4. How To Identify Stock Market Direction (Trends) Part 1

Hi I’m Prateek Singh from MarketScientist
TV and welcome to another episode
Today we are going to learn about market direction, now it’s very interesting because everyone
keeps coming with this question “will the markets rise?” or “will the markets fall?”
well, using just a few technical tools and I’m not talking about indicators, just pure
price action we can actually determine market direction, now market direction is actually
referred to in the technical world as “trends” So a stock moving upwards, is in an uptrend
And a stock moving downwards is in a downtrend sometimes stocks reach in a no trade zone
or a sideways and this happens because as soon as markets go up it forces a situation
of supply and when markets fall down it forces a situation of demand coming in.
This was seen in the earlier half of December 2012 on the nifty hourly charts.
Lets move on, when we use concepts of supply and demand over long periods of time you must
realise that psychology exists on all timeframes, Except of course in tick-charts; wherever
you have good volume, markets will always behave in the same way if your concept is
technically sound. So let’s see how you can become your own amateur
financial analyst, determining whether your stock that you are stuck in or making a profit,
might continue to move up or might continue to move down.
Si the first thing we are going to learn is about a rally and a decline
A rally and decline are seen on a per bar basis, meaning we look at one bar and then
the next. Simply put a rally is an upmove
A Decline is simply a down move They together form something more important,
which we will discuss later lets look at a rally first,
So this is one bar this isn’t enough information, the next bar breaks the previous bars high
and this continues to happen Now you will notice that every bar is breaking
the previous bars high and its also having a higher low.
This means the market is in rally mode. Also remember in a real market situation this
may not happen consecutively but a general move up is still considered a rally.
A decline is just the opposite, and I’m sure intuitively u have understood what I’m about
to draw here. So the market falling down each consecutive bar breaking the previous bars
low and making a lower low every bar So that’s very simple, here is another rally,
which makes a new high and here is another decline. so now that we have that, you can see that
we have formed a wave structure, markets will always move in waves, markets will never plunge
down or move up unless it’s an erratic day or days. Over general long periods of time,
markets will always move in waves and this is very healthy.
So now that we have understood a rally and decline let’s move on to swing highs and a
swing low. Simply put the meeting point of a rally an
upmove and the immediate decline; this tent, mountain or this peak is called a swing high.
the opposite of this is a swing low, meaning the meeting point of a decline and the immediate
rally is a swing low. Now trends are made up of swing highs and
lows, people call these by different names but all technicals follow this because a swing
high is a naturally place of resistance, it basically means that the markets rallied hit
a supply point, either buying diminished of too much selling happened and we fell, now
the longer time frame between a swing high is untouched the more important it becomes.
At MarketScientist we follow trend following methods/systems, so awhat we discuss in this
video and the next is extremely important, if you don’t understand please rewind or you
can ask questions by emailing us or writing it in the comments below.
Here is a real example of a chart, this chart belongs to nifty and it is basically in downtrend,
but what we have to look now is the swing highs and swing lows.
I want you to take am moment and try to find the latest swing highs u can see here
I’m helping you a bit and marking all of the swing highs on this chart. I’ve marked them
with green circles. Next step is to indentify swing lows, now
before we proceed I want you to pause and take your time and look at the swing highs
and know that you have understood this. We are basically looking for peaks (swing highs)
and crests (swing lows). I’m marking the first the swing lows for you
and I want you to mark the resting your head or write it down somewhere. Pause this video
and find out all the swing lows, we will meet in the next video with the answers…. I’ll
be waiting for you then.

2019 Stock Market Outlook: Stocks to Watch, Trends, & Upcoming IPOs

Chris Hill: It’s the Motley Fool Money radio
show! I’m Chris Hill. Joining me in studio this week, senior analysts Matt Argersinger
and Aaron Bush. Happy new year, gentlemen! It’s our 2019 preview. We’ve got stocks to
watch, stocks to avoid, CEOs on the hot seat, and more. And, of course,
a few reckless predictions, as always. Before we get to the 2019 preview,
though, I think we have to talk about Apple. Shares of Apple falling 10% on Thursday after CEO
Tim Cook warned investors first quarter revenue was going to be about $5-$8 billion lower
than previously expected. Several reasons for that, Matty. The trade war in China, the economic
slowdown in China, the battery replacement program that they had last fall. This was
still pretty shocking development. Matt Argersinger: Lots of moving parts,
but you’re right. This was pretty bad. If you look back to their guidance in early November,
looking for between $89-$93 billion in revenue. To come in, then, at $84 billion, $5 billion
below the low end of your guided range, that’s a problem. CEO Tim Cook said that really 100%
of the miss was due to China and a contraction in the smartphone market there.
That’s a good excuse. It’s probably the right excuse. Investors have been questioning whether or not the
iPhone, especially the latest versions of the iPhones with the high price tags, could really penetrate
the highly competitive smartphone market in China. I think we’re starting to see the fact
that no, that’s not really the case. Aaron Bush: I don’t think it’s that surprising,
actually, that Apple has China issues. I was just thinking back, four years ago, when Matt
and I were talking about China in the context of our Supernova portfolio, talking about
opportunities and concerns, China was a big thing we were talking about. At the time,
we realized that China is a big opportunity simply because how many people are in that
country, but we didn’t necessarily expect it to play out the same way as it did in the
U.S. Since then, the stock is about roughly flat with the market, which is interesting. 
I think we started to see the cracks in the foundation about two years ago. About that
time is when I started studying Tencent, which owns WeChat. It made me realize that iOS is
far less important in China because WeChat is an in-app operating system that people
do everything in. So, the same type of competitive advantage that Apple would have in the U.S.
with iMessage, Notes, various services, that doesn’t exist in China. It showed in the data.
At the time, the retention rate, people who would have an iPhone that would buy another
iPhone, outside of China it was over 80%. In China, it was 50%,
which is essentially a coin flip. I think now, because of the economic turbulence
that’s starting to happen, trade wars, slowdown, we’re starting to see that play out at an
accelerated rate. People who would be the Apple buyers either already own them or did
own them. Upgrade cycles are longer, and retention is still sub-optimal. Apple just has mediocre
market share, and I think that’s not necessarily going to change.
Argersinger: I agree. As long as the iPhone is such a large part of Apple’s core business,
they can talk about Services all they want, but this is still a product that’s about 70%
of revenue and the majority of operating profits. Now, I will say this, because we’re positive
people here at The Fool. Coming into this report, Apple was already down about 40% from
its high. Granted, it had a horrible day this week that took it down even further. But even
at the reduced earnings estimates now, you’re looking at a stock that’s only trading about
11X-12X earnings. Certainly below the average market multiple. Now, if earnings come down
further, the stock could certainly follow suit. But it’s hard not to call
it cheap right now. Hill: That’s the thing. Tim Cook talked
about how he hadn’t seen the December numbers, therefore there’s no way he’s seen the
January numbers, because they’re not in yet. Their first quarter report comes out in early February.
If you’re looking at this stock, and you’re thinking, “Boy, it looks cheap,” do you buy here?
Or you want to see what the actual numbers are before you put down a little
money to buy some stock? Bush: Oh, I don’t know. It sounds like another
coin flip to me. We don’t really know. I do think that the valuation is somewhat compelling.
You’re betting that iPhone sales stabilize, and you’re betting that the Services segment
can become much more than 15% of revenue, which it is now. I think that most people
think that is the case. Or, at least around here, that’s the bullish stance. Personally,
I have some more questions. When you have a monopoly taking 30% of
every single transaction that goes on your ecosystem, regulatory issues will one day be a concern. The same
thing that we’ve seen with Alphabet, the same thing we see with Facebook. One day,
those same headlines are going to be going on with Apple, too. And then the Services narrative
will slowly not seem so amazing anymore. Hill: Alright, let’s get to our 2019 preview.
Aaron, I’m going to start with you. What is one industry you’re
going to be watching this year? Bush: I’m really interested to be watching
the ride sharing industry. With Uber and Lyft, and maybe even DiDi, which is in China,
IPO-ing in 2019, it’s really exciting that public market investors will finally have access
to this new, massive, quickly growing industry. I’m excited to see what the numbers
look like. They probably won’t be great from a profitability perspective. But thinking about
transportation as a service, and what that means beyond just ride sharing, what it means
for logistics with food, and are they going to buy more bike and scooter companies?
That type of thing. I’m really interested to hear more about that longer-term game plan.
We’ll learn a lot about that in 2019. Hill: Matty, what about you?
Argersinger: It’s always interesting, but I think especially so this year,
I’m going to be watching the social network, social media space. We’re already seeing for the
first time ever a real, legitimate slowdown in user growth and usage rates,
especially if you look at the core Facebook platform. My questions are, how does Facebook,
how does Twitter, how do these companies solve for all the privacy risks that people seem to
be somehow aware of these days that they weren’t aware of years before? How do they prevent
all the vile and deceptive behavior without damaging free speech and freedom of expression
on the platforms? These are big challenges. Throwing money and bodies as we’ve seen
Facebook do, I’m not sure that’s going to solve it. It’s going to take a lot of innovation.
I don’t doubt Facebook and Twitter can do it, but I think there’s a real chance we actually
see a tipping point in 2019 where the powerful network effect that has sucked in so many
users over the years to these platforms starts to weaken, and we start to see meaningful
declines in time spent on the platforms. I think it’ll cause a reset of the businesses.
Hill: In terms of trends, Aaron, what’s got you excited in 2019?
Bush: Augmented reality. I think it’s been a long time since we’ve had a big new
consumer-facing technology to invest in. I have a hunch that AR, and probably VR associated with it,
is going to be one of the next big waves, even though some of the hype around it seems to
have fizzled out. I might be off by one year, but 2019 could be the year in which good AR
products are revealed by at least one major tech company, probably Apple. For Apple,
it makes sense. They’ve been acquiring companies with AR tech since 2013. They released their
AR kit, their developer toolkit in late 2017. They have all the pieces in place, controlling
the hardware and the software, plus the developer community to make it happen. They probably
recognize that winning over the AR market might be as big of a deal one
day as winning the smartphone wars was. I’m a bit iffy on timing, but I’m really
excited to see the pieces start to come together. You never know, Apple might have a big AR
glasses or something announcement and late 2019. Argersinger: So, you’re saying Apple has a chance?
Bush: I’m saying that they need to do this. Technology is going to shift past smartphones.
Services won’t be enough. Fingers crossed. Hill: The cash that Apple has on the balance sheet,
that probably also helps them sleep at night. Argersinger: It helps a little bit.
Hill: In terms of trends, Matty, what about you? Argersinger: Big trend this year, the past
year already but even bigger now this year, sports betting taking off. I’ve been known
to place a bet or two in my time. I think there are broader implications for the economy.
The world is far more efficient, far more innovative when it becomes gamified. A competitive
marketplace of ideas and dollars that are wagered, inefficiencies tend to get streamlined out. It’s interesting. If you go back to this fall,
you could place real money on which party was going to lead the House of Representatives
after the November election. You could have placed money on where Amazon was going to
open its second headquarters. We talked about that on the show. Imagine betting on things
like what the weather is going to be like tomorrow, who’s going to succeed Warren Buffett
as CEO of Berkshire Hathaway, what’s the over and under on the minutes it’s going to take
for Domino’s to deliver my pizza. These might seem like silly things to bet on,
but when you’re wagering real dollars at scale, it tends to be incredibly informative to the
marketplace. It makes the economy more efficient. I’m excited about all the innovations that
I think are going to come out of sports betting, especially when it becomes
so much more of a mobile application. Hill: One of the ripple effects that we saw
in 2018 in terms of sports betting and the legalization played out in media. In the subsequent
months, pretty much every major network, both on the regional level and on the national
level, started to roll out programming aimed specifically at betting.
