On this week’s Eggerss Report, Karl discusses whether or not the Federal Reserve should be eliminated. Also, Warren Buffett said this week that he owns Amazon. Did he just call the top in Amazon?
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So, let’s jump right in and really what happened this week. It was kind of quiet early in the week and then things started to kind of pick up starting Wednesday when the Fed, Federal Reserve that is, left interest rates unchanged, as everybody thought they would. Market bounced around a little bit but kind of ended on a sour note. There’s still this funny debate going on where the Fed is saying, “We’re not raising rates right now. We don’t see a need to do that. We’re not lowering rates. We don’t see a need to do that.” Yet, you have President Trump, you have Vice President Pence, you have Larry Kudlow all clamoring saying, “We need to have lower interest rates,” which is a complete oxymoron, right? We don’t need low rates if the economy is doing fine. But, yet they can ask.
For those that borrow, which Donald Trump spent his majority of his professional life borrowing money, because that’s what real estate tycoons do, is they use other people’s money. They want low rates, and they know what low rates means for the stock market. They know what low rates means for business owners. So, of course, everybody, every president wants a Federal Reserve accommodative lowering rates in their administration, not raising rates. This administration has seen rates go up, so now they want them to lower rates. But, if they do that means the economy is in trouble. So, right now it’s kind of a Goldilocks, right? We’ve got a scenario where we jaw a jobs report on Friday, good jobs report, 263,000 jobs created in the month of April versus 190,000 estimate. So, a good solid report, so we don’t need a rate cut right now.
Now, the market is pricing in. The next move will be a rate cut at some point. But, when that time comes, who knows. We were hearing all about, literally, two, three months ago, maybe even a month ago, about a recession is inevitable because we have an inverted yield curve. We have interest rates are higher on the short end relative to interest rates on the long end of the curve. So, when you look at things like a three-month treasury, it was actually paying more than a 10-year treasury. People said, “Oh, we have to have a recession.” So, I guess those fears seem to be gone because I haven’t heard that this last couple of weeks as the markets make new highs, as we have a solid jobs report, we’re getting good earnings. Revenue for some of these companies has been a little suspect, but overall good enough to keep us where we are.
Thursday we did see kind of more continued selling. We did see Stephen Moore, who took his name out of the running for getting on the Federal Reserve Board. We saw Tesla issuing more stock and bonds, and rallying on that. A lot of people look at that and say, “Wait a second. This company is burning cash.” They need more money so they do a stock offering, which should be dilutive, meaning it should hurt the existing shareholders, and yet the stock rallies. You could look at that and say, “Well, it’s because with that new money they can do more stuff.” Probably again, I’ve said it, one of the most polarizing companies ever. There’s people that think it’s going to zero, and there’s people that think it’s going to the moon. I continue to watch from the sideline, entertained. I will say that.
We had the … Of course, with May comes the proverbial sell in May and go away, and it kind of worked for the first couple days, didn’t work the third day of May, so we’ll see. But, there’s so many statistics out there that suggest, “You should just park your stuff on the sidelines for the next few months.” But, of course that’s great until it doesn’t work. We’ve had several Mays in a row that were up. We also know that when the stock market gets off to a strong start like it has this year in 2019, it generally continues. So, there’s as many statistics that point to a much stronger market going forward than one that says, “Okay, just because it’s gone up it has to go back down.” Again, balanced approach. We are probably a, I don’t want to say [toppy 00:06:37] but definitely we’re losing a little bit of the momentum. You can kind of feel it in the last few weeks here. It would not surprise us to see a pull back, but we still believe the bull market will continue and will go up higher in the next few weeks and months.
