You wrote that this week's economic data-- CPI, PPI, retail sales, you name it-- would have outsized importance in terms of long term price discovery. Sarge, what did you mean by that? And are things playing out as you expected them to?
STEPHEN GUILFOYLE: Not exactly. What I did mean by that was that earnings are starting to dry up and that the macro, not that the Fed could speak about it as well, would take a larger percentage of our attention, which it has. Although I'm a little surprised-- maybe more than a little surprised on how strong the market has been over the last couple of weeks or so. I mean, CPI and PPI were both disinflationary.
Import and export prices were outright deflationary. The Walmart CEO spoke about deflationary conditions that are coming on down the pike. Jerome Powell remains pragmatic, in my opinion. Most of his crew, however, is probably still leaning towards the hawkish side. The macro has been kind of lousy.
Retail sales were better than expected, but they were still poor. Industrial production was poor. The Empire State, Philly Fed, and KC Fed were all rather poor. It's been-- probably we're either somewhere in between what some people think will be a Goldilocks or a soft landing or a much harsher landing. I don't think we can decide yet. But we are definitely slowing down.
Whether we'd decelerate all the way into contraction, we just don't know yet. My suspicion is that we are. I've been both right and wrong about recessions in the past. So maybe I lean towards recessions. Maybe that's a biased opinion. That's possible. But I do see us-- I do see them not being able to react swiftly enough once the economy goes below the Mendoza line.
J.D. DURKIN: The Mendoza line. Well, you're not alone in that. I will say, obviously, we got an outlook earlier in the week from names like UBS, Morgan Stanley, Goldman Sachs-- at least the first two names I mentioned there, Sarge, they see us hitting a recession. They actually project Fed cuts more than the Fed itself is currently projecting. So your points are well taken in part of the broader context.
I do want to ask you about bonds-- Treasury bonds, Fed speak. How do those things fit into the puzzle that you're currently looking at?
STEPHEN GUILFOYLE: The long end of the curve-- one thing I stated a couple of weeks ago was that maybe that the long end of the curve had gotten away from the Fed. It does not look that way right now. The long end of the curve seems to have come back into the fold here a little bit, maybe it's been a little too strong. I really didn't like to see 10 year go below 4.5%.
I was hoping it would hang around there and let markets stabilize. If it keeps coming in, I think that'll create a situation for stocks where some traders get ahead-- or maybe they're chasing. But maybe they'll get ahead, and stocks will get into this over-evaluated situation, which we have been in before.
As we head into the recession, we don't want PE ratios-- forward looking PE ratios for the largest stocks to be, on average, in the 20s. I think the 18s is fine. I just don't want to get to see it get overvalued.
J.D. DURKIN: So, Sarge, right now, the 10 year, if I could quickly follow up, is at 4.45%. A few weeks ago, it was north of 5% for the first time since '07. Is there a Goldilocks zone where Sarge Guilfoyle would like to see it settle in at?
STEPHEN GUILFOYLE: I'd like to see a-- I think if it maintains 4.5% to 4.75%, I think we can still develop, once the Fed starts cutting short term rates, a healthier looking slope of the curve. What we want-- the best thing for economic growth going out further would be a healthy curve where credit costs more over time. So I mean, that just hasn't been the case for quite some time, on and off going all the way back to the Great Financial Crisis, and even before that.
So we probably had about 25 years of perverse treasury markets, perverse bond markets where risk has not been properly assessed due to poor fiscal policy and monetary policy that aided and abetted fiscal policy in its recklessness. So I think, as monetary policy has become responsible-- it has done that under Jerome Powell and this Fed-- we can't knock them on that. They have moved monetary policy towards a more responsible place. Obviously, QT has to go a lot further. So they're going to have to keep tightening even as they stop-- even as they put the brakes on the interest rates.
But I mean, we know that fiscal policy is nowhere near solvable at this point. We know that come late January, early February, there's going to be a real dogfight in Congress, because the hawks are going to hold their ground and the ones who want to spend are going to hold their ground. And this Speaker, who is a hawk himself, is going to be caught in the middle where he's trying to play a little bit like McCarthy and try to please both sides.
