh and seven lean years that follow seven fat years. And I think we're very much in the market and in the economy of a period of what I call slugflation-- sluggish growth and relatively sticky inflation that can't be pierced. And I think we're like 19-- if you think about it, and I've written about this, 1974 to 1981 when the market made no progress. And what happened in 1974? The nifty 50 bubble was pierced.
Similarly, in 2021 and mostly 2022, Cathie Wood's disruptive stock bubble was pierced, and these stocks went down 80% or 90%, just like what happened to Avon and Xerox and the other nifty 50 companies. So I think we're making this high. I had as, you know, a non consensus view that the market actually would fare well in the first half.
I had no idea it would fare this well. I thought we'd have a high single digit return-- 5% to 10%. It has overshot my expectation. But my view is basically we're in a period of very sluggish growth, which is not valuation-friendly for a period of years. And the market is making a very important top, and I don't want to steal Divine's thunder, but I think we are in an environment which Divine sees too technically.
HELENE MEISLER: Well, we can put up chart number one. Is it going to go up here?
SARA SILVERSTEIN: Yeah, and you'll also be able to see it, I believe, over there, but we'll see. But yeah, so I can ask you the question that will make you mad, which is, are we in a bull market? And if we could get the chart up--
HELENE MEISLER: Well, depends what your definition is.
SARA SILVERSTEIN: Oh, yeah. That's true.
HELENE MEISLER: You know, I'm not-- I have this pet peeve about this nonsense of 20% is a bull market. 20% is a bear market. If you've read me, you know I've railed about that. And so I've been doing some work, and I've been going back to look that-- I don't remember this obsession early in my career. And I went back, and I looked-- here's funny. I had no idea about Doug's view, but there's your 1974 low. There's your huge rally that for anybody who's been around a long time, everybody talks about the 1974 bull market.
Well, yeah. Look how great it was, but then we went into from 197-- late '75 until pretty much '82 really. You were in a huge giant trading range, and I'm even going to step off here if everybody else is. I just want to point out this is the S&P. Take a look up there-- if I had a pointer, I could show you-- where it says 108-72, OK?
That was a higher high, and I went back and I looked, and everybody was bullish, OK? And all you do is make a higher high and come right back down into the range. And then I went and I looked at 90-01. People were bearish, rightfully so, but you rallied then 7%. And then you came down, and you made a lower low, and boy, were they bearish there.
And what happened? You fell right back into the range. 108-05, right up there again, and that's what happened for a number of years. So I keep looking at this chart, and I stare at it, and I keep thinking I think we're in that kind of a period, where you have these amazing runs in the market, and then you churn around, and then you come back down, and then you turn around. And you'll end up-- when you look back years later, you're going to end up like-- maybe Tom is right, and we're getting to 4,600, which was our old high.
I don't think you're getting much beyond 4,700. I can't even remember. And then you're going to come right back in to the range. What?
TOM LEE: 4821.
HELENE MEISLER: There we have it. And then you're just going to come right back into the range.
TOM LEE: Every point counts.
HELENE MEISLER: I just don't foresee us starting something new. Now, somebody is sure to say, but what about technology?
SARA SILVERSTEIN: But what about technology?
DOUG KASS: By the way, you're not going to have to say anything.
SARA SILVERSTEIN: I know. It's very good.
DOUG KASS: I don't know. Leave us alone.
HELENE MEISLER: And so we should look at--
We should really look at chart number two now. Oh, look at that-- beloved technology. From 1986 until 1991, look at that gigantic trading range. And these swings were like 35% or 40%, so you can only imagine if we were doing that bull and bear market thing how many times there were-- new bull market, new bear market, new bull market.
But again, it's more common than not after the market has had a massive run, a la the run that we've had from, if you will, 2009 all the way up-- it's just very common to go into a giant sideways trading range. And then you can see the big break out there in 1991, when the Fed started cutting rates again. But again, that was not a period of low-- I mean, on a relative basis, that was a period of basically higher interest rates.
DOUG KASS: Hey he Tom because you have a fundamentalist. You have a technician that sees a parallel 74 to 81. I have a question for Tom.
