J.D. DURKIN: Good morning, subscribers Sarge Guilfoyle the one and only takes time out of his very busy day to join us now on this morning for his take on the market, economy, earnings, and much more. Sarge, good morning. Thanks a lot for joining us, as always.

SARGE GUILFOYLE: Oh, good morning. Thank you for having me today.

J.D. DURKIN: So, we have a lot to get to, but I do want to start, of course, with the Fed. We had no shortage of Fed speakers this week. This was a big messaging period for the central bank. Given all the speakers that we heard, paired with stronger than expected economic data the last few days, Sarge, what is your read on the state of affairs over at the central bank? What are you following?

SARGE GUILFOYLE: Well, I don't think Jerome Powell screwed this up. I mean, he basically left open as much optionality as he can as far as interest rates and monetary policy is going forward. True, the economy's been a little hotter than they probably would have liked the last month or two.

Overall though, he looked back over a year, and over a year there is serious disinflation. So the ball, from the big picture, looks like it's rolling his way. It may be getting away from him. That's why he sounded a little more hawkish, I think, than a lot of his colleagues have this week.

A lot of them were pretty much, like Harker, he sounded very dovish. He's been out there saying, no rate hike November, no rate hike until we really see a need to. Almost no one's ruled out future rate hikes. I think the issue now really, is how the long end of the curve has gotten away from the Fed's control.

And really, the forces of free market pricing have taken over bond prices from the middle of the curve on out to the long end. So the Fed, while they can still control the short end, and thus, therefore, control the slope of the curve, they really don't have control over monetary conditions at the longer end, because let's face it, the bond vigilantes have taken that over.

J.D. DURKIN: Sarge, a quick follow-up on all of these Fed speakers. It can be overwhelming, even for the most ardent of market or central bank follower to have all these dizzying speeches or public comments that are given. Are there key officials that you listen to more than others?

For instance, President Bostic, Raphael Bostic, not a voting member this year, but when he speaks, a lot of people tend to listen. He is a voting member for next year. So in this environment, as we are in the fourth quarter, knowing the voting arrangement for the FOMC is set to change in a few months, are there certain officials that you maybe give a little bit more of an ear to than others?

SARGE GUILFOYLE: Sure. I mean, like obviously, Jerome Powell, he's very important. And Stanley Jefferson is very important. He's the Vice Chair. Anybody who's on the voting committee for next year is probably more important than somebody who's on the voting committee for this year, because this year, they're not going to raise rates, short-term rates in November.

I think it's down to about a 20% probability that they raise rates in December, so they're probably not going to raise rates again this year. So your 2024 voters are far more important than your 2023 voters. Although they all are important, I believe Mester is a voter next year. I'm not looking at my screen. Obviously, I'm outside. Mester is very, very important, because she thinks like a hawk.

She has been the thought leader on the hawkish side of the football for years now. And with Esther George gone in KC, she pretty much stands alone as a Fed President in that regard. So if she leans one way or the other, she's going to lead those who are thinking more hawkishly. Pretty much, she is the one to follow once you get past the governors.

J.D. DURKIN: Yeah, and you are correct. Loretta Mester of Cleveland, currently an alternate member, is set to be a full voting member starting 2024. Even without the notes in front of you, Sarge, you're always batting .1000. This does bring us to the conversation of Treasuries, right.

We've heard from several Fed officials, sort of indicate, hey, maybe some of this long-term action in bonds is taking some of our work off our plate. A lot of attention, of course, given to the 10-year briefly crossing 5% for the first time since 2007. How significant of a moment is that to you? It's a psychological number, but it will be talked a lot about.

SARGE GUILFOYLE: I think it's very significant. It's the normalization of the slope of the yield curve, although it's painful to us in the present. And it should slow the economy. It's almost an ingredient we need to have a healthier economy down the road.

So while these bond vigilantes, we call them, have taken over the long end of the curve, if the Fed, let's just suppose, this is just me thinking, that the FOMC were to go ahead and think about cutting rates. Not because the economy is weak, but to help the slope of the curve invert, steepen further.

Now let's say, that would probably get people a little nervous. There would be a little bit of pain up front. But if they were to take down the short end of the curve, let's say 25 or 50 basis points, folks would get a little, would increase their expectations for inflation. So that would probably take the long end of the curve out to 6%, maybe even 7%.

Sounds awful. Would slow the economy on Main Street. So I don't take hurting millions of people that lightly. But on the other end of the game, on the other end of the fence, you would probably have a yield curve that slopes from maybe 3% or 4% up to 7% or 8%, which is the foundation for a healthy credit environment, a healthy debt environment, maybe a healthy economy.

Although we do have tremendous, a tremendous fiscal imbalance in this country. That's why, that's one of the reasons why these bond vigilantes have taken over the long end of the price discovery process, because there is such supply at the long end. So that's not going to go away.