Now, one other thing that came up this week, and this is kind of interesting. Basically, Warren Buffett announced that he’s kind of, he didn’t say it this way, but he’s kind of capitulated and bought Amazon. Now, he said, “I’ve been dumb not buying it in the past,” which probably that’s a lot of us, right? A lot of you listening feel the same way. It’s interesting when you look at Amazon, because it isn’t a cheap company. We know it’s a very expensive company. Having said that, this is a really good lesson. Number one, I’m asking you the question, “Did Warren Buffett basically just call the top in Amazon?” He has had that reputation. He has an unbelievable track record. But, it is interesting that he used to not buy tech companies, now he buys tech companies. He used to not buy airlines, now he buys airlines. He used to buy value, and I don’t think Amazon’s a value. I don’t think anybody would say that. Most private …
Just to give you an example, by the way most private companies sell for, I don’t know, five times the earnings before interest, taxes, depreciation, amortization. Amazon trades at 30, so it’s not cheap. Now, having said that, they are raising their … Their EBITDA growth is very fast. Everything’s growing fast. Now, a lot of people missed Amazon because they said, “Hey, this company’s not profitable, it doesn’t make a profit.” It didn’t for years, but it kept going up. So, it baffled traditional CFAs and mutual fund managers that looked at this company and said, “This makes no sense. Why does it keep going up? It’s expensive.” This has been a great case study for all of us to examine. What does Amazon go up on? Why is it continuing to go up when it looks expensive?
This is where you do have to change the metrics, and you do have to look at what characteristics does it have that’s different? It’s clearly not a PE ratio, because it didn’t have any E for the longest time. It didn’t have any earnings for several years, right? Then, they kind of flipped the switch and said, “You know what. We can make ourselves profitable. We’ve just been choosing to use our cash elsewhere to where it showed up as a negative on the income statement.” But, take a look at Amazon. If you look at Amazon. Look at their EBITDA growth. That’s what it’s been trading on, and it’s been going straight up, and it’s going to continue to go straight up. Now, they did grow that at 85% in 2018; 2019 is supposed to be at 70%; 2020 is at 26%, and 2021 it’s supposed to grow at 18%. So, you see what’s happening is it’s decelerating. What will the market do? Will it always give them this large premium for that? Because when the growth slows and investors smell out that it’s slowing they will take the stock down at some point.
The other thing that’s hard with Amazon is it’s so loved. Nobody can ever give you a reason why it should go down, other than it’s expensive, right. Everybody loves Amazon. They use it multiple times a week. It’s the greatest thing ever. They own grocery stores now. They have distribution chains. They have their own planes. The world’s their oyster, right? So, when that happens, though, when you can’t think of a reason to sell it that’s usually when a stock goes down.
You think about Apple losing 50% a few years ago, and it was just because it was over loved. Micron Technology, another example of a stock that was just roaring along. Nobody could figure out why that particular company should ever go down. From 2016 until 2018, in two years, two years, Micron went up 500%. It was a stock that was around 10 bucks a share. It got all the way up to $45 a share. Then, eventually, of course, it fell about 50% in 2018 alone.
So, when these stocks are over loved it’s a big deal. That’s why you have to look at sentiment just as much as you have to look at the financials of the company, and the income statement, and the balance sheet. But, what they do they do it very well. They do it very, very well. They have lots of different businesses. It’s not just buying stuff online. They have all kinds of businesses.
I’m not saying he’s called the top but it’s interesting that he kind of sounds like he’s capitulating. “I should have bought it in the past,” which is usually a cardinal sin for the rest of us. Now, Warren Buffett’s got deep pockets so he can always more if it falls. So, that’s the question. If you buy Amazon today, can you buy it if it falls? It’s sitting at almost $2000 per share. If it falls to $1000 per share can you buy more? He can. He can buy more, and more, and more, and more of it, kind of unlimited really. That’s a different situation then most people are in. Interesting, though to see him say that, and to change, too.
I also think there’s a part of this that he’s not a spring chicken, so as they are putting in their succession plan there’s probably a lot of other people helping make these decisions, and this portfolio is not just his portfolio anymore like it used to be. I don’t say just his, he’s always had partners. But, it’s probably more a team approach than it’s ever been. That’s why inevitably when something happens to him we may see the stock not even sell off hardly at all, because this transition plan’s probably been in place for quite a while. It’s been an amazing run. Interesting, though, so see him say he owns Amazon right now. I didn’t think we would see that time, but here we are.