Argersinger: Absolutely. You see it all the time now. Hill: Aaron Bush, what is a stock — or an industry; you can go broad if you want —
in terms of upside for investors? Let’s face it, it’s been a volatile couple of months
here. We’re looking for some upside. What do you have?
Bush: I’m going to go big and then narrow down. Software-as-a-service. The past two years have
been huge for emerging software companies. But I do think this is an instance
in which winners will keep on winning, and a lot of these stocks have
been beaten down in the recent turmoil, too. Unlike the consumer-facing innovation, which is occurring mainly in startups
and the massive tech companies, there are tons of great options to invest in small
and mid-cap software companies with lots of room to multiply. Some of these will turn into
the next Oracle or Salesforce. A basket of three stocks that I have super high conviction
in that I think will do well in 2019, definitely beyond: Twilio, which is a leading communications
platform; Alteryx, which is a leading data blending and analytics platform; and MongoDB,
which is a next-gen database services company. All of these companies are growing super-fast, are
dominant in what they do, have very little competition. At scale, they’re going to be
producing ridiculous amounts of cash flow. I’m super excited to see what these companies do,
even though they’ve already been hyped in the past years.
Hill: Also, a fun basket of names. It’s fun to say Twilio. What about you, Matt?
Argersinger: I’m going to jump way out and talk about an entire sector. Real estate
has really underperformed recently thanks to, as you’d expect, higher interest rates.
Homebuilders especially have been really hit hard. But the sector itself is what you want
to have some exposure to over the next few years. Despite what the conventional thinking
might be, real estate actually does quite well in periods of higher interest rates,
higher inflation. One safe, cheap way to play it is to buy the Vanguard Real Estate ETF,
ticker VNQ. It pays a nice 4% dividend yield, gives you a broad exposure to a bunch of publicly
traded real estate companies and REITs. I think it has a real chance of
outperforming the S&P over the next few years. Hill: On the other side of the spectrum,
it can be a stock to avoid, or maybe just one to have on a really short leash. In terms
of that category, Aaron, where are you? Bush: I think the marijuana industry is
super interesting, but it was so hyped in 2018, I think 2019 is going to bring disaster to
investors investing for the most part in that industry, but especially in the companies
that were the most hyped, like Canopy Growth, Tilray, Aurora Cannabis. If you’re investing
in those, watch out, 2019 is almost definitely going to be a rough year.
Argersinger: It was funny, Aaron and I talked back in the fall. We both said, watch out.
As soon as cannabis gets legalized in Canada, which was mid-October, you could almost draw
a straight line from that point on. That was the peak of a lot of these stocks.
They’re down huge since then, even more so than the market we’ve seen. It’s funny, it was one
of the easiest calls I think you could have made. And it still has more to go.
Hill: It was interesting in part because it wasn’t just individual investors who were
excited about this. We saw major companies, consumer brands that everybody knows,
investing hundreds of millions, and in some cases billions of dollars.
Argersinger: Coke, Philip Morris. Amazing. Hill: What do you have on a short leash?
Argersinger: You can probably guess. I’m going to say Facebook needs to be kept on
a short leash, if not avoided altogether. All the problems I mentioned regarding the social
networking space… the stock price looks cheap. You can call it that. If you assume
that they’re going to continue to grow their advertising revenue at a similar pace,
or even slightly slower pace, yes, the stock looks very, very compelling. I just think
there’s going to be a big reset in expectations across the space. I have big questions about
whether Facebook can effectively monetize Instagram and WhatsApp without damaging
user experience. And I’m not even getting into the leadership questions you have to have right now
around Mark Zuckerberg and Sheryl Sandberg. I just think you can do better elsewhere.
Don’t try to catch Facebook, even though it’s a snazzy name with now a cheap valuation.
Hill: This happens at this time every year: investors and particularly the business media
start to look ahead in terms of private companies going public. Despite the volatility that
we’ve seen recently, you’ve got executives on Wall Street saying, “Actually, that might
accelerate plans for private companies to go public.” In 2019, some of the best-known
names, Aaron — Uber, Slack, Airbnb, Lyft. Is there one that you’re either really hoping
goes public, or you’re just eager to get your hands on the S-1 filing?
Bush: I hope Stripe goes public sooner or later. It might not IPO this year.
They’re a payment platform that makes it super easy for companies to sell things online.
Their developer tools are known to be excellent. They continue to roll out new solutions.
The founder and CEO, Patrick Collison, seems to be a super thoughtful. It wouldn’t surprise
me if one day, because this market is so big, buying things online, that Stripe becomes
a larger payments company than PayPal. I think that’s super fascinating. Right now,
they have a market cap of about $20 billion, so I would love for them to go public sooner
than later, [laughs] before they start hitting the upper tens of billions in their valuation. 
Hill: Do you think they’re at the point now where they’re way past the acquisition standpoint?
Bush: It would be a big acquisition. I doubt it would happen, at least from another
payments company. I bet they’ll go solo public. Hill: Matty, what are you eager
to get your hands on? Argersinger: You mentioned it, Airbnb.
My wife and I have actually been Airbnb hosts for over a decade now. What you have is essentially the
world’s largest, most expansive hotel company that really doesn’t own any of its rooms.
It’s fascinating to me. It has somewhere on the order of five million listings,
150 million users in close to 200 countries. It has a profound network effect, maybe
actually the strongest in the world. I think we’re going to realize that. I don’t know what the
market cap is going to be when it becomes public, but just in terms of room count and
customer count, it’s bigger than all the major publicly traded hotel companies combined.
Hill: OK, I really wasn’t expecting that at the end. I’m assuming the answer is yes. Do you
have a good rating? What kind of rating do you have. Argersinger: We have
almost a five-star rating across our listings.
Hill: Nice! I’m not surprised, but I’m very pleased for you. Alright, we’ve got just
a couple of minutes left before we wrap up. We do this every year, reckless predictions.
Make them reckless. They don’t have to be about business, although they can be about
business. You can go off the board to sports, pop culture, whatever.
Aaron, what do you have? Bush: Even though the Chinese trade wars and economic
slowdowns will continue to generate headlines, I predict that in 2019, we’ll see the
largest technology acquisition in which a Chinese company buys a U.S. company.
I don’t know if that’s Tencent buying one of the big three video game companies, maybe Alibaba
acquires eBay as a way to get into U.S. e-commerce. Maybe DiDi, which is larger than Uber at their
last valuation, acquires Lyft as a way to get to the U.S. markets and get a partnership with
Waymo. I don’t know. There are interesting possibilities. Hill: That would be fascinating! Matty, what about you?
Argersinger: I think Warren Buffett’s going to buy an airline.
Hill: [laughs] Really? Argersinger: Berkshire Hathaway already
owns major stakes in all the major U.S. airlines. The industry has changed. Consolidation has
made this much more a value creator than a value destroyer. You have a strong airline
like Delta that’s actually been assigned an investment grade credit rating. It’s buying
back shares and paying a dividend, and the valuation is very cheap. This is a different
industry now. Much like how Buffett viewed the railroads 10 or 15 years ago, I think
he views the same with airlines today. Hill: That would be maybe the greatest example
of someone taking emotion out of investing, when you think back on how much Buffett used
to openly hate the airlines as an industry. Argersinger: Oh, absolutely!
Hill: Alright, Matt Argersinger, Aaron Bush, guys, thanks for being here! Happy New Year!
Coming up: our 2019 preview rolls on with Ron Gross and Jason Moser.
Thanks for being here, gents! Ron Gross: How are you doing, Chris?
Hill: I’m doing well! The 2019 preview rolls on. Real quick, though. We talked about Apple
at the top of the show. Jason, any thoughts in terms of one of the largest companies
in America and where it is right now? Jason Moser: As Aaron was saying, I’m really
surprised that people are surprised by this. It’s not something that I’m all that taken
back by. In November, we were talking about Apple’s chip suppliers ratcheting back
their guidance, which was more or less implying that there may be some weakness in iPhone
performance like we’re seeing. Granted, they seem to be holding China accountable for
most of this. But it all makes total sense. As iPhones get better, they last longer,
you don’t have to upgrade as much. They can only raise prices so far until consumers become
a little bit more sensitive. Everybody wants to just get on Apple’s case here and predict
that this may be the beginning of the end. But let’s be clear, it’s still Apple.
They’re still selling millions upon millions of devices. They lost control of the conversation a little
bit because they’re not going to be announcing those unit sales anymore. But there are a
number of different ways they can win. It’s not going to be just Services. Services will
have to be part of it. But when you look at Services, other devices, the portfolio of
wearables, you can’t discount the potential big acquisition at some point or another,
either, with that balance sheet. iT’s all like just take a step back here…
Gross: I’m all for the take-a-step-back approach. I think that makes good sense.
I’m going to be really curious to see if Warren Buffett and Berkshire Hathaway are buying
stock during this period of weakness. I would be one of those analysts that would recommend
that investors take a position at these levels. 11X-12X forward earnings, there’s not a lot
of growth built into the stock at this price, and they’ve got a lot of ways they can win.
Moser: And let’s remember, too, we have a whole generation of smartphone users that
haven’t bought smartphones yet. There are going to be plenty of opportunities to get
new smartphones in new consumers’ hands, and there’s a brand loyalty
there that’s quite impressive. Hill: Ron, let’s get to the preview.
When you think about 2019, what’s your biggest question as an investor?
Gross: My biggest question is, will value investing rise from the dead? As most of us
are aware, growth has nicely outperformed value over the last, let’s call it a decade.
Not just a few months here and there, but quite a few years. FAANG stocks are perhaps
the most obvious examples of growth stocks that have led the way. Obviously, we’ve had
an extended bull market. That tends to favor growth stocks. So, my big question is,
do we see a resurgence of interest in stocks that are considered value? Growth often does
underperform in bear markets. If, perhaps, we are entering a bear market, are we going
to see a sustained bear market, then one would expect value to come back into vogue.
But, you know what? We haven’t seen it anytime in recent past.
Hill: What about you, Jason? Moser: We’ve talked a lot about Disney and
their move to over-the-top distribution. They own part of Hulu, which I think they’ve done
a good job building out, especially with that live Hulu offering. ESPN+ seems like it’s
gaining some traction. And now, Disney+ is going to be their service that launches sometime
in 2019. We talked before on the shows, they really need to make sure they execute there.
I do think that’s a compelling product. It’s going to take a lot of content away from other
streaming partners, namely Netflix. I find it interesting to see that the shows on Netflix
that garner the most views as a percentage are all shows that are not Netflix shows.
I think that’s telling. Netflix is still having to put up a lot of money to get content that
people want to see, and Netflix is not the one producing that content. They still, have
a little ways to go in succeeding on that original content front to justify all of that
money that they’re spending. I think that Disney+ is going to re-emphasize the
competitive advantage that they have there in that intellectual property. I’m excited to see how that product
arrives. I’m certain that we will at least be testing it in our house, if not becoming
full-fledged subscribers, unless they really drop the ball.
Hill: Wasn’t there a minor freak-out in the Netflix universe when they said they weren’t
going to renew the show Friends? Moser: Yeah.