Our fiscal imbalance is not going to change, especially since our legislators, although they can't even elect the Speaker of the House, don't sound like they're really interested in fixing our budgets anytime soon. So that's here to stay.

So we're probably going to have higher longer term interest rates regardless of what the Fed does. The Fed's not in control of that anymore. So we have to get that out of our heads. But what they can do, is help normalize the slope of the curve, which I think would be helpful.

J.D. DURKIN: You mentioned the fact that there's still no House Speaker, hasn't been a House Speaker in over two weeks. There's a fair bit of chaos on Capitol Hill, Sarge. I'm pretty sure you're familiar with this. You summed it up in terms of your take over on "Real Money."

You said, quote, "Pick a speaker, any speaker."


What happens, well, I mean, listen, oftentimes, markets like stalemates, they like gridlock on Capitol Hill. It indicates probably not a whole lot is going to get done in terms of regulation or a dramatic change in policy. But this is unlike anything we've seen. What happens if the Speaker stalemate continues in the House?

SARGE GUILFOYLE: Well, this isn't gridlock. This is gridlock within one party. It's not-- it's not gridlock as we know it. So what it does is, it stalls legislation. If we only have a Speaker pro tem, pro tempore, or however you pronounce that, he's very limited in what he can accomplish.

So if he's not granted additional powers, not only will he not be able to pass the President's plan for giving aid to the West Bank and Gaza and Israel and Taiwan and the Ukraine the US Southern border, but it also slows down the process of Congress being able to pass a budget or a continuing resolution by November 17, which is crucial.

If we have to turn the lights out on November 17, then you're going to see a tremendous loss of confidence in the United States as a, not as a sovereign nation or anything, or even an ability to pay its bills, but as a competent leader on the global stage, especially if US forces are coming under fire now because this war between Hamas and Hezbollah and Israel spreads beyond those borders.

J.D. DURKIN: And to that point, Sarge, it's impossible to ignore the horrific human toll of that ongoing conflict, but we are in the business of covering the market implications, which I think objectively we can all agree, is of less importance than the actual deeply human component about this.

But to the point of the markets, because there is an economic impact and things to track there, what role has this war so far the last couple weeks played in markets this week? And what will you be watching as we move forward in the conflict?

SARGE GUILFOYLE: I think it's shaken markets somewhat, because they don't have their traditional safe haven. Because the long end of the price discovery process for debt securities, for Treasury debt securities, has been taken away, out of control. It's been taken over by the free market. We haven't seen that safe haven asset value that usually US treasuries can bring to the table during times of crisis.

So I think, I think markets are a little bit in flux, and that's one of the reasons. As an investor at home, what you can do to defend against this, I think, now you've heard this from me before. I've been right and I've been wrong, so take it with a grain of salt, if you want, is leave something in the defense contractors.

Right now, I'm only in Lockheed Martin. General, which we reported last week. General Dynamics and Northrop Grumman, which report this week. But I always have something in the defense contractors because I hate to put it so callously, but the world never disappoints me.

I mean, I don't want to see conflict, but there's almost always armed conflict, and there's almost always a need for what these firms can provide. So while they're not vehicles for growth, they are tremendous vehicles for cash flow.

J.D. DURKIN: So let's stick with Lockheed Martin. Chris Versace remains long-term bullish on that name, writing that Lockheed's prospects on catching up on F-35 deliveries it's not a matter of if, it's simply a matter of when. What is your take there? And what more are you tracking in terms of Lockheed Martin that you think members should also be following, Sarge?

SARGE GUILFOYLE: Well, Lockheed Martin's had a recent success with their-- they and Northrop are both developing it. It's an intercontinental ballistic missile, not aimed at the superpowers, like Russia, former Soviet Union, or China, but on a smaller scale, that would be aimed at rogue missiles that come from tertiary states.

So that's actually, that missile is actually $1 billion program, and Lockheed passed a great tremendous test in that this week. So that's important. The F-35 program, of course, is their most lucrative program, and there's always something slowing down this program, but it's still the most-- it's still the most expensive thing, highest margin thing you can sell in the world of defense.

So it's not like they're going to leave the F-35 program anytime soon, it just takes longer to get the full production. You're still talking about a tremendous cash flow vehicle. You're still talking about huge profitability. Lockheed Martin just increased, they just added $6 billion to their buyback program, bringing it up to $13 billion. I think they pay a 2.85% yield.

I think that free cash flow margin is something like 2.25%. So I mean, it's-- while I have reduced my holdings in almost everything I own, I think except for Lilly, Eli Lilly, I've sold, I have reduced my exposure to almost every name I own, including those defense contractors that I just named, I still see it as a name you want to be in going forward.

J.D. DURKIN: Sarge, it's a great conversation. A lot of context, and no shortage of really important issues to talk about. I'm grateful for your time today. Have a great weekend, Sarge, thank you.


J.D. DURKIN: Members Chris Versace and I will be back early Monday morning to get ready for another busy week ahead. Until then, have a fantastic weekend, and we'll see you again Monday.