Now, we did also discuss healthcare a couple of weeks ago and how we thought it looked like an interesting point for a bounce, because it was getting so beat up, relentlessly. I think it went 6% a couple of weeks ago, and we talked about it and said it looked like an interesting opportunity. Here healthcare’s up, the baskets up about 6%. We said, “Snoop around in that area to look for individual companies,” because there’s a lot of companies in that healthcare space that we really like and are deep value. Again, we keep talking about it, and this is really important. This market is becoming more and more bifurcated where there’s some stupidly expensive stocks out there that don’t deserve the premium they’re getting, and their time will come when they get hit. Hopefully as you avoid those and don’t become a shareholder where you are buying at a significant premium.
On the flip side, there are companies that are dirt cheap, and you can still get a good bargain on those. Now, there is something to be said about … I’m not saying that you can’t buy fast-growing, expensive companies, you just have to realize when you do that you are risking that when the growth slows down, when Wall Street sniffs out any little growth slowdown, that’s when the stock gets hammered. So, growing fast and getting paid a premium for it that’s one thing. Slow growth paying a premium is not. There are companies that aren’t growing that fast and yet for whatever reason in the last few years they traded at a big, big premium.
Now, I did want to switch gears for a minute. I got a listener question about the Federal Reserve and how it may impact your stock in bond portfolio. “Hi, Karl, I’m wondering what your thoughts are on Ray Dalio’s article about MMT and how if enacted this will affect equities and treasury interest rates. If you can spend a few minutes covering them on your podcast I’d appreciate it. Thank you.” So, Ray Dalio, Bridgewater, huge asset manager discussing MMT. Now, what is MMT? It’s Modern Monetary Theory. So, basically what this is about is the Federal Reserve has controlled interest rates for several years, right? They do it by when they want to slow things down they raise interest rates. When they want to speed the economy up they lower interest rates. That’s what they’ve done. It’s called Monetary Policy.
There’s also fiscal policies, taxes, what the government is doing in terms of issuing bonds, and things like that, to stimulate or slow down the economy. So, Ray Dalio says it’s inevitable that we’re going to have to switch to that. The Fed will just become instinct and we’re going to switch over to this other policy. There’s been some of this already. All these plans that were put in during the financial crisis. This is what it really boils down to. Should the government intervene at all? Some say let’s eliminate the Fed and have it be a formula. In other words, when you’ve heard me talk about, and we’ve written about the Taylor rule. Basically it’s a formula somebody came up with, named Taylor, and essentially said, “Hey, this is the factors and this is where rates should be, so let’s set it and forget it, like the rotisserie chicken deal, right?
Now, some say we don’t even need a formula. Jim Grant says, “Let’s let rates float just like commodities do.” You don’t see somebody dictating the price of commodities, and they’re floating, right? Supply and demand. Why don’t we have interest rates do that same thing. In fact, I’m actually judging a thesis next week, and this is the topic that’s going to be discussed. I’m one of the three judges on the panel to ask questions and kind of poke holes in this thesis, and so forth. That is the idea here, though, is:
1. Do we need the Fed?
2. If we don’t have the Fed, do we need a formula to set rates?
3. Do we just need it to float and let it do its thing?
4. Do we even need the government involved at all, even on the fiscal side of the equation?
This all boils down to comfort. Nobody wants to see a great depression. Really, nobody wants to see a great recession. What’s happening is as we’ve moved along decade by decade the government has become this governor. I don’t mean a governor of like a state; I mean a governor of slowing things down, speeding things up, and thinking they can control this through manipulation of all different ways. Some of it’s very, very experimental. Some of these are things that have never been tested before. Some of them are things that have been tested and failed. So, what they’re trying to do is they’re trying to smooth out the cycles. They don’t want the cycles to get too high and inflation to get too high, and they don’t want the recessions to be too deep and a lot of people thrown out of work.
But, shouldn’t some of the stuff be self-correcting, and isn’t it usually? If you look at oil prices, which you could argue some of that’s controlled, but generally speaking oil prices go up what happens? People stop driving. People stop doing all kinds of things. Conversely, it goes down the other way and then people use a lot. It’s just plain supply and demand. That’s what it’s all about. So, should the Federal Reserve get out of the way? Should we move to this Modern Monetary Theory? I don’t have the answer to that. I think they’ve been dabbling in all of that for years. I don’t know if it will make some shift and, if so, what’s going to happen to the stock and bond market. You know, it really depends on how it’s done, how much it’s done, but it is a good question and something that we have to see how it plays out. I have no idea how that would play out.