Gross: In my household, for sure. Moser: That is something that they need to
pay attention to. As a percentage of views, Friends is No. 2 on the list just behind
The Office. When you look at that list of the shows that are garnering the most views
on Netflix, it takes you back, not a lot of their original content is on that list. It just
tells you they still have a little ways to go. Hill: What’s a trend you’re excited about this year, Ron?
Gross: It piggybacks off of what Jason was just discussing. 5G technology, fifth generation
wireless cellular technology, is coming, and it’s coming pretty quickly. It’s going to
be pretty exciting. It’s going to make devices more capable of accessing the internet,
it’s going to deliver much faster speed than 4G, some say 20X-100X faster than 4G.
Lots of companies are going to benefit here. The most common names would be AT&T, Verizon,
T-Mobile. But I think Nokia, even Apple will benefit as people upgrade to 5G-enabled phones.
It’s going to be a really exciting trend to watch from an investment perspective, but also from
a consumer perspective, because I think we’ll all benefit. Moser: I’m glad you mentioned Apple there. That’s another point with 5G. I think they’re
going to be a little bit behind others in getting their devices up to speed. But once
that does happen, that’s going to be another catalyst there in the upgrading.
For me, I’m excited about podcasts and where podcasts are heading.
Gross: Shameless plug! Moser: I’m not going to just pat ourselves
on the back here too much, but it’s worth noting that you and Mac and our partners here,
you had the senses to make some early bets in this market back in 2010 and 2011.
And lo and behold, now, in 2019, we’ve got a full-fledged family of podcasts. They’re doing
very well. We’ve seen Sirius XM acquire Pandora, noting in their call that, to their dismay,
they passed on podcasts for a while. They admitted that mistake, and they’re going to
start putting some resources into podcasts and building out that environment.
I think we’re in a day and age now where Netflix really changed the game for content for people
being able to watch what they want, when they want, and where they want. Now, we’re seeing
the same thing play out on the audio side. We’re able to give people what they want,
where they want it, when they want it. It’s nice to be a part of it.
Hill: Let’s talk stocks. Ron, whether it’s an industry or a specific stock,
what do you think is poised for upside this year? Gross: An industry I’m looking at,
it’s a sector/ industry. I’m not ready to call the big r-word yet, recession.
I’m not freaking people out yet. Hill: You are a little bit, by saying that.
Gross: I think it’s important to have some allocation to some defensive stocks in the
environment that we may be approaching. So, when I think of companies in those sectors,
I would say some utilities might be a good bet right here. Some of the discounters,
in fact, discount retailers. Costco, Dollar Tree, Walmart would be some nice stocks, defensive
stocks to have as we enter an economy that might not be as robust as it has been.
Hill: What about you, Jason? Moser: I don’t want to time when a recession
might hit, because really, that’s bad for everybody, but I do think we are entering
a period where banks are going to have some opportunities to boost their earnings a little
bit as interest rates continue to nudge upward. In particular, I’m looking more at small banks,
and one we’ve talked about before, Ameris Bancorp. This stock has a tremendous
risk-reward scenario playing out here. The stock is now trading around 15X earnings.
They recently announced this merger with Fidelity Bank in Georgia. It’s about a $750 million deal.
Given that Ameris is about a $1.5 billion company, you can see, it means a lot.
The market rightly sold the stock off. There’s some skepticism there. That’s rolling in a
big acquisition. But they’re two very similar cultures. It gives Ameris tremendous exposure
to the valuable Atlanta market. It’s also going to help grow that asset and
deposit base, particularly in a period where a lot of these banks are competing for getting those
deposit bases. So, to me, this could play out like the McCormick thing. Remember when
McCormick acquired RB Foods? The market thought, “Whoa, this is a big one to digest here,”
and they held off for a couple of quarters to see how things worked out. Lo and behold,
it worked out pretty well. The stock recovered nicely. I think we could be looking at the
same thing here with Ameris if they execute this acquisition well.
Hill: Ron, if defensive stocks have you interested, what’s at the other end of the spectrum?
What are you avoiding this year? Gross: Specifically, I have one stock
in mind. I come back to it often. It’s Fitbit. I’ve really never been excited and probably
will never be excited about this one. They entered the smartwatch market in 2018.
I give it to them, they’ve done pretty well. But this is a formidably competitive market,
with the likes of Apple, for one, right there behind them. You even have some Chinese upstarts
that could be a problem, as well. I don’t see Fitbit being the company that is constantly
able to innovate, either take market share or defend market share.
I’d be really careful about this one. Hill: What about you, Jason?
Moser: Zillow. I’ve changed my tone on this company over the past year. I used to be excited
about the potential there. I feel like they’ve failed to convince me of the sustainability here.
They’re yet to become meaningfully profitable at all. Now, in this most recent quarter,
they put in their shareholder letter that Zillow Group has entered a period of
transformational innovation. To me, that’s code for, “We’re not going to be profitable any time soon.”
For a company like this, a company that’s been around for a while in such a big market
opportunity as our housing market, they should not be entering this period. They should be
coming out of this period. I think that’s what they were trying to do over these past
few years. This instant offers business, it’s not up their alley. Buying homes and renovating
them and selling them, it’s not scalable. There are a lot of people out there doing it.
I don’t know that they have any real advantage there. Good will now represents essentially
half of the total assets on the balance sheet. It’s not a bad company. I’m just disappointed
in the way they’ve executed. They still have a ways to go before they
get to meaningful profitability. Hill: One of the things that ties these two
businesses together, Fitbit and Zillow, is the word “optionality” has been used in connection
to both of these businesses. They were seen as, “They have options, in terms of where
they can go.” Optionality is something we like to see as investors, but Ron, it almost
seems like optionality works better if you’ve got one dependable cash cow in your portfolio.
Gross: You nailed it. Optionality is great for additional upside. Maybe you can’t even
see the different options that a company might have three to five years down the road.
But if they don’t have that profitable cash flow producing segment of the company, then you’re
relying on all of the value of that company being in the optionality category,
and that’s just too much risk for me. Hill: Guys, 2019 has just begun,
but The Motley Fool is already looking for summer interns in investing, editorial, software development,
and much more. Come, spend the summer! Gross: Join us!
Hill: Join us here at Fool global headquarters this summer. Go to careers.fool.com for all
the information and to apply to be a summer intern here. That’s careers.fool.com.
Happens every year, Jason. There are a few CEOs who are on the hot seat. We’re long-term
investors, but let’s face it: over the long-term, if you’re not delivering, that means in the
short-term, you’re on the hot seat. What do you have? Moser: In 2018, I certainly had Kevin Plank of Under Armour on the hot seat.
He’s not off yet. I’m calling him out again. While we are seeing signs that he is embracing relying
more on his team, particularly the CFO and COO of the company, Frisk and Bergman,
when you look at the expectations we’ve had for this business over the course of the last
several years, as it’s been a recommendation in a number of our services, this has been a phenomenal
disappointment. The real disappointing part there is, they were essentially self-inflicted.
They just made some dumb investments for the sake of growing as opposed to making good
strategic decisions and letting the growth come from making good decisions.
I think he’s on the right track. We need to make sure that team stays intact here.
If we see that CFO or COO leave, we have a really big problem. But at this point, with the market
seeming like it wants to recover, if we don’t have a recession, this is a company that should
be performing a lot better than it is today. Hill: What about you, Ron?
Gross: I think Wells Fargo’s CEO, Timothy Sloan, probably should go. He was probably
the wrong choice from the get go, as he’s been at the company during all of the controversies.
Having taken over the CEO role in 2016, he’s really not done anything to turn the tide.
From an operations perspective, the company’s not really doing very well. From a controversy
perspective, as well, things don’t seem to be getting better. I think it’s time for some
outside blood to come in and right the ship. Hill: I think back to last year’s show.
I mentioned that John Flannery, who was CEO of General Electric at the time, I mentioned
that he was certainly a CEO to watch because I thought he was laying all his cards on
the table. I thought, “Boy, this is going to be a really interesting company to watch.”
In hindsight, I probably should have said he was on the hot seat. I didn’t think he was
on the hot seat! Then he didn’t make it to the end of the year.
Gross: That’s how it goes! Hill: As I talked about with Matt Argersinger
and Aaron Bush, it’s interesting to see not only the companies being named in the private
market as potential IPOs this year, but the possibility that the recent volatility we’ve
seen might accelerate those IPOs in the first six months of 2019. Whether it’s the S-1 that
you’re eager to look at, or a company where you just think, “I want this thing to go public
now so I can get a few shares,” what’s on your radar, Jason?
Moser: One that probably a lot of people are thinking won’t end up by IPO-ing. I hope
it does. SpaceX, Elon Musk’s rocket company. They’re set to raise $500 million at a
$30.5 billion valuation shortly. To me, space is one of these markets, one of these trends
that’s going to open up a lot of fascinating investment opportunities over the course of
the next decade and beyond. I think SpaceX is going to be a part of that.
One thing that SpaceX is doing today is this project called Starlink. Essentially,
the idea is looking to build out a constellation of satellites all over the globe in low orbit
that will basically be able to beam high speed internet connection to every corner of
the globe. It seems like he’s getting buy-in from all the regulators. We’ve seen what he’s been
able to do here in the rocket launches that have taken place thus far.
I think this is a fascinating company. It’s going to offer a lot of opportunities.
If we do get a chance to see it go public, I more than likely would want to own a few shares
just to be a part of it. But, I’d really want to read that S-1. Hill: Do you think Tesla shareholders are eager for the prospect of Elon Musk at the
helm of yet another public company? Moser: Maybe we save
that for another show. [laughs] Hill: Ron, what about you?
Gross: A favorite company in my household is fast casual Mediterranean restaurant Cava.
They recently acquired publicly traded Zoës Kitchen. I’ll give them a little time to digest
that acquisition, decide what they want to do with all the Zoës locations. But then,
let’s take the whole darn thing public. Some great capital that they can use for growth
to take the world by storm and expand the concept. Hill: Have they given any more color on what they plan to do with those locations? I remember,
we talked about that acquisition on this show. The only thing that surprised me was the fact
that they seem like, “No, we’re not necessarily going to turn these all into Cavas.”
I think our general reaction was, why not? Gross: I’ve seen more along the lines of
making some menu changes, changes to the way the kitchen operates to be more efficient
and have offerings that are more appealing to the consumer.
Hill: Alright, just a couple of minutes left. Reckless predictions for 2019.
What do you have, Jason? Moser: I was thinking about going with the
Red Sox repeating as World Series champions. Then I thought about it, that’s not that
far-fetched, really. I’m calling it, they’re going to repeat. That’s not my reckless prediction. 
I’ll go with a more business-related story here. I was talking earlier about the potential
acquisitions that Apple could be looking at here. What would stop them from wanting to
acquire Square. You want to look at expanding your business and becoming a little bit more
of an integral part of the commerce scene here, not only domestically, but globally.
I think Square and Apple have a lot in common. They’re both in the business of developing
sleek hardware that people like to use, generating some pretty strong brand loyalty there.
Then, we know, of course, the payments space is one that’s growing very quickly.
I’m not saying it’ll happen, but it’s certainly an acquisition that Apple would
be capable of executing. Maybe it will happen. Hill: Ron?
Gross: I went a little off the rails here. There’s going to be more definitive signs
of previous life discovered on Mars in 2019. That’s going to build off of the work done
by the Mars Curiosity Rover that, earlier in 2018, found some organic molecules.
We’ll figure out where those actually came from and build on that. There aren’t going to be
any signs of actual Martians running around Hill: Or will there?