SARA SILVERSTEIN: Please.
DOUG KASS: I'm telling you not--
SARA SILVERSTEIN: I'm done.
DOUG KASS: You're done. So Tom was on with my boys-- John Farrow and Lisa, and Keen. Was it early in the week, or it was late last week? So I'm wildly texting John to ask you a question, but you kept on talking, so he couldn't ask you the question. But my question to you is-- so I think it's really important in this business to recognize and admit when you're wrong. So I've been wrong the last couple of months. I didn't expect this overshoot.
And the reason I wrote a very brief column about it yesterday in my diary was that I pay heed to interest rates in terms of that relative-- as the foundation's evaluation. My question that I asked-- I wanted to ask-- have John ask you, and I'll ask you now is about the earnings premium rate. And the S&P dividend yield is 1.5%. The yield on the one year note is 5.4%. I think that's the widest range in three or four decades. Double B credit yields exceed-- is the widest gap between the S&P earnings yield, which is the inverse of the PE ratio, in the last 17 years.
The earnings yield sits on, basically, the one year note yield. Why doesn't the EPR concern you? Because remember, the hurdle rate, the one year rate, if you will, is the risk free rate of return and as Noble will tell you, the determinant in all discounted dividend models.
TOM LEE: Great question. What Douglass is referring to is the equity risk premium, which is in my finance 101 class at Wharton.
DOUG KASS: You went to Wharton too?
TOM LEE: Yeah.
DOUG KASS: Noble?
TOM LEE: We graduated the same year.
DOUG KASS: Noble, Kass, and Lee?
TOM LEE: Yeah. I graduated--
DOUG KASS: Like, take us to Everest to chance.
No one knows what that is. It's a famous baseball double play combination.
TOM LEE: Actually you know, and as I studied this, I did spend a lot of time with Mike Gibbins, who was my professor at the time. And I did ask him about whether risk premia is dynamic, but I don't want to get too academic. What Douglas is asking is if you're earning money on cash-- like let's say 5%-- and the dividend yield of the stock market is two or earnings yield of five, what is the extra money you're getting owning the stock market? That's the equity risk premium.
However, one of the things our team's been spending a lot of time analyzing, and we've ingested a lot of white papers, is that equity risk premia by almost all historical studies includes inflation risk premia. So the idea is if you take anyone who studied 1900 or 1800 or 1700 to now, and they look at the interest rate yield versus the earnings yields, they're saying, oh, you should earn a little more money to own the stock market. So the earnings yield-- that's the difference. That's their risk premia.
But in times of inflation volatility, that inflation risk premia gets built into the price of a bond-- into the bond yield. So bonds are earning you yield because of inflation risk. That risk isn't a spread to the stock market. It's the same number. So the risk premia should shrink. This is what everyone, I believe, is getting wrong about the stock market. So there's--
DOUG KASS: I certainly got it wrong.
TOM LEE: Yeah. Well, the Fed's written about this. They are trying to extract that number. The Bernanke talked about it-- that when you look at inflation break evens, you have to pull out that risk premium of inflation. Nobody knows that number. In fact, JP Morgan wrote a piece trying to capture it. When you look at it, you can't capture it because it's dynamic.
So the point we would make is anyone saying stocks are expensive because bond yields are high, they're forgetting both are discounted because there's inflation risk premia in both numbers. Once inflation risk goes away, bond yields are going to fall. Then you'll see the real risk premia for the stock market. Does that make sense? That's another reason why the yield curve is inverted for the exact same reason.
HELENE MEISLER: So Tom, where do you think bond yields are going on the tenure?
TOM LEE: I-- don't call me a-- now, when you ask about interest rates, I learned something very famously at JPMorgan. The next hardest thing to ever predict is interest rates, and then the hardest thing to predict after that is currencies. So whenever you hear someone talk about with certainty what the dollar is doing or what interest rates are doing, they don't know history.