And he's going to lose his credibility with his crowd while losing face, maybe, with the overall right, because he has to play ball with the left. And I just see us getting into a situation in February where we really could have a government shutdown that could become lengthy.
J.D. DURKIN: And so, obviously, it's not purely a politics segment, but you do mention some of the domestic politics there. How about the global geopolitics? We saw President Biden sit down with Xi Jinping this week. Any kind of takeaways there for Wall Street that you're following or something in the global sphere you think investors should pay a little bit more attention to, Sarge?
STEPHEN GUILFOYLE: I mean, it's-- that may have added some positivity to the week's marketplace. I mean, it's definitely a positive when the President of the United States and the President of-- I almost said the Soviet Union-- the President of China get together and speak and seem to get along. Now, we know they're only talking to us if they need something. So I don't think we have any false illusions about them suddenly becoming a much friendlier and much less hostile type of economic adversary, unless they actually need something.
And they do need something. There's been almost no foreign investment in their country for quite some time now because they played so many games with those countries that did invest. So almost all of them have shied away. The ones that have stayed have been burned on and off. Sometimes it works for them, sometimes it doesn't. It depends on if it works for the Chinese government in Beijing. So I think we know enough not to trust them. But if we can somehow help each other, it does no harm to listen.
J.D. DURKIN: What's the old saying-- jaw jaw is better than war war? Anytime you see two world leaders, especially of the globe's two biggest economies talking, perhaps that, in and of itself, is a positive thing. Talk to me about your outlook here, Sarge, for 2024 before we move on to earnings. How is your outlook for next year shaping, how is it coming together now that we're already staring, impossibly, at the end of November right around the corner?
STEPHEN GUILFOYLE: Yeah, I think if you've been cautious, as I have been, I think you want to maintain that posture going forward. We are enjoying something of a seasonal rally here. I don't if it goes away through the first few days of January. Typically, it gets really red hot towards the very last few days of December and first few days of January, and then we go off a cliff a little bit.
So I do see us going over that cliff a little bit when the January effect kind of wears off and it gets a little nasty into February, especially if the government is shut down, especially if that provokes, what was it, Moody's the other day that downgraded-- didn't downgrade US debt, but downgraded their outlook on US debt. I think once all three have then taken away the triple-a rating and probably put a further negative outlook on US credit ratings, I think that will have a negative impact, I think, that could reverberate across the economy at a time when the Walmarts of this world and the Targets of the world are going into their own little problems where their margins are being compressed by deflation because they've already bought this stuff.
They've already bought their inventories for the holiday season and beyond. And now, they're not going to be able to sell them for as much. So the part of the economy that is consumer facing, where the point of sale is between the consumer and the retailer, is going to run into a bit of a problem here.
I see their earnings, S&P 500 earnings, for next year-- I think are still over 11% on estimate, but we've seen how the fourth quarter has come in from over 8% four or five weeks ago down to a little over 3% right now on their estimates. So I do see that coming in probably rather sharply.
J.D. DURKIN: Sarge, would you say that are currently bullish or more bearish for the new year?
STEPHEN GUILFOYLE: I think I'm spotty. I think you have to pick your spots. It sounds like I'm copping out, but I'm not copping out. I think investors need to have a large cash balance as long as they can get 5% plus for that cash. If you can get 5% plus for that cash in 30 day paper, hey, you're still liquid if your paper is tied up for 30 days. 90 days is not 180 days.
So if you can keep rolling that over while the short term rates are this high, how much are you really missing out on? Yeah, you might get a little bit more in some equities, but other equities are probably going to be hurt to a greater degree. So yes, my largest exposures are still in tech. I'm still long Microsoft, ServiceNow, AMD, NVIDIA.
I'm still long all the crazy dangerous names. I added some Palo Alto this week, I'm still long CrowdStrike. So yeah, but also it's tempered. It's measured. And I do have a sizable chunk, as I have almost all year, in cash, because I'm getting paid for cash.
J.D. DURKIN: Yeah, Microsoft's making a run at the crown for biggest market cap, kind of jockeying for position up there with Apple-- it's an amazing story. Let's talk about the year kind of overall here Sarge. Early innings in terms of predictions for next year. But last year, and I love questions like this, you chose AMD as your stock to watch in 2023. It's up 87% year to date-- likely safe to say that's one for the win column for you, Sarge. So congratulations there. What did you get right there in that projection? And is there a new stock, I wonder, on your radar for 2024?