I just think that, again, if we had bigger cycles it would be a little more painful for people losing jobs but, also, it spurs creativity, it spurs an angst to get things going, and it does resolve itself. It has in the past, but the more we intervene … It’s very similar to basically being on pain killers perpetually. There’s long-term repercussions of taking pain pills every day. Yes, it makes things feel a little better. You don’t have those aches and pains, but maybe it doesn’t allow you to recuperate as fast as you would have. That’s just an example. There are long-term repercussions to giving too many antibiotics, giving somebody a steroid shot every time they feel bad. There’s repercussions to that.
So, a lot of people believe that the more intervention you have, whether it’s the Federal Reserve, the government, whatever it might be, the bigger price we will have to pay for our kids, or our grandkids. That’s probably true. That is probably a true statement. So, switching to MMT may not resolve that, it’s just a different way of doing it, but it is all in an effort to smooth things out and to make things very muted. When that happens and you control it too much bad things can happen.
So, but thanks for the question. I appreciate it. Keep those coming. You can email me at email@example.com. Hey, if you’d like to get a glimpse of our video newsletter you can do that. Just shoot me an email. You can go to firstname.lastname@example.org. Use that email address and we will send you our video newsletter, kind of a synopsis of what we think. Really, we always kind of cover what happened in the previous month, things that are coming right now, things to consider. There’s a lot going on. Obviously, some of the main thing is we have trade. We still have that, which seems to be progressing, but it seems like both sides are getting antsy to get a deal done. This has been going on for quite a while. We said that months ago that this is going to take a while. You don’t just resolve all these issues overnight. But it seems to be progressing still. Market may have discounted some of that already. Interest rates, which have been big talk this week, but are really on the back burner for the most part.
Then, the last thing would be oil, which up until this week was starting to become a problem. I mean, if oil continued to go up during the summer driving season this could be an issue. But, this week we did see oil fall off a little bit, kind of bounced a little bit, but it’s kind of peaked out in the last couple of weeks here, so let’s continue to watch that. I thought that and the dollar are a couple of short-term, probably our biggest risks short-term. You saw an interesting move on the dollar on Friday. After a good jobs report you would think that the dollar would rally, but instead it sold off and gold rallied. So, let’s watch to see does that trend continue where the dollar sells off and the commodities, especially gold, start to rally.
It’s been an interesting move in gold really since last summer. We’ve seen it making higher lows, but it’s had a tough time in the last couple of months, but it’s still kind of within this general up-trend. It’s just going to be a bigger swing. So, let’s watch that, but it’s all predicated on the dollar’s move. Also, it’s not just gold and commodities, it’s also international stocks. Emerging markets have lagged, and developed markets have lagged behind, the U.S. again this year, just like they have the last several years. There was a period in 2017 where they outperformed quite a bit. We thought the tariff talk really put them in the backseat again in 2018. But, again, a move down in the dollar and you could see foreign stocks really take off. We continue to be overweight in that area. We really like international stocks. They’re cheaper, growing faster, and you have a very strong dollar, which when it reverses will be a huge tailwind for some of those international indices. So, continue to watch that.
All right, everybody, don’t forget eggersscapital.com is the website or telephone number 210-526-0057. Don’t forget. Feel free to share the podcast with one of your friends that may need this information. If you have any feedback, send it to us. That would be great. Keep the questions coming. Again, we can’t always answer every one, or sometimes we may answer it in the next few weeks. Just be patient with us as we get those questions. Have a wonderful weekend. Take care, everybody.
This show is for entertainment only and the information provided by the host, guests, and this station should not be deemed as advice. You’re investment decisions should be based on your own specific needs. You should do your own research before you make those decisions. As president and CEO of Eggerss Capital Management Karl Eggerss may hold securities mentioned in the show for himself and his clients, just don’t buy or sell anything based on what you get from radio or TV. Use your own judgment, or get yourself a trusted advisor.