But if you ask me where interest rates are going, I don't think inflation is sticky. I don't think population growth justifies it, and there's productivity, and I think the inflation-- this is just my opinion, but I think a lot of the inflation we're seeing is profit-led. Meaning social media has made people expect inflation, and companies are getting away with it. That's--
HELENE MEISLER: I just paid 70 bucks for an Uber from LaGuardia into Manhattan, which I almost choked on because the last time it was like 45.
TOM LEE: That's exactly right. And so until people stop using those things--
HELENE MEISLER: Yeah, but the cab was $70 too.
It's not like I had a choice, and I picked the expensive option.
TOM LEE: But again, just remember inflation is the next you take it, if it's still 70, inflation zero.
HELENE MEISLER: Yeah, I know. All right.
TOM LEE: So you have to remember--
HELENE MEISLER: My purse doesn't feel that way, but I get it.
TOM LEE: The prices aren't going to go down.
DOUG KASS: Sara.
SARA SILVERSTEIN: Yeah.
DOUG KASS: One more--
SARA SILVERSTEIN: I'm staying out of this. No. Please.
HELENE MEISLER: Wait. Wait. Wait. You didn't-- I know you don't want to predict interest rates, but do you think that we are likely within the next 6 to 12 months, the 10-year to be under-- call it 3% or over 4%? We're going to stay in the range.
TOM LEE: Well, here's the way I would answer, and I'm not trying to dodge the question.
HELENE MEISLER: No. I got.
TOM LEE: If the tenure stays between 3 and 4, the PE is going to go to 20. So the stock markets multiple will expand because since 1930 the highest realized PEs occur when the tenure is between 3 and 1/2 and 5 and 1/2 percent. So when you look at the S&P now, it's at 15 times, excluding FAANG. That could go to 20. That would be-- think about 5 points on 15. That's 33%.
DOUG KASS: OK. I'm not exactly responsive to your response because you are basically using-- as you look at the equity risk premium, you're looking at your projection. But let me add-- let me--
TOM LEE: I'm not, actually. There's all these white papers. You can look at trailing. All these-- I mean, we can send you the links. Seven or eight white papers we had to--
DOUG KASS: All right. All right. Let's look at the climb-in interest rates. Let's get away from the-- put aside the narrowness of the rally, which continues today with the Russell down over 1% with the S&P and NASDAQ up. We basically made a new high since March, April of last year when the Fed started raising interest rates. So let's look at the climb of interest rates. Let's look at the deterioration of S&P, EPS expectations, and let's briefly look at yields-- what they've done in the last 15 or so--
HELENE MEISLER: Well, hang on. Yields peaked in October when the market made a low.
DOUG KASS: Relationship-- credit yields. OK. So in April 2022, the Fed funds rate was 0.375. And at the time, the Fed was forecasting a 2.8% rate by the end of this year. Today, we're at 5.125%, and the forecast is 5.6% by year end. The 2/10 spread in April of last year was 25 basis points positive versus negative 99 basis points approaching a decade high. The 2022 year-end earnings forecast back in March and April of last year was $228, and it came in at year end, 2022-- excuse me. Came in at $218-- $10 less.
Today, for 2023, the EPS estimate is about $218, so degradation in the estimates. The Bloomberg high yield to worst was 6.57% a year and a half ago versus 8.53%. The spread then was 347 bips. It's 418 bips. The CCC category or credit was yielding 9.9%. It's 13.2%. The spread then was almost 700 basis points and almost 900 basis points. So you feel you can rationalize a 20 multiple against for 2023 based upon the degradation in income expectations for the S&P. The climbing interest rates, and the fact that inflation is sticky.
TOM LEE: Well, as you know, number one, markets climb a wall of worry. If everybody here was optimistic and talking about expansion, you'd want to be fading that. Everything Douglas has cited-- and we have dozens of fixed income clients-- tell us these same metrics. Let's just start with the fact. FactSet has a running history of top down or bottoms up estimates since 1992 or '93, so you have almost 30 years. How many of those years do you think the beginning of your estimate for the year ahead ended higher?
DOUG KASS: 94%.