STEPHEN GUILFOYLE: Well, AMD, yeah, I'm a big fan of Lisa Su. I've reduced that position since. And it's still, I think, my third or fourth largest holding. So I'm still heavily invested in AMD. But I knew NVIDIA was the runaway winner. I had exposure there as far as AI would go, and it was my best guess that AMD would be the nearest thing they would have to a competitor, given the tight knit relationship that Lisa Su seems to have with Jensen Huang.
So I just figured that she, given the driven kind of leader she is and how strong of a corporate leader she is, I figured they would be best set up for this move into AI. And it surely has paid. Even if they don't sell more product, the margin on this product is incredible.
And Microsoft, even though they're going to make their own chips now, they're still playing ball with NVIDIA. And they intend to play ball with AMD.
So I don't really want to go flat any of these for the time being. In the middle of the year, I picked Berkshire Hathaway as my second half stock. That has not worked out that well at all. I'm still up in Berkshire. Let me see where I'm doing here in Berkshire.
I'm still up 18%, but that's because I was in it before I made that call. The stock is down since I made that call and. And now with the questions around Warren Buffett's investing behavior away from Berkshire, we don't know. None of us really know the truth there. But it's something that I think could hurt the stock. So I definitely got that call wrong.
And I think Doug Cash actually picked the opposite side of that trade. So come New Year's Day, I'm pretty sure I'm going to owe Doug a beer or two. As for next year, I guess, I'm still long Lily. In fact, I'm writing a piece on it right now for RealMoney Pro.
Lily has a chance to, even though it's valued so much, at such a greater PE ratio than the rest of the big pharmaceutical space, Lily, with this drug, with the Zepbound or Mounjaro drug that treats diabetes type 2, that treats obesity, that may be able to treat cardiovascular issues-- I mean, this might be the new wonder drug. And we see estimates for $4 billion plus in terms of sales for Lily going out to 2031.
So I don't if that's a next year play, but that's a long term play for someone looking for a long term, in my opinion. And I'm long the name, so I would benefit from that, if you chase me.
J.D. DURKIN: Sure. Sarge, it was a heavy week for consumer earnings. Talk to me about your take on the consumer. What is the health of the consumer with Black Friday, Cyber Monday all set to kick off in the next week or two?
STEPHEN GUILFOYLE: Yeah. I think the consumer is in a bit of a jam. Target, although it was received well-- I'm short Target, by the way-- but even though it was received well, comp sales are contracting. Comp sales are projected to contract. Walmart seemed to have a pretty darn good quarter, but the CEO is clearly a little rattled by what he's seeing late in the October period.
So those are your, I don't want to say "lower end," but those are where you're more cost conscious shoppers go to when they need to buy their necessities. So I think they're in a little bit of trouble. I think the New York Fed told us a couple of weeks ago-- maybe it was last week or the week before-- that delinquencies were up for auto loans and credit card balances.
And now we hear from, I think, Mastercard, and if I recall it was Discover, that that's exactly the case. They're seeing sharp increases in delinquencies for their customers or cardholders. So the consumer is, as we know, is in a tougher place than he or she was. They're borrowing just to maintain their standard of living.
And they will probably welcome this bout of disinflation that's going to hurt the retailers in the coming quarter or two. But is it enough to bail them out? It probably will not be. There's going to be a period like there was, I think, in maybe, what was it, in '09 or '10, where the economy really slowed down a great deal because a lot of people felt really poor? We could be going into one of those periods.
J.D. DURKIN: Yeah. And you're right-- you mentioned earlier in our conversation, WMT, the CEO and CFO talking about deflation and what that means not just for the consumer side, but for the Walmart side as well. A fascinating conversation as always, Sarge. You always give us a lot to think about. Thank you for taking the time on a busy Friday. It's great to have you, my man.
STEPHEN GUILFOYLE: My pleasure.
J.D. DURKIN: Members Chris Versace and I will be back bright and early on Monday morning to get you geared up for the shortened holiday trading week ahead. It will be a fun one. Thanks, as always, for taking the time to watch, and we will see you again soon.