Gross: — but I think we’re going to see signs of some previous life. Moser: Alright, reckless prediction No. 2:
Ron Gross and Jason Moser will be heading up the new Motley Fool Space Investing
service to launch either late 2019 or 2020. Gross: [laughs] Sell that short.
Hill: I’m just going to say that regardless of where free agent Bryce Harper ends up,
the Washington Nationals are going to the World Series. Moser: Wow! That is reckless! Gross: I’ll take that bet.
Hill: Ron Gross, Jason Moser, guys, thanks for being here! That’s going to do it for
this week’s edition of Motley Fool Money. Our engineer is Dan Boyd. Producer Mac Greer
on a well-deserved vacation this week. I’m Chris Hill. Thanks for listening!
We’ll see you next week!

What’s behind the recent stock market volatility?

AMNA NAWAZ:  Today’s 800-point plunge on
Wall Street is just the most recent swerve for a stock market that had very recently
been hitting record highs. Jeffrey Brown reports that the high level
of volatility has investors large and small on edge and looking for answers. (BEGIN VIDEOTAPE) JEFFREY BROWN, PBS NEWSHOUR CORRESPONDENT: 
President Trump’s trade and tariff wars, major slowdowns in the economies of Germany and
China, the prospect of further actions by the Federal Reserve, and more. It may be August, but national and global
events are impacting markets and, maybe, the economy overall. Neil Irwin, senior economics correspondent
for “The New York Times,” joins me now. Nice to have you back. NEIL IRWIN, SENIOR ECONOMICS CORRESPONDENT,
THE NEW YORK TIMES:  Thanks, Jeff. JEFFREY BROWN:  Big drop in the market today. You see several things going on. Let’s start with the trade and tariffs. How is that moving markets? NEIL IRWIN:  Sure. So, we’ve seen a bit of a de-escalation of
the trade wars in the last couple of days — JEFFREY BROWN:  Uh-huh. NEIL IRWIN:  — as the president has kind
of backed away from one round of tariffs that were set to go into effect. (CROSSTALK) JEFFREY BROWN:  Which should be good in a
sense, yes. NEIL IRWIN:  It should be good, but remember,
that was only partially pulling something that was only announced back two weeks ago. JEFFREY BROWN:  Yes. NEIL IRWIN: What we’re seeing is that this
trade war, it’s something bigger than just one little dial that you can twist. It’s infecting the overall economic relationship
between the world’s two largest economies. Businesses worldwide are having to adapt and
adjust, and they’re nervous about making investments and really investing in the future given that
backdrop. JEFFREY BROWN:  Do we see actual damage already
or is this about fears looking ahead? NEIL IRWIN:  So, so far, in the U.S., economic
data, it’s pretty mild. You see some evidence that the industrial
sector is slowing down. Business investment has been weak in the last
few months. But it’s not a catastrophe so far for the
U.S. economy. So far, the U.S. economy seems to be holding
up. The question is what — what’s going to happen
in the future? JEFFREY BROWN:  And when the president pulled
back yesterday on the latest tariffs or at least postponed them, was that perhaps as
seeing that it might — this time, it might affect consumers, or why — why do you think
he did that? NEIL IRWIN:  Yes, I think this was — this
round of tariffs is going to affect consumers 10 percent on basically all Chinese imports,
including toys, including iPhones, including things that people are buying in the Christmas
season. They didn’t want to do that. The thing is you can’t really go back again. Sometimes, this idea of constantly escalating
global economic warfare, once that gets in place, it’s not so much the details of any
one tariff, it’s what’s going to happen to the relationship overall, and what does that
mean for the future. JEFFREY BROWN:  All right. So, there’s that on the one hand, but you’re
seeing something that’s part of — this is part of something much bigger, deeper,
a slowing, a weakening, perhaps even signs of a recession. What points to that? NEIL IRWIN:  So, the biggest thing is what
happened today is called an inversion of the yield curve. So, the yield curve is interest rates on the
treasury bonds for different durations, different time periods. And what’s happening now is you’re actually
seeing lower interest rates on longer term bonds than on shorter term. All that means is investors worldwide soon
to be pricing in an expecting slower growth, weaker growth, lower inflation, more Federal
Reserve rate cuts. That’s a pessimistic signal we’re getting
from global bond investors. JEFFREY BROWN:  And how — where are they
seeing that? I mean, what specifically are they looking
at that’s making them feel so pessimistic? NEIL IRWIN:  It seems to me this global forces,
not just the trade wars that we’re already talked about, but a sharp slowdown in the
European economy, geopolitical tensions. You have tensions between China and Hong Kong. JEFFREY BROWN:  Yes. NEIL IRWIN:  You have a very complex situation
where the entire world economy and the world political system seems to be in this very
fragile state. So, it doesn’t take much to undermine growth. JEFFREY BROWN:  Now, the president clearly
seeing what’s going on, he put out another tweet today, another blast at the Fed chairman. He referred to him as clueless Jay Powell. What is — what is that coming from? Or what do you seeing there? NEIL IRWIN:  So, look, President Trump wants
to blame the Fed for everything bad that’s happening in the world markets and the economy. And it is true — look, the Fed raised interest
rates four times last year. They’ve already taken back one of those. They seem to believe that — you know, there’s
some evidence that they overdid it last year and maybe raised rates too much, given where
the global economy is. But you can’t — you know, you can’t hold
the Trump administration blameless. They keep kind of throwing bombs in the different
elements of the global trading system in ways that are disruptive. And you talk to CEOs. You look at corporate earnings reports. There’s clear evidence that the Trump administration
has part of the responsibility. JEFFREY BROWN:  I mean, we’ve talked about
this before and over the years many times, the uncertainty unsettles markets, right? NEIL IRWIN:  Yes, if you’re a CEO, you’re
trying to decide whether to invest, whether to hire people, whether to build a factory. You look around — you don’t know what the
world economy is going to look at in a year because there’s this kind of chaos that
emanates from, not just Washington, from other world capitals as well. That’s a very difficult setting in which
to do business. And what’s happening in markets is reflecting
that more and more. JEFFREY BROWN:  It is still true, though,
that some numbers look OK, or even good, right? Job market is still OK. Wages are up. So, is everybody sort of parsing all these
numbers, huh? NEIL IRWIN:  Yes. Look, so far, the U.S. economy has been the
calm in the storm. The U.S. economy has been basically sound
even with all this — all this turmoil overseas. The problem is what’s being — what we’re
seeing in markets this month seems to be suggesting that could change. And it doesn’t have to be a recession. We can still avoid a recession, but the risk
of one is a lot higher than it was a month ago. JEFFREY BROWN:  And just briefly before we
go, what is it about August? Something about — everybody is supposed to
be relaxing, but a lot of things happen in the economy and market — markets. NEIL IRWIN:  We keep seeing this — happened
in 2011, happened in 2007, happened in 1998. You know, one explanation, it seems to be
that a bunch of traders are on vacation, so there’s liquidity in markets. You get wilder swings. It may be just a coincidence but I think we’ve
seen this pattern before where August is the month where global markets seem to melt down. JEFFREY BROWN:  All right. Neil Irwin of the “New York Times” — thank
you very much. NEIL IRWIN:  Thanks, Jeff.

November Economic Collapse: Stock Market Crash! Brutal Financial Crisis With $23 Trillion Debt

… panic sounds… The clock is ticking, and financial conditions in the U.S. are about to make a brutal turn for the worse. … five years to go higher it’s now down
forty percent 2019 Financial Crisis begins the US stock market’s complete final tops November collapse will be quick rapid and sudden they will
not know what hit them they will try to stop it and they will fail World
November collapse complete before Thanksgiving but the world is sleep
walking towards a fresh economic and financial crisis that will have
devastating consequences for the Democratic market system according to
the former Bank of England governor Mervyn King Lord King who was in charge
at Threadneedle Street during the near death of the global banking system and
deep economic slump a decade ago said the resistance to new thinking meant a
repeat of the chaos of the 2008-2009 period was looming giving a lecture in
Washington at the annual meeting of the International Monetary Fund King said
there had been no fundamental questioning of the ideas that led to the
crisis of a decade ago another economic and financial crisis would be
devastating to the legitimacy of a democratic market system he said by
sticking to the new orthodoxy of monetary policy and pretending that we
have made the banking system safe we are sleepwalking towards that crisis
the market levitates higher on phony economic data from the government
Trump tweets fed money printing and hedge fund algorithms chasing headline
and Twitter sound bites currently the stock market doled by
money-printing and official interventions could care less about
economic reality and rising global systemic geopolitical and financial reg
corporate headline earnings beats are considered bullish even if the earnings
declined yoy or sequentially someone is not telling the truth the Fed once again
last week increased the size of both the overnight and term repo operations
starting Thursday October 24th the overnight repos were increased from
75 billion dollars to at least 120 billion dollars and the term repos
two-week term of at least 35 billion dollars were extended to the end of
November with to at least 45 billion term repos thrown in for good measure
the Fed is also outright printing helicopter money for the banks at a rate
of 60 billion dollars per month the tea bail pomos at the height of the last QE
money printing cycle the Fed was doing 75 billion dollars per month so whatever
the problem is behind the curtain it’s already as large or larger than the 2008
crisis that escalated quickly when the repo operations started in September the
Fed attributed the need to relieve funding pressures at the time the public
was fed the fairy tale that corporations were pulling funds from money market
funds to pay quarter in taxes well we’re over five weeks past that event and the
repo operations have escalated in size and duration three times someone is not
telling the truth the truth is they are gone and as the US
economy continues to collapse things are going to get even worse the rapid
increase in Fed money-printing in just five weeks
reflects serious problems developing in the global financial system actually the
problem is easy to identify at every cohort government corporate and
household the level of debt has become unsustainable with not insignificant
portions of that debt in non-performing status seriously delinquent or in
default one market expert breaks down why the mother of all bubbles is unlike
anything investors have ever seen and lays out additional evidence that a
crisis is approaching several warning signs including the mother of all
bubbles are adding up to diagnose the next recession according to joseph
Zittel the chief investment strategist of black stones Private Wealth Solutions
Group he is concerned that investors are treating these signs as random events
even though they are all linked just like the 2008 crisis was the culmination
of many separate risks joseph zittle is adopting the framework his boss used to
foresee the housing crisis over a decade ago Blackstone CEO Steve Schwarzman
espouses the idea of hunting for discordant notes these refer to trends
in the economy and markets that easily pass as isolated events but combined in
a dissonant troubling fashion as a case in point the surge in housing prices and
the collapse of the reserved primary fund due to its exposure to Lehman
Brothers seemed like two separate issues however we now know they were part of
the same awful financial crisis the next recession will likely be no different
according to little many warning signs that easily pass as isolated are adding
up to four warn investors the US economy is seriously deteriorating and things
are only going to get worse in the weeks ahead the next shoe in the farm crisis drops
bankruptcies soared 24 percent the American Farm Bureau warned Wednesday
that farm bankruptcies are entering a parabolic move the farm crisis as we’ve
pointed out is only accelerating and will likely be on par with the farm
disaster that was seen in the early 1980s president Trump’s farm bailouts
given to farmers earlier this year appears to be failing at this moment in
time as a tsunami in farm bankruptcies is sweeping across the country with
record high debt collapsing farm income and depressed commodity prices US
farmers are dropping like flies as there’s no end in sight and the 15 month