TOM LEE: No. 80% of the time earnings estimates come down. Analysts chronically overestimate earnings. I was an equity analyst. We always had plus-15, plus-15 for the year ahead, and then you actually start to calibrate as you go through the year.
So majority of the time, earnings estimates come down. It's a silly game, and I did that for 14 years. And then companies beat the number. On spread, nobody's ever made money looking at credit spreads at level. It's always change. The question you ask is if BB-- let's say high yield is at 8, 9, and CCC is at 9, where is that yield in 12 months? If it's lower, stock market's going up.
So you can't look at level and say, that level determines S&P. That actually gummed up a lot of folks when I was at JPMorgan, and I worked with Eric Bernstein Pete Acciavatti. Eric Bernstein was investment grade. Pete Acciavatti did high yield, and Chris Flanagan was our mortgage guy. They always had a spread, and they said the S&P should be at X. And then I said, guys, like, what do you guys watch when you determine where your bonds should trade? And they're always like, oh, well, we watch the S&P and then-- for we calibrate our forecasts for the spread.
And I said, guys-- this was a huge debate when I was at JPMorgan. I can show you that what your spreads are going to do determines what the S&P is going to do. It's the exact opposite. So I always take the view that credit leads stocks. And Pete and I would argue for years because this was around the GFC, but by 2010, he's like, yeah. You know what? High yield leads the equity market. So credit spreads, if they're going to come down, or if yields are going to come down, it means multiples will go up. So you can't take where they are now and say, this is where you're pinning S&P in a given year.
DOUG KASS: So my one last response is if that is tautological, explain to me why the market advanced in the last 14 months in the face of deterioration spreads?
TOM LEE: Well, here is an interesting question because our team just calculated this. Between a year ago--
DOUG KASS: Crap.
TOM LEE: OK. Ready? Between a year ago and today, the market is about the same price. What do you guys think happened to PE?
HELENE MEISLER: That's come down.
TOM LEE: It's about the same.
DOUG KASS: Same, yeah.
TOM LEE: The market's multiple didn't go up, but if spreads come down in credit, the PE is going to go up.
DOUG KASS: Now, you've learned today why Tom Lee is the leading investment strategist for Wall Street.
TOM LEE: I mean, we do evidence-based rewrites. Rights
DOUG KASS: --who writes for "TheStreet."
TOM LEE: Yeah.
SARA SILVERSTEIN: Hey. I take offense to that.
TOM LEE: Well, I just wanted to-- so a lot of the work you see maybe on Twitter, oftentimes, is so superficial. It's like an inch thin. Our guys-- and they're all sitting back there-- they're calculating all the evidence. And we rarely try to have opinions. But the good news is, like, everyone says here, you'll be able to access our work through the suite, which we're excited to share because we do want the public to be more informed about everything we just discussed.
SARA SILVERSTEIN: And I think the purpose of trying to dissect all of this, and one of the things you all have in common is trying to find opportunities no matter what the market is doing. So I'd love to hear from each of you as far as where you think the opportunities are for the rest of the year, and Helene, let's start with you.
HELENE MEISLER: Well, I've been a big fan of the down and outs much to my detriment. I keep thinking that the stocks that are lagging, the poor breadth, is going to improve. It improves one day, and then it does not-- absolutely nothing for five days.
So in the end, yeah, there's improvement, but it's not-- if you're trading, it's exhausting. So that's just where I've been at. I have not-- I know a lot of people were looking for technology to come down. I just thought it would be OK if technology hung around and all the other stuff started to move up. So you've had a smattering of stuff move up-- a lot of it is junk, but you've had a lot of stuff move up, and that's kind of where I'm at. So far it's been a trudge.
SARA SILVERSTEIN: Tom, what about you?
TOM LEE: I just want to maybe just walk people a little bit through our view. So at the start of this year, we thought the S&P could rise more than 20%, but the idea was that inflation was going to fall faster than expected, so we didn't have a recession.
That put us into the vector of financial conditions ease, which means the Fed gets its foot off the brake and interest rates calm down. And so at the start of this year, our bet was interest rate falling. What's the most correlated? FAANG. So we had our number one overweight being by FAANG, and we thought it could rise 50% this year. It's actually already up 60.