long trade war AFB said farm bankruptcies for the 12 months ending in
September totaled and astonishing 580 filings up 24% yoy the number of chapter
12 farm bankruptcies 580 filings for the period was the highest since 676 filings
were recorded in 2011 for third quarter nineteen farm bankruptcies were slightly
lower down 2% yoy total bankruptcies filed by state vary significantly from
no bankruptcies in some states to more than 20 filings and others bankruptcy
filings were the highest in Wisconsin at forty-eight filings followed by 37
filings in Georgia Nebraska and Kansas Iowa Kansas Maryland Minnesota Nebraska
New Hampshire South Dakota Wisconsin and West Virginia all experienced chapter 12
bankruptcy filings at or above 10-year highs a FB row AFP’s next chart is yoy
change in farm bankruptcies over the 12 months which shows bankruptcies
accelerated the greatest in Oklahoma Georgia California Iowa and Kansas the
next chart from AFB outlines how bankruptcy filings over the previous 12
months ending in September jumped in every major region across the country
some of the most significant increases were seen in the Midwest
40% over the period chapter 12 farm bankruptcies are expected to increase
through the next several quarters this could be problematic to President Trump
as the 2020 election year begins many of the bankruptcies are occurring
in election battleground states like Wisconsin according to Lynette Zhang
from ITM trading the total size of the municipal bond market is more than
doubled since 2008 from 2.8 trillion to six point nine six trillion as of
September 2019 if you look to the grading services they say the risk is
small but studies conducted by the New York Fed in 2012 as well as a 2019 study
by the Brookings Institute tell a very different story because ratings agencies
only report these bonds they have graded which leaves out a huge swatch of the
market in fact according to the WSJ as of 8:30 nineteen forty three percent of
reporting muni bond issuers default within three years so far 11 states have
moved to protect their citizens by passing legal tender laws that put sound
money gold and silver as a Fiat money alternative which i think is a very good
thing is your state one of them if not you might want to see what you can do to
help in the meantime you can create that protection for yourself and your family
which i think is a very good idea in particular the United States finds
itself in a massive economic mess it was once the greatest creditor nation on
earth but now it is the biggest debtor in the history of the world it blows the
mind to think that the richest nation in the world has become the nation with the
most debt in the history of the planet in just one short generation the great
American economic empire is crumbling the economic despair that is coming in
the years ahead is going to be so great that there are no words to even describe
it the clock is ticking and financial conditions in the US are about to make a
brutal turn for the worst a financial crisis is coming you better get ready the financial and political opinions
expressed in this video are not necessarily of financial argument or its
staff opinions expressed in this video do not constitute personalized
investment advice and should not be relied on for making investment

🔴 How to Time the Market (w/ Milton Berg)

MILTON BERG: On a daily
basis and a weekly basis, the movements of the
market are random. However, there are particular
times when the market movement is very far from random. When the market
generates data that tells you the market’s close
to a top or has topped, or the market is close to
a bottom and has bottomed. In their mind, this is a cuckoo. This is nuts. This is impossible. We were taught
this can’t be done. So you need to
have a discipline, you need to have a view, and
you need to rely on your data. If you don’t rely on your
data, you’re just lost. GRANT WILLIAMS: I’m
about to sit down for a conversation with a man
who is a very quiet Wall Street legend. He’s worked for some of
the titans of the industry. He’s worked for
Michael Steinhardt. He’s worked with
Stan Druckenmiller, with George Soros. And the work he does is
absolutely fascinating. This is going to captivate
and entertain a lot of people. There’s going to be some
questions afterwards. So join me now. We’re going to sit down
and talk with Milton Berg. Well, Milton, welcome. Thank you so much
for doing this. I have been looking forward to
it for a very, very long time. MILTON BERG: Well,
thanks for inviting me. And I’m going to learn
more about Real Vision. I skimmed some of the
videos this morning, and I feel bad I
wasn’t on earlier. GRANT WILLIAMS: Well, I’m glad
you finally got this to happen. So just before we
get into what you do, which is so
fascinating, I just want to give people a quick
sense of your background. Because you’ve been in the
markets a long, long time. So if you can just give
us a quick potted history, that’d be fantastic. MILTON BERG: OK. Well, my background
was never in finance. I got degrees in Talmudic
law in the 1970s. But I didn’t feel I’d
make a living out of that, make a profession out of it. So I started studying
markets on my own. I was exposed to
markets as a child. My uncles used to trade in the
’60s and somewhat in the ’70s. And then I decided
to study the markets. I received a CFA, one of the
earliest ones, number 6881. Now there are hundreds
and hundreds of thousands, so one of the earliest CFAs. So I studied pure Graham and
Dodd fundamental analysis. I thought that’s
what you have to know to do well in the business. I studied accounting and
financial statement analysis, and Graham and Dodd. But as soon as I got my first
job, I realized two things. First I realized that
I’m competing with all these other fundamentalists. I have no edge. There are thousands of analysts
who follow Graham and Dodd. So that’s one thing I realized. Secondly I realized that, on
average, the typical analyst just has average performance. And a lot of the
analysis doesn’t really contribute to their earning
money in the market. So I was exposed
initially to Ned Davis. Was then working at JC Bradford,
so first technical analyst I was actually exposed to. And I was fascinated
because I saw there was more to the market
than what I perceived Graham and Dodd was teaching me. And from then on,
what I did was really is I spent more than 30
years analyzing markets, until I learned to focus on
market tops and market bottoms. So my background was I
started at Talmudic law. I started as an analyst
for low grade credits for a mutual fund organization. Then I started managing
money for a mutual funds organization. I worked at Oppenheimer
Money Management, managing three mutual
funds in the 1980s. Actually in ’87, I managed the
three top funds in the country. At that time already, I
already had the discipline of trying to call
tops and bottoms. We got to 80% cash before
the crash in October, raised the cash in September. Then I worked as a
partner at Steinhardt. I took off for a few years,
moved to Israel with my family. I then went to work for
George Soros with Stanley Druckenmiller. I worked with Stanley at
Duquesne, always did research. In the last six years, I’ve
been doing the same research I’ve done all the
years for other firms, doing it for myself and
marketing new research, selling the research to clients. So currently, my clients
really are the titans of the hedge fund industry. The type of work I
do is very atypical. People look at it, and
they don’t understand it. They don’t
necessarily accept it. But the clients
who’ve been– people dealing with it for
years understand that it’s much value added. GRANT WILLIAMS: Well,
let’s get into that because it is different. It is something that people
won’t be familiar with. So just talk about how
you built this framework and how you began
to kind of assemble the pieces of the jigsaw. MILTON BERG: OK. Well, one thing I realized
in studying Graham and Dodd– Benjamin Graham was actually
a technical analyst. GRANT WILLIAMS: Right. See, already people
are going to be going– MILTON BERG: Well,
people who know Graham know the end of his– yeah, he
said we give up all research. And the rest can
look at the numbers. People who know Graham and
Warren Buffett will tell you, in the last five years of
Benjamin Graham’s career, he would no longer do rigorous
analysis of balance sheets. He’d just look at numbers, P/E
ratios, price to book value, what the price of
the stock is relative to its last
five-year high, which is really technical analysis. Later in life, everyone
knows he became a technician. But prior to that, even reading
Graham and Dodd’s security works from the
1920s and the 1960s, he suggests that
the only reason he needs a value analyst
is, of course, experience shows him that it works. He actually spoke in Congress. He was testifying in
Congress in the 1960s with a question of
market manipulation. They asked him, why is it a
stock that’s trading for $20, and you believe it’s
worth $60, why doesn’t it ever trade at $60? Why does it remain
at $20 forever? In other words, the question
is, if the stock could be trading– be
undervalued today, why can’t it be
undervalued forever? Why? Why must the stock ever
reach intrinsic value? And then really, Benjamin
Graham’s whole theory was the theory of
intrinsic value. He said, I have no
answer to this question. It’s a mystery. All I know from
experience is that if you buy a cheap stock, eventually
it will trade at fair value. That’s his answer. It’s a mystery. Once we’re dealing
in mysteries, I figure there must be many more
mysteries strictly valued. So there are far many things we
look at that create the market movements other than the value. And I think intrinsic value
is just a technical indicator. In Graham’s thought,
the more a stock is trading below its intrinsic
value, the more likely it is you’ll make money because
it’s going to trade back towards its intrinsic value. But there’s no inherent
reason for a stock to trade at intrinsic value. Because of course, it’s
a very valid question. If a stock could be
overvalued today, why can’t it be
overvalued forever? If a stock can be
undervalued today, why can’t it be
undervalued forever? GRANT WILLIAMS:
Yes, exactly right. So taking that into
account, how do you then start to build
your own framework using that and applying
it to tops and bottoms? MILTON BERG: So what
I try to do is say, is the market actually
a random movement, which we were taught in the schools? Actually, the CFA program
goes with random movements, modern portfolio theory. Or is a market not
necessarily random? Is there some edge you can have? Of course, Benjamin
Graham did not believe the market’s
random because there wouldn’t be an undervalued stock
if the market would be random. It would be efficient. Everything would be
traded at intrinsic value. But the reality is I found that
the market generally is random. On a day-to-day basis, you
have the talking heads on TV and you have the analysts giving
research reports every day, trying to analyze the
reason for today’s move, the reasons for tomorrow’s
move, maybe the reason for the next week’s
move, most likely explaining the reason
for last week’s moves. But I found that on a daily
basis, on a weekly basis, movements of the
market are random. However, there are particular
times when the market movement is very far from random. When the market
generates data that tells you the market’s close
to a top or has topped, or the market is close to
a bottom and has a bottom. So what we call that is
turning point analysis. Turning points at
turning points, the data generated by the
market is no longer random. In fact, if you take a bell
curve, for example, and it lets you track something
simple as five-day volume. You look at the average five-day
volume, ascent of the curve. You look at the extremes. You’ll find that the
extremes of five-day volume are associated with
turning points. Now intuitively, it
makes a lot of sense because you know
at a market low, everyone’s selling their stocks. It’s at high volume. But people haven’t looked at
that as a technical indicator. We say, we’re not
going to be one of those who panic and
create the five-day volume. We’re going to wait for
five-day volume, greatest in one year, greatest in two
years, greatest in six months. We track these kinds of things. And that tells you that an
impending turn in the market we see. That’s just one indicator, an
increase in five-day volume as an example. GRANT WILLIAMS: So let’s
just jump back in time to ’87 because that
was a call you famously got right to the day. It’s extraordinary, reading the
story of your work around ’87. So take us back there and talk
about in the days leading up to that. And perhaps the month before
September, what did you see, and how did you go about
making use of that? MILTON BERG: Well, we saw a
spike in volume on August 11 of 1987, a big spike
in the five-day volume that we look at. The market actually peaked
a couple of weeks later, less than 2% above that level. So that was the first
indication that something was going to change. And the logic of it is
that if people are– why would the volume increase
after the market’s up 30% of the previous 12 months? Why all of a sudden
are people jumping in and volume increasing? There’s got to be
a reason for it. And the reason is
because people are now comfortable about the market,
and they’re speculating. If the market went up 30%