But now that we're in the middle of the year, and yes, this week's press conference from the Fed was indeed we're at a place-- the Fed says we're at a place where we can look around. And just remember in November last year when someone asked about rising stock prices, Powell flinched and then turned super hawkish. He didn't once flinch about the stock price-- stocks rallying. I'm interpreting this-- that's an interpretation. That there's a green light for financial conditions to ease more. So what do we like?
We talked to a lot of institutions. They've missed most of this rally. So they want to edge out and buy market breadth expanding. So what we see is things like industrials, tech that's not FAANG-- like comm equipment-- consumer discretionary, even the regional banks. So we are very cyclical, and we want to buy the bet on financial conditions easing further. Most correlated, by the way, is tech, industrials, and discretionary.
SARA SILVERSTEIN: And Helene, what were you saying?
HELENE MEISLER: Well, I've been thinking the banks should rally. [LAUGHS] And we got a big rally, and the banks-- and then they just died. And I just feel like that's-- even Boeing. I thought Boeing would break out. Yeah, had a great day and then just died. That's just how it's been.
We're getting expansion in a really lousy way because you're not getting any follow through whereas you only get follow through with FAANG. And so to me, until you can get some follow through in all that down and out stuff, it's exhausting. To me that's not a healthy market. The market is going up. It should continue to have an upward bias, but it's not great.
TOM LEE: Yeah. I might add just a floss observation because Bill here and Mike and John are two institutional sales coverage, so they talk to our 250 hedge fund clients daily. Most of those guys are expressing a risk on view through futures or S&P index calls.
HELENE MEISLER: Which helps the funds.
TOM LEE: Yes, but they now have to pretend they want to own stocks. So they are looking for ideas, but that's what you're seeing as this herky jerky because they're still playing it through the index options. And so I think if inflation's breaking and second quarter earnings is coming up-- and I think it's going to be really good earnings season-- then the stocks are going to break out. And there's this thing-- I'm not trying to be crude, but there's this thing called [KOREAN]. Anybody who's Korean knows what a [KOREAN] is.
It's a prank people play, where a stock goes like-- well, if it's a stock, it goes like this, and then goes like that. It's like a-- it's a needle. That's what the [KOREAN] means. Nvidia was a [KOREAN]. Meaning everybody was trying to short it in size, and then it went and did a [KOREAN]. I think the S&P is about to do a [KOREAN] on a lot of people.
HELENE MEISLER: Everybody is calling for a melt up now, though, Tom. Now, you have a lot of company. Let me just say. I have seen about five melt up calls in the last week. So whereas you were the lone voice a few months ago, now you're sort of consensus.
TOM LEE: Yeah. Well that might mean there's a tactical pullback coming, but that is not my department. That's Mark Newton, who-- I'll Slack Mark is what's going on with the VIX. Mark, what about the internals? What about the [INAUDIBLE]? What about this RSA? And so I'm constantly bugging Mark about tactical questions.
DOUG KASS: I do think-- and one of the reasons I shared your optimism in the beginning of the year, although I was much-- I was a cautious bull, not like you, and based upon two factors. One you mentioned. Was that the rate of growth of economic activity would not deteriorate to the degree that the consensus thought. That the level of inflation would decline greater than the consensus thought, but the second item was positioning, which made me more optimistic.
And I think it's very hard to make a positioning argument today vis a vis late December. I remember buying-- unfortunately, I sold them out in January, February-- all the FAANG stocks. You guys don't remember how bad things were during that tax. Remember the--
HELENE MEISLER: Oh. The tax was selling-- was terrible.
DOUG KASS: My CEO is saying, what the hell are you doing buying Google and Amazon, Meta? It was a disaster. I mean, they were getting pound on.
TOM LEE: There was no bid.
HELENE MEISLER: There was no bid.
DOUG KASS: There was no bid. Sentiment was terrible. People were massively negative. So what happens today? AAII comes out. We have the largest level of bulls, the smallest level of bears in 15 or 18 months, but more importantly, we have in the last couple of months coincident with the rally in equities.
We have a massive change in hedge fund positioning to the point where-- every idiot on TV on the Death Star CNBC cites the large position-- the short S&P futures position. Doesn't look for hedge funds and doesn't look at the other side. And the fact of the matter is hedge fund gross is in the 99 percentile long, and the NET position is at the 94 percentile long now.
TOM LEE: Douglas, we could just ask Bill, Mike, and John, because they talk to-- we cover over 80% of our active--
DOUG KASS: Not anecdotally. I'm just--
TOM LEE: No, no, but we cover over 80% of the actively managed AU1 for hedge fund. And long-- guys, are your clients long the market or are they short? Bill?
AUDIENCE: They're short [INAUDIBLE].
TOM LEE: Mike?
TOM LEE: John Bay? Our clients are not long. And we're like the bullish guys, and they're fighting us. People aren't bullishly positioned. I mean, we talk. Bill sends out hundreds of emails a day, talks to a lot of people. They are not long.
And these are brand name clients. We don't disclose our clients, but we're talking to them. And we engage with them.
DOUG KASS: I'm just looking at the numbers.
TOM LEE: Something's weird on the numbers, and I think people are trying to get beta by expressing it through a futures contract. They are not long equities. I'm just letting you know.
HELENE MEISLER: You know, I can see that there is a chase to get long. And when they chase to get long, they're not getting long-- what I keep calling the down and outs. They're all buying the same 10 stocks.
And part of it, I think, is that they're buying them because it's a quick way to get exposure. But also, if you're short S&Ps and you want to hedge your short S&Ps, what are you going to buy? You're going to buy the 10 stocks and move the S&P. I mean, it becomes almost.
TOM LEE: Yeah. And as you know, the rest of the world's been in a huge bull market. 8 out of 10 major countries are at all time highs except for the S&P. You know, Japan just hit an all time high. So why should the US be in a bear market if the rest of the world is in the midst of a raging bull market?
DOUG KASS: Tom, you cited that your optimism for the second half of the year is based upon an improvement in financial conditions. So my question is, specifically, what components of financial conditions are you expecting to improve? And secondly, if we look at some of the groups that you cited and Divine just mentioned, the banks, consumer discretionary, retail, energy-- I'm trying to find the larger components which would move the market--
HELENE MEISLER: Materials.
DOUG KASS: --away from a top heavy component. So the first question-- because I followed banks my whole life. I wrote a book on Citibank with Ralph Nader. The financials face not only an inverse yield curve, but regulatory mandates which are going to be very oppressive for the next 12 to 24 months.
And they are all warning. And the stocks are kind of stable to weak. Every company I know-- at a recent-- I think it was a Morgan Stanley conference or JP Morgan conference-- warned about a NET interest income, noninterest expenses, et cetera. Retail faces obvious headwinds.
I find it hard in energy because in commodities it's hard for me to predict commodity prices. But it's hard to see energy stocks leading. So the first question is, what are the improving financial conditions you see? What components in the next six months?
TOM LEE: Well, you covered a lot of questions. So let me sort of tackle these. Number one, if you want to look at the cold hard facts since 1950, here's just an audience question. Let's say you want to time your buy of industrial stocks, and you're going to use the ISM as the metric.
I want to see a show of hands. Is the best time to buy the ISM when it's above 50? Can I see a show of hands? Oh sorry, let me give you the choices. Or it's below 40. So 50s expansion, below 40 is contraction.
Can I see if people think your over 50 is when you buy industrial stocks? OK, two hands. And how about when it's below 40? Yes.
HELENE MEISLER: Yeah. [INAUDIBLE].
TOM LEE: You always buy the industrials when the PMIs are tanked and even falling. The best time to ever time consumer discretionary stocks, relative to consumer confidence, it's the bottom decile. You always buy it when consumer confidence is at a low and your win ratio is 90%. The reality is have to buy stocks when it looks bad.