for the last 12 months, let it go up 30% for
the next 12 months. So the volume is not
just an indicator which is suggesting
a turn of the market. It’s telling you something. It’s telling you that something
in the nation’s market has changed. There are more
speculative dollars coming into this market. That took place on
August 11, 1987. I wrote many reports saying
the top is not yet in. September 4, ’87, the Fed
raised rates for the first time, and that was all
that was lacking from indicators that I look at. Again, to my opinion, raising
rates is a technical indicator. They raised rates
one-quarter of a point, and that caused the crash. So it’s not as if
that one-quarter point had a fundamental
effect on the economy. A present corporation
borrowing money. It had no effect at all
on the economy at all. It had some effect
possibly on psychology. Wherever it was, that combined
with other things we saw in ’87 suggested that the market
was very vulnerable. Of course, valuations were
the highest in history. Paul Montgomery, who
did a lot of work on bond yield,
stock yield ratios, found that the ratio of stock
dividend yields to bond yields were also the
highest in history. So it wasn’t strictly
the price of stocks were the highest in history,
but actually the ratio, the preference for stock
yields over bond yields was the highest in history. GRANT WILLIAMS: When
you think about ’87, we had a very different
market back then. We had a very different
set of inputs. And one big part of
the Federal Reserve had a much lesser
impact on markets. When you look at these technical
indicators that go back so far, how do you adjust for today
and the oversized impact of the Federal Reserve? MILTON BERG: I’m laughing
when you say so far. We have indicators
going back to the 1900s. I’ve tracked 30,000
indicators on a daily basis. So ’87 is modern history,
as far as I’m concerned. GRANT WILLIAMS: Yeah. No, absolutely. MILTON BERG: But yes,
the story is this. And this is also
Benjamin Graham. Benjamin Graham has been
misquoted, very much misquoted. They say that Benjamin Graham
says that on the short term, the stock market is
a voting machine. But in the long term, the stock
market is a weighing machine. Benjamin Graham never said that. And it’s very
illogical to say that. Let me give you an example. At the 2000 top, there are
many, many long term companies not involved in
the internet that were very, very undervalued. Now, if stocks are fairly
valued over the long term because the market’s
a weighing machine, why would a stock ever be
undervalued if a stock has a 30-year history of earnings? It’s long term. If, in the long term, markets
are a weighing machine, let General Motors
always be weighed, let General Electric
always be weighed. It doesn’t work that way. Benjamin actually said
that the market is not a weighing machine. It is strictly a voting machine. Because he says–
and it’s in the book, Graham and Dodd analysis. He says because although
possibly fundamental factors affect stock prices, and
possibly monetary factors affect stock prices, and
probably psychological factors affect stock prices,
the reality was, in order for the
stock price to change, you need a buyer and a seller. So no matter what
you’re going to say about fundamental
analysis, the actuality is that the given change
of a price of a stock is based on voting, based
on a buyer willing to buy at a certain price, and
a seller willing to sell at a certain price. So this is very important. Once you realize that the
stock market is a voting machine rather than
a selling machine, you also realize that
most turns in the market– nearly I’d say all
turns on the market– are sentiment based and
psychologically based, rather than fundamentally based. If the Federal Reserve
makes an announcement– we’re going to raise rates
by 400 basis points– and the market’s definitely
going to collapse if they ever raise rates — basis points. It’s not because of any effect
fundamentally on the economy at all at that time. Because it takes time. If they say they’re going to
raise rates in six months, the market will collapse today. There was no fundamental
change in any company at all. It’s just that
psychologically, people understood that in the
future, it’d be very poor, and it’ll sell now. It’s a vote. And someone might
argue, oh, there had been so much inflation
when Volcker raised rates. In fact, the markets went up. And he made rates far more
than 400 basis points. But he didn’t do it overnight. But the reality was his raising
rates cut inflation, gave greater value to stocks,
and psychologically, the vote was going to
do better in the future. We’re going to buy the stock. GRANT WILLIAMS: But
it is very difficult to quantify human behavior. I mean, markets are essentially
the collective representation of human psychology. That’s it. There’s nothing more than
that, really, to your point. MILTON BERG: Exactly. GRANT WILLIAMS: So how
do you go about building some kind of framework that
captures the uncatchable? MILTON BERG: Yes. Well, let’s look at
the bottom in December. If you don’t mind, I’m going
to look at some of my notes if I have it available. Let’s look at the bottom
in December of this year. Federal has just raised rates. It speeded down 20%. Russell is down 27% in just
a matter of less than three months, I believe. The peak in the
DOW was in October. The bottom was December. The Russell peaked in August. The market’s down nearly 30%. Now, we called the
bottom to the day. We were 100% short
on December 24. By the end of the day,
the market was up 4%. We were up 3/4 of 1%. We covered a short and
went long on that day. Why? What is it? You’re asking a
very valid question. It is difficult
for a psychiatrist to evaluate pyschology. How could a market analyst
evaluate psychology? So just the example
I gave earlier when you see a big increase
in five-day volume, it’s just a number increase
in five-day volume. But it’s telling you
something psychologically. People who were unwilling
to sell a week ago are willing to sell today. Or in order to induce
the buyers to come in, price had to come down to
compensate for the fact that people weren’t
willing to buy. So let’s look at December. From December 19 till December
24, the day of the low, we saw a five-day volume
surge, highest five-day volume in two years. We saw what we call a
10-day reverse thrust, which is the opposite of an
advanced decline line surge. The number of stocks
down relative to stocks up was also at a great extreme. And that’s just a number. It’s a data point. But why would all
of a sudden people be willing to sell so,
so many stocks to cause a 10-day advanced decline line? Although we look at it
as data, we look at it– it’s actually psychology. It’s actually measured. It’s capitulation. We saw the number of
new highs and new lows. On both a one-year
basis, two-year basis, and three-year basis,
we’re also at extremes. We looked at the five-day
rate of change of the S&P 500, and so on and so forth. And these are the
kinds of things that you look at at the bottom. So to us, it’s just data. We calculated the
30,000 indicators. But it’s my view– and I got
this from Paul Montgomery– that all market turns
are sentiment-based. There’s no such thing
as a market turn that’s fundamentally based. It’s all sentiment-based. GRANT WILLIAMS: It is
interesting because what we seem to have
had in recent years are very sharp bottoms
and very sharp tops. We don’t seem to have these
rounding top and rounding bottom patterns that you’ve
had throughout history. Is that something that we need
to be prepared to continue, or do you think we will
see like a rounding top? MILTON BERG: OK. Bottoms and stocks are
always V bottoms, always. Tops and commodities are
always V tops, always. My question is, why? Why do stock bottoms
generally V and stock– It’s also psychology. In the stock market, fear is a
far greater emotion than greed, far greater emotion. When people are fearful,
all of a sudden, they look at their 401(k)s, they
look at their broker statement, they look at the fact that they
have these loans to pay off. Where is the cash
going to come from? So they panic at the lows. In commodities, which trade
at the commodities market, it’s really a zero-sum game. For every long, there’s a short. So the exposure
to the short side is far more dangerous than
exposure to the long side. If you’re long a market,
you could lose your capital. If you’re short
a market, there’s multiples of the market. Since commodities
are a zero-sum game– the futures market, which is for
every long, there’s a short– the panic takes place when
the market is rallying. Because every long
had to have a short. So that also proves
that it’s psychology that turns the markets. In commodities, the psychology
takes place at the top. The great dramatic
shift in psychology takes place at the
top, where everyone’s fearful of losing money,
covering the shorts. And then ultimately,
the market turns down. In the stock market, it’s
the other way around. Now I don’t necessarily agree
that the nature of markets has changed. I still see generally
in the stock market on its immediate term basis,
long term basis, and short term basis, I still see V bottoms. But the one change is
you’re seeing tests. For example, the low in 2000– you got a first low
in July of 2002– the market gained more than 20%. It made a new low
in October of 2002. It gained 24%. It made a slightly higher
low in March of 2003. Each of those bottoms
were V bottoms. But there was a series
of three V bottoms. So you take a broader picture. You’ll say, hey, it
was a rounding bottom. I don’t look at it
that way because we don’t take a broader picture. In my opinion, if you
traded the market right, you got long in July 2002. You get out in August, made 20%. You get short. You have long in October 2002. You made another
20%, sold up 24%. You went short. So I look at it as
three separate markets, each one showing a V bottom. But the typical analyst,
they will say, wow. If you bought in
July 2002, and you held through the
rounding bottom, you did very, very well. You did very well, but basically
did what the market did. You did what the S&P did. You’re lucky to have gotten
long if you were short. And you basically did
what the market did. But if you recognize that every
turning point in the market has indicated, suggested
that turning point, you will have attempted
to do far better than the whole of the market. Now that we brought
this up, let me just take it one step further. And this is really where
people doubt what we do, and people don’t understand
what we do and what we do it. If you invested $1 in the
Dow Jones Industrial Average in 1900, January 1,
1900, and you held– not looking at
dividends, just held. Your $1 would have grown. You can guess if you like. GRANT WILLIAMS: Not– well– MILTON BERG: OK. GRANT WILLIAMS: I thought
you’ll take a spin at that one. MILTON BERG: Well, it
grew to $658, which is an amazing, amazing return. 658 times your money. GRANT WILLIAMS: That’s to today? MILTON BERG: That’s to today. This is actually til June
30, but close enough, right? $658, which is these long
term investors, like the Nobel Foundation, who’s been
around for over 100 years, they could say, well, let
me take a long term view in stocks. $1 to $658 over a century,
or a little over a century, that’s amazing. I’ll be able to give all
my Nobel Peace Prizes out, whether deserve it or not. However, let’s say somebody
only traded 73 times over that 120-year
period, 73 times. But he happened to buy stocks
at the exact day of the bottom, and he happened to short stocks
at the exact day of the top. Now I’m not going
to ask you to guess. That dollar would not
be worth $600, or $800, or thousands of dollars. It’d be worth $392 trillion. It’s funny. That’s a 30.19%
return over 119 years. Now I’m not arguing
that anyone can do that. But I’m arguing
since you can see how compounding market, bull
market and bear markets, makes you so much money,
why not attempt to do it? GRANT WILLIAMS:
Sure, absolutely. MILTON BERG: Why not
attempt to do it? And like everything
else in this world, there are many people
who may attempt to do it, and maybe it’ll be one, or two,
or a dozen successful people successful at it. But people really
don’t attempt to do it. I don’t anyone who has a
hedge fund whose goal is to be 100% long
during bull markets and 100% short
during bear markets. They don’t do it. The clients wouldn’t
think it’s going to work. GRANT WILLIAMS: Well
then, I think that’s it. It’s the client side. MILTON BERG: Well, it’s
actually the consulting side. It’s the psychology side. It’s the business school side. I just met, about two months
ago, believe it or not, with a– I’m not going to mention names,
but a managing director of one of the largest money management
companies in the world. They’re looking to
start hedge funds that can have high capacity,
high capacity meaning at least a billion dollars. Now of course, if you’re
going to trade long the S&P and short the
S&P, that’s easily you have a high capacity. I imagine it’s 10 to
20 billion capacity. And I met with
this fellow, and I said I have a strategy for you. I have a strategy for you,
and this is the strategy. We will attempt to go long
at the top of bull markets, attempt to go short at
the top of bull markets, attempt to go long at the
bottom of bull markets. I said we’re not going to