Now, the banks are in a tough spot. Let me go financial because you didn't talk about banks. But financial conditions-- remember, the FCI that Goldman uses is spread, plus the S&P level. And then it's things like swap spreads, and LIBOR, and all these metrics that, by the way, turn on a dime. Because I worked at JP Morgan. Whether it's swap spreads, TED spread, these things flip because it's all by confidence. And right now, the world is not confident. So financial conditions could flip in a second.
On inverted curves, Japan had an inverted curve in 0 and negative interest rates for 20 years. Which industry was gigantically profitable in Japan that entire time? The banking industry. Banks are creatures of survival. They will make money in any environment. I worked at J.P. Morgan after GFC at a time when they publicly said that our ways would be under 10%, 8%.
Guess what the MD offsites were always? Guys, don't worry. It's going to be 20. Banks make money. They know how to make money. That is their business.
HELENE MEISLER: Can you tell bank of America that, please?
TOM LEE: I can call Brian. He won't take my call.
HELENE MEISLER: Because the chart just won't get going.
TOM LEE: Well, you know, I don't if B of A is the horse you have to ride, then. Because you always want to buy strength, which Mark Newton would say--
HELENE MEISLER: Well, that's JPMorgan.
TOM LEE: Yeah.
HELENE MEISLER: But I'm not good at that, Tom, and I never will be.
TOM LEE: It's tough. Listen, I don't expect anybody to agree with us. In our internal meetings, Mark-- and we do these huddles at 10:00 AM-- we'll tell you for the better part of last year, almost everybody thought I was insane. Mark and I would be the two constructor guys.
Everybody else thought we were crazy. So we don't expect agreement even internally. We don't need it because we're just following the data.
DOUG KASS: To what degree-- final question.
SARA SILVERSTEIN: OK.
DOUG KASS: --to Divine and to Tom. To what degree have all these relationships, as it relates to stock market levels and pricing, been bamboozled by changing market structure? When you and I were walking here, you were frustrated about the VIX, for example.
And I said to you, in my view, 0DTE options have smoothed out the VIX. So it will never be predictive or reflective of fear or greed. But when you and I started the business, Tom, active management and active investing was a [INAUDIBLE]. And now 80% of the business is quants.
And it's self-fulfilling. It exaggerates moves. It's run by machines that know everything about price but nothing about value.
HELENE MEISLER: Well, what about passive? You haven't even mentioned that.
DOUG KASS: And have they cleared the charts as well? Well, I'm talking about passive.
HELENE MEISLER: Um, from my perspective, I'm going to say it again. Breath is OK. It's not great. It's not leading.
And there is, in this market, a handful of stocks that will shove the indexes every which way. If you can get that handful of stocks to stall or correct, and you can get the rest of the market to play catch up, you'll have a healthier market. If you can't get that, eventually the deterioration is going to get to it. But right now, I give it that opportunity.
DOUG KASS: But has it been market structure changes that have a profound impacting?
HELENE MEISLER: Dougie, there's always market structure changes.
DOUG KASS: No, no, no. This is never--
HELENE MEISLER: Oh, yes there have.
DOUG KASS: Quants have never dominated this business. Fidelity--
HELENE MEISLER: You know, it's always going to be someone.
DOUG KASS: --and Putnam dominated this.
HELENE MEISLER: We went from mutual funds to the hedge funds. We went from the hedge funds to the quants. It's always some kind of change in the market.
We can't-- I don't like to rationalize. The markets do what the markets do because the markets do it. So I don't want to say, oh, it's always going to be different because now it's quants, not hedge funds, or now it's quants, not mutual funds or--
TOM LEE: I might have an interesting piece of trivia for you. If you took the eight largest markets outside of the US-- so year to date, the top 2% of companies are something like 75% of the gains year to date. Would you be surprised that it's about 70% for the other eight countries?
The US isn't distorted. What is the historical contribution of the top 2% of companies for these eight countries? It's roughly 60% in any year.
Most country indices are distorted by the best and biggest companies. There's nothing really weird this year about FAANG being up except most people don't own it.
SARA SILVERSTEIN: OK, well, with that, since we're running out of time, I do want to do one thing before we move on from this. Helene, you're famous for your hand-drawn charts. And we found that you brought all of them with you in your bag.
And so I would love for you to show them to us because I don't if everybody knows about this, but I do feel like one of the practical joke ones that he was talking about, the S&P, or the Nvidia one if you know where that is. And if you can show us what these look like.
DOUG KASS: You are some kind of weird, Divine.
SARA SILVERSTEIN: And how many charts--
HELENE MEISLER: I have no life.
SARA SILVERSTEIN: This is your life. How many charts do you update every day?
HELENE MEISLER: I don't know. How many do you think are in the pile?
SARA SILVERSTEIN: Over 100.
HELENE MEISLER: Yeah probably 150, 200.
SARA SILVERSTEIN: OK, that seems like a lot.
HELENE MEISLER: I've never counted. If I counted I'd probably have a heart attack. OK, so here's Nvidia. Everybody thinks it really has gone parabolic. It really hasn't.
It broke out. I'm actually going to pass it around. It broke out. That's all it did. OK?
I mean, take a look. It broke out. That's all it did. I'm going to show you-- pass it around. I'm going to show you a stock that has been persistent much more than Nvidia.
SARA SILVERSTEIN: And while you're finding that one, can you tell us why you do this by hand instead of--
HELENE MEISLER: Because I'm old.
SARA SILVERSTEIN: Oh.
HELENE MEISLER: I do it by hand because, seriously, when I got into the business 41 years ago, you didn't have chart machines. We had Quotrons. I mean, if you wanted to look up a news story, you had to walk down the hall to the Dow Jones machine where it printed it out on paper.
So you had to keep charts by hand or you could get them delivered every week. But then you had to update them through the week. So anyway, in 1996 I did try to give them up.
My husband and I moved to Asia. And I tried to give it up thinking, well, we've got the internet. I know it was dial up, and I can look up charts. And anyway, a month later I didn't feel like I knew what was happening in the market, so I went back to doing it.
It's just a feeling you get from putting the pencil to the paper every night. And it's the same way-- Tom and Doug, I'll bet you do all your own work and you know your--
TOM LEE: I do, G-4.
HELENE MEISLER: You know your datas.
TOM LEE: I do G-4 [INAUDIBLE] Look at the price.
HELENE MEISLER: You know the data and, you know, that is persistent. Nvidia is not persistent. Nvidia was a breakout that kind of stalled out, really.
AUDIENCE: What is it?
HELENE MEISLER: This is Tesla. Now I'm going to show Tom Banks, just for a minute.
TOM LEE: You don't need banks for a bull market.
HELENE MEISLER: You don't. But I'm going to show you two other charts. Here's the Boeing I talked about. Imagine if Boeing does what Nvidia did.
Can you imagine how great that would be, if it could just get up through here? Can't. It can't do it. The market's rallied a gazillion points, and it still can't do it. It annoys me.
And here's my precious little Bank of America that can't get going. It can't get going. It's like nobody loves it.
TOM LEE: That looks like digital disruption right there.
HELENE MEISLER: I mean, there's nothing there. There's nothing there. And I'm going to show you one last stock that, in disclosure, I do not own, but my mother does. And she owns a ton of it. That's also just breaking out.
TOM LEE: What stock?
HELENE MEISLER: Microsoft. So that's what we have. I would love it if the down and outs-- my favorite down and out just started rallying yesterday. Amgen, So you know we're late in the short term. Because if my AMN can finally get going, they're coming after the crap is this.
DOUG KASS: Divine, one last question, critical question. Seriously, Sara, I promise.
SARA SILVERSTEIN: Yeah, no, I believe you.
DOUG KASS: Has your mom bought Nvidia yet?
HELENE MEISLER: No. We'll see if she asks about it when I see her tomorrow. But she has not mentioned Nvidia to me.
I think the only FAANG name she owns is Microsoft. She may own another one. I can't remember. But--
DOUG KASS: If she does, tell me. I'll go short.
HELENE MEISLER: If she does it, I will scream from the top of the hills.
SARA SILVERSTEIN: I just want to say thank you so much. That was the best thing I've ever done, without having to do anything. So thank you.