catch every top or bottom. And actually, we’re not even
going to look at bull markets. We’re going to
look for 15% moves. We don’t need it
at every 30% move. So I said, if you count
every 15% move since 1900, you’d have $6 quintillion,
which is 18 zeros after the 6. GRANT WILLIAMS: Nice. MILTON BERG: But the
point being we’re not going to have that return. But we think we’ll have returns
far greater than the market. Optimistically, it’s a
simple transparent program. But in order for you
to do the program, you have to have an edge. Your edge has to be, be able
to call tops and bottoms. We spent years and years
analyzing tops and bottoms and trying to call edges. So this is what we do. This is what we offer
to our clients– the ability to recognize
tops, recognize bottoms, and understand that the
movement in between is random. So while people are watching
television each day, should I buy stock? Should I lose? They read all the
balance reports. The reality is, if
you caught the bottom, you can usually sit tight
for quite a number of months before worrying about a top. And if you caught the
top, you could usually sit quite a number of months
until you worry about a bottom. Now I was talking about
the cycle you called, the one you saw in December. We have 27 bicycles beginning
on January 4, 27 distinct bicycles, all based
on the fact that we’ve modeled every bottom
since 1900, and we’ve modeled every top since 1900. We modeled not only the 38
major bull and bear markets, we’ve matched at every
move of 7% or greater. So we’ve modeled every
move of 7% or greater. And I have to admit that we
can’t catch every 7% move. We can’t even catch
every 15% move. But if you only catch
every other bear market, you’ll still way, way, way, way
outperform the typical hedge fund and the typical investor. So let’s look at what
happened this year and how we implement our work. January 4, just a
number of trading days. I think it’s not even 10
trading days off a low. It was seven because it has
Christmas and New Year’s. January 4 was seven
trading days off the low. The S&P 500 was
up 3% on the day. And this took place
seven days off a low. Now the background is when
we’re tracking tops and bottoms, it’s very simple. How do we do it? If the market makes a
bottom, we count one day off the bottom, no new low. Two days off the
bottom, no new low. Three days off the
bottom, we have– we publish a report
called “Boundaries of Technical Analysis” in the
Market Technicians Journal. You see a low, and
you count the data as to what takes place during
the first four to seven days after a low, which
is generally the key. So we looked at the low. On the day of the low,
you saw an extreme of net new highs over total
issues was less than 18. It was minus 18.20%. That’s a cutoff. That’s an extreme. Seven days later, the S&P was up
more than 1% on higher volume. And we look at every
time in history, you saw this type of
a low, always so low, and the seventh
day after the low, the S&P was up just 1%
greater in higher volume. That only took
place twice before. But the median gain 12
months later was 35.24%. Now people ask, it only
happened twice before. But that’s exactly the point. We’re trying to
find aberrations. We have to try to find evidence
that this time is different. If it happened
1,000 times before, then you’re just
a random analyst. If it happened twice before,
and each of those times, the market rallied
significantly, this is something significant. Just the opposite of what
people think intuitively. People want thousands
of examples. Well, in 1,000 examples,
you get randomness. If you want to get just a few
examples of extremes– and this is very simple. Over a low base the
number of highs and lows, and at day seven, up 1% or
greater on higher volume. Beautiful, simple. And we are ready
long on January 4. That was the first bicycle. They say we had 20
something bicycles. Another example,
January 8, very simple. This is not my own bicycle. I learned this signal from Ned
Davis Research and Ned Davis. I think — may have also
contributed to this signal. There are many
indices you can use. We use the New York
Stock Exchange 10 day advance-decline. It was greater than 1.921. Very simple indicator. I think actually the chart is– it goes back to the 1969 thing. He also uses this indicator. You look at the 10 days
advance over decline. If it’s greater than
1.921, you buy the market. Now historically, the median
gain within the next 12 months is 22.01%. We’ve gained 15.60%
through yesterday’s close. So the point being is,
this is very simple, but it’s not a random event. You don’t see the 10-day
advance-decline line at 1.921 on a random basis. In fact, you generally see
it within 10 days or 15 days off a major low. In this case, it came actually
nine days after the low. We’re counting 10 days
advance-decline line, including a negative day,
which was 10 days ago. And you’re still at a 1.921. So what do we do? We don’t just say,
well, it looks to us that there is a high probability
the market’s going to go up. No. We tell our client, if you’re
not long yet, get long. But what if it doesn’t
work this time? What if doesn’t work this time? You’ll get out. Of course, historically, we
have a list of the drawdowns. And generally, the
drawdown’s less than 3%. So if you’re going to
market climb 3%, get out. Lose 3%. But take the risk. Follow the data. Follow the indicator,
and get it to the market. GRANT WILLIAMS:
But this is trust. I mean, this comes down to
trusting the data, right? Because if you can get people to
trust it and get them to trust it for a long enough
period of time, they’ll see that
over time, it works. MILTON BERG: This
is getting people to trust that markets are
not random at turning points and that it’s possible
to time the market. That it’s possible to get in
close to a bull market low and to get out close
to a bear market high. People do not believe
it’s possible. They just don’t. I mean, I see it all the time. They don’t think it’s possible. I’m saying it to you,
and you are smiling. Hey, this sounds crazy. GRANT WILLIAMS: No,
it’s fascinating to me. MILTON BERG: When
I speak to someone who’s never seen this before,
in their mind, this is cuckoo. This is nuts. This is impossible. We were taught
this can’t be done. GRANT WILLIAMS: Well,
that’s exactly it. We’re taught it can’t be
done, so people don’t try it. That’s exactly right. MILTON BERG: We’re taught
that it can’t be done. That’s exactly why
we don’t try for it. Last January 8, [INAUDIBLE]
not all 27 indicators. I’ll go through some of them. But yeah, on January 9,
the next day, at the low, the five-day volume was
the greatest in two years. But we cut it off at 60 months. At the low, which was
probably 12 days before, you had a high five-day volume. And on this day, the
10-day advancing volume over the declining volume
is greater than 70%. This is our own indicator. Rather than losing advancing
issues over declining issues, advancing volume
over declining volume is greater than 70%, just
those two indicators. This took place six times prior. The median gain over the
next 12 months is 23.40%. And the worst drawdown
was only 5.6%. So again, you guys
won’t trust it. And the second worst
draw down was 2.7%. What person ignores the 5.6? I’ll get out if
it declines 2.6%. GRANT WILLIAMS: 2.7, sure. MILTON BERG: It declined
minus 0.09% the next day. That was it. The market continued higher. It’s up 15.13% since then. I can go through many
of these indicators. The point I want to
make is that although we try to pinpoint the low, we
also feel that close to the low, the information
is not yet random. Once you get two or three
months out of the low, generally information
is randomly worse. Although we did get a
new buy signal yesterday. Although, we’re short–
which is kind of funny. But we got a buy signal. The buy signal that
we got yesterday is based on five week
advance decline line. Now, five week is a
very blunt instrument. You’re looking at
five weeks of data. So it has very huge draw
downs of as much as 11%. Although, in each time
we saw this indicator, the market was up significantly
over the next 12 months. But it’s not indicated where
I tell a client buy, buy, buy, based on this. I say the client should
have bought in January. He’d be holding and
sitting pretty right now. GRANT WILLIAMS: So
how do you do that? Because you have
so many indicators, how do you prioritize them? How many do you need to kick in? Because I’m sure you have
conflicting signals happening all time, how do you
see through the fog? I mean, this may be the secret. MILTON BERG: You’re
asking the best question. There are no
conflicting signals. Generally, there are
no conflicting signals. GRANT WILLIAMS: Interesting. MILTON BERG: Because what we do
is we count days of a bottom. If you’re counting days of
a bottom, by definition, you’re not going to
get a top indicator. GRANT WILLIAMS: You’re
over-selling it the same day, sure. MILTON BERG: We’re
all looking for– we modeled the hundreds
of bottoms since 1900. We’re counting 1 day, 2 days, 3
days, 10 days, 12 days, 15 days off a low. You’re not going to get a sell
signal if you’re counting data from low– if you’re going to
get a buy signal. Same thing with the top. The top is a little bit broader,
as you mentioned earlier. But also, say the market
is up 5%, 6%, 8%, 10%. If such and such has
taken place at this level, I don’t want to say there
are no conflicting signals, but conflicting signals
are very, very rare. Now, how do we combine it? Well, we spent 30 years
creating these models. We have a huge
computer database, and our computers
combine the models. We combine it based on rarities. So any given day, if there
are six rare indicators, the computer combines
it and see in the past whether these six rarities
made any change in the market. So it’s really nice. It’s somewhat computerized. Of course, I have
to pull the trigger. It’s not a systematic
type of trade. But it’s serious work. First, I have to believe
that it’s doable. Now, why do I
believe it’s doable? Almost everything I’ve done
I’ve learned from people. First of all, I
mentioned Ned Davis. My first exposure to
technical analysis. There’s a great
market technician named G. Stanley Bursch. He was around for
maybe 40 years. And he taught me that
the key to a market is what took place at the bottom
and what took place at the top. Unlike everybody else who’s
trying to find information on a daily basis. That’s what I learned from him. But I also learned,
again, any technician who was successful in calling
some tops and some bottoms, taught me that it’s possible. And Marty Zweig was a fellow
I tracked over the years. And of course my favorite
technical analysis of all time– who’s
no longer with us and was a good friend of
mine– was Paul Montgomery. And Paul Montgomery– a
little bit about his history. He was a major researcher. He’s the one who developed
the hemline analysis, if you remember that one
back in the 60s and 70s. And he used to use
newspaper headline cover– magazine cover– Time
Magazine, and that was all Paul Montgomery. But what he discovered– and I’ll tell you how he
discovered it in a moment– is what’s called
cycle turning points. That sounds very strange. We’re talking about data. What’s a cycle turning point? What is it? Well, he had many of those. And I’d say he sort of
mentored me in how to use them, and I sort of developed
it a little bit further. But once you’ve established
that all market turning points are psychologically based rather
than fundamentally based– or sentiment based rather
than fundamentally based. In other words, it’s not the
rational part of your brain that’s getting you to
sell it to the lows. It’s not the rational
part of your brain that’s getting you to buy the
high tech stocks in the year 2000 paying 160,000
times earnings that we may well never have. It’s not the rational
part of your brain, it’s the emotional
part of your brain. Now, Paul was a
manic depressive, which is very, very
helpful in analyzing markets cause the markets
can be also manic depressive. And he found out that
when he gets depressed, at the same time,
markets are bottoming. And when he gets exuberant,
it’s the same time that markets are topping. So he realizes there’s something
affecting him and affecting the markets at the same time. GRANT WILLIAMS:
Yeah, it makes sense. I mean, it really
does make sense. MILTON BERG: In
other words, what’s affecting him is
affecting the markets. So I’m going to give
you one of his cycles. This is our favorite
cycle, and that is called the eclipse cycle. Now, I don’t know if you
know much about eclipses, and I don’t try to study too
much about the solar system or about eclipses. But you know that the
electromagnetic and gravitational
forces on the world are far greater
during eclipses than– for example, the
earthquakes in California we just had took place
on the July 2nd eclipse. Because when there’s
an eclipse, you have the sun and the moon
in the same direction, pulling at the tides,
pulling at the Earth. And that causes a
physical change. But eclipses also cause
an emotional change. It causes a shift in
people’s psychology, in people’s sentiment. So we monitor eclipses and
the full moon and the new moon adjacent to the eclipses. So every eclipse gives
an eclipse cycle, two cycles before and
two seconds afterwards. Because the eclipses,
the sun and the moon, affects psychology. Now, this sounds– what’s
this guy talking about? Well, let’s look at what
happened the last year. The Russell 2000, in 2018,
peaked on a cycle date. The S&P 500, on
September 21st, peaked on a W Gibb cycle day, which
is not quite an eclipse cycle date. December 24 was one
of our cycle dates based on the adjacency
to an eclipse. July 2nd, which so far is the
latest high in the market– when bonds peak now– which
I think is a major peak– is on an eclipse date. Bitcoin is having
major, major cycle– and I’ll show you
the charts later on. Bitcoin had major cycle
turns on these cycle dates. Why is it the more a commodity–
the more a capital market is affected by psychology,
the more it’s likely to cycle? So gold is always a prime
cycle because there’s no intrinsic value to gold. But most of the gold mined–
unlike any other commodity in the world, nearly
all gold that’s ever been mined in the history
of the world is above ground. GRANT WILLIAMS:
Still here, yeah. MILTON BERG: It’s still there. GRANT WILLIAMS: Yeah. MILTON BERG: So it’s
very hard to say there are fundamental factors
affecting the price of gold. It can’t be mining. People will say it’s
Federal Reserve, that’s not really true. Gold is strictly a
psychological commodity. So gold has traded
very well in the cycle. I’ll show you the
charts later on. GRANT WILLIAMS: This
is fascinating to me because a friend of
mine, Mark Yusko, gave a presentation
back in May that I saw. And he was trying– they
were trying to kick him off the stage, and
he was rattling through the rest of the
stuff he had to talk about. And he very quickly threw
in a study of full moons and new moons and
the returns that you would’ve made if you’d have
invested around that basis. And when he brought it up
the room, kind of, snickered. MILTON BERG: Yeah. GRANT WILLIAMS: Which I
find fascinating because we know that the moon
has an effect on us. We know that. We know it– MILTON BERG: There’s a caveat. This is very important. And I’ll tell you
why they snickered. They’re right in snickering. Because if you’d
stop me right here, you’d have to snicker as well. The moons themselves do not
affect markets at all times. Every eclipse doesn’t
affect markets at all times. It’s only when there’s a
combination of factors. People are already
over-exuberant about a market or very depressed
about a market. That is when the moon
affects the turn. GRANT WILLIAMS: It’s
that last– yeah, yeah. MILTON BERG: You need a
combination of factors. So we never ever trade a cycle
based on the moon itself. So, for example, with bonds
making multi-year highs on July 2nd, with people shifting
money out of equity funds and into bond funds,
all these separate– That told us that it’s
possible that July 2nd would be a top for the bond market. We ran 75% short the
long bond on July 2nd. And our stop is, if it
ever gets above that level it’s topped out. Now, we’re making money. So the snickering is because
there’s a moon every month, but markets don’t
turn every month. So how can you argue that
the moon’s turn markets? But if you understand that
the way the moon works is it shifts the sentiment
from depressive to manic, or from
manic to depressive, you wait for signs of the mania. For example, a five day volume. December 24th was a cycle,
and it turned the market, but associated with that was
the highest intraday put call ratio in history. GRANT WILLIAMS: Right. MILTON BERG: So the
moon affected me, but I already was
affected by the market. So that’s very important
to keep in mind. I’m not a lunar guy. I’m a data guy, but I
accept that the moon– I accept the things I’ve
learned from my mentors– that the moon does
affect markets, if you know how to analyze it. GRANT WILLIAMS: So why
do you think it is? Because you said
to me that people don’t understand what you
do and a lot of people struggle to believe it. And you have these
perception problems. What is it about us– bringing
it back to psychology. Why do we find it so
difficult to accept stuff like this that’s very
heavily backed by the data– that just to some people
seems a bit quirky? Why do we as humans
struggle to accept it? MILTON BERG: Well, firstly
we’re taught that we live in a very rational world. GRANT WILLIAMS: Right. MILTON BERG: We’re taught that
the Federal Reserve lowers rates, markets go up. In fact, it was once
a technical indicator. Federal Reserve lowers
rates twice, three times, the market’s rally. Because that was
the case until 2000. Then, in 2000, you
have a bear market, Federal Reserve lowers
rates all the way down. 2007, 2008 bear market–
the Federal Reserve lowered rates before
the market peaked. They lowered rates in
September while the market peaked in October. But people want
it to be rational. People are much more comfortable
living in a rational world. And I’ll tell you
something else I’ve discovered about this business. I’m not going to
mention any names. But some of the greatest,
greatest money managers have some mental quirks. They’re either on the
autistic spectrum– and there’s a reason for that. Because when you’re on
the autistic spectrum, you don’t follow
conventional wisdom. You’re able to see things
a little bit differently. So the people who snicker, or
the people can’t accept it, are very rational people. They can’t get
their mind to focus on something other than
something they’ve been taught. But people who have some
personality quirks– you know, many of
the great money managers are known to have– GRANT WILLIAMS: Absolutely. Yeah, absolutely. MILTON BERG: Part of that
disability gives them the ability to look
at things a little bit differently and do things
a little bit differently. GRANT WILLIAMS: Fascinating. But some of the guys you work
for, some of the big name hedge fund managers
you work for, are very famous for talking
about ignoring tops and bottoms and sitting in the
belly of the trend. And, you know, if I missed
the first 10% and the last 10% I’m OK with that. MILTON BERG: Yeah. GRANT WILLIAMS: When
you look at that, how does your work jive
with that sentiment of trying to capture the trend
as opposed to the turning points. MILTON BERG: OK, I’m not sure
which of these money managers you’re talking about. I will tell you– I don’t like to
mention names, but I’ll tell you George Soros is an
excellent breakout trader. He buys breakouts and
he shorts breakdowns. But he’s very disciplined. GRANT WILLIAMS: Yeah. MILTON BERG: He’s
very disciplined. So he could write many, many
books about fundamental factors in markets. But you watch him
on a trading desk, and you’ll see that is buying
is not based on the fundamentals alone but based on
fundamentals combined with action of the commodity
or stock or currency you’re looking at. I would say buying a
breakout, the reality is you’re not
getting the bottom. You’re not getting the low. Let’s say you have gold
that bottomed at 1,000 and it churned and it’s
breaking out at 1,300, you’re buying the breakout. You can argue you’re taking
the belly of the move. GRANT WILLIAMS: Sure, sure. MILTON BERG: But the
reality is, what’s making that trade– what’s
giving you the confidence to make that trade is that
pinpoint breakout– that move from $1,301.00 to $1,302.00. GRANT WILLIAMS: Right. MILTON BERG: So we’re trying
to do it at the exact turns. These people are
doing it at breakouts. But they’re still following the
same platform of discipline. GRANT WILLIAMS:
Confirmation, yeah, yeah. MILTON BERG: No one is out there
saying, the market’s up 15%, we’re in the belly of
the move, let’s buy. None of the successful
managers are doing that. These are the losers
that are doing that. These are the people
who are giving me the data that suggests
the market’s at the top. Those are the ones
that are doing it. But I’ve worked with some of the
greatest investors and traders on Wall Street, and
they all have an edge. And they’re all
non-conventional. And there are some people who
are so-called trend followers. But even trend following
has a discipline. It’s not just markets There is
a discipline to trend following. So you need to
have a discipline, and you need to have a view. And you need to
rely on your data. If you don’t rely on your
data you’re just lost. GRANT WILLIAMS: So when you
look across the landscape now do you see anything that’s
got your radar twitching? Do you see any imminent tops
or bottoms in any asset classes that have you– MILTON BERG: I’m glad you
phrased the question the way you phrased the question. Because I never see
an imminent top, I never see an imminent bottom. I only see probabilities. I never see a top or a bottom. When you make one mistake,
you miss the bottom– I was 175% short
into December 24th. I missed that one
bottom and I decided I have no evidence of a low. I’m 174% along with
the S&P up 22%. That’s crazy. So I look at probabilities. I went long and I
say, based on history there’s a strong probability
that the low is in. But since I look
at probabilities rather than assuming that
the market has turned, it gives me the
flexibility to get out. Because if I get
out, I know it’s a 99% probability that there’s
a 1% chance I was wrong. So the way you phrased
the question was what am I looking for at this point. That’s the question. Well, this is how I look
at the current market. We had a major, major low
based on the data in December– major low, really major. I say the highest intraday– GRANT WILLIAMS: Yeah,
people forget how– MILTON BERG: It was the
highest intraday put-call– GRANT WILLIAMS:
–intense it was. MILTON BERG: –ratio
in history, the number of lows relative to highs. He had a record, on a five day
basis, of net downside volume to upside volume. We had many, many, many extremes
which told you most likely we’re headed for a new bull– I called it a new bull market
rather than a bear market rally. However– and I have 27
buy signals since then, which suggests on a median
basis the market should reach– I have the number right
here, if you don’t mind– $3,276.43. On a mean basis, $3,320.65. Based on the mean of
those 27 indicators, looking at the history. However, there are
things bothering me. The one that’s bothering me is
that the market is acting as if it’s in a bear market rally. Now, what does that mean? S&P is at a new high. NASDAQ is at a new high. The Russell peaked in 2018. The New York Stock
Exchange Index peaked in January of 2018. Worldwide markets, believe
it or not, most of them peaked in 2000 or 2007, with
adjustments for the US dollar. But even on a short term basis,
with the S&P at new highs and the NASDAQ at
new highs, there are too many lagging indicators. That’s not a reason
for me to go short. GRANT WILLIAMS: No. MILTON BERG: But there are
other factors involved. I know that there’s a time
bomb that grows every day. I don’t know if time bomb
is the right word to use. But there’s something going
on underlying our economy– as a fundamental basis– that’s going to cause– ultimately cause
a major collapse. And that is the
debt outstanding. If you look at all
government debt– state, city, local. It’s about 176% of the GDP. If you look at an
off-balance sheet, pensions and loan guarantees– we’re approaching 350% of GDP. Now, that can’t continue. Another thing I bear in mind,
which is very important, is that this great bull market
we had beginning in 1982 until today, great
bull market took place in conjunction with a
great bull market in bonds. 10-year treasury yields
are down from 15.75% to– the low in the cycle
was less than 2%. GRANT WILLIAMS: Yeah. MILTON BERG: This has
goosed markets worldwide. On top of that, you have
the quantitative easing and all this other stuff. So we had a great bull
market that began in 1982, and in a sense may
have occurred only because of monetary easing–
maybe only occurred because of interest rates coming down. Maybe the only reason companies
were able to grow to the extent that they had was because
rates were coming down. They were able to
borrow free money. They certainly did. So I’m afraid that one day
that’s going to backfire. We’re going to get
a turn of the cycle. Now, this is fundamental
talk, but my data– so I say, any time I
see evidence of a top, I’m going to assume that this
is it, until I’m proven wrong. So we just went from– on the year, we
have two portfolios. One is up about 26%. One is up 28%. And we were long most of the
year– couple of short trades which failed. We got out quickly. We went short on July 2nd. We went short the S&P.
We went short the NASDAQ. Why? A, it’s a major
Montgomery cycle date. B, we have a list of
more than 100 indicators that we match to
previous market peaks. And of all these
hundred only two are inconsistent with
levels seen at market peaks. P/E ratios, invest
intelligent sentiment, the number of new highs,
the number of new lows– I may have the– I don’t have my list on
me right at this moment. But the reality is, everything
is consistent except for one thing. Except bonds, 30 year bonds
are at a six month basis and on a 12 month basis of doing
far better than they’ve ever done at a final market peak. So what I say to myself,
that’s only one indicator, it’s the bond. Secondly, hey, maybe this time
since the whole bull market may have been
generated by the fact that bonds are doing so well– maybe the hook at the
final peak in this market will be the bonds
are still doing well. And bonds are making the top
coincident with the market top. So bonds have done very
well the last 6 to 12 months into July 2nd. We went short the bond
market for that reason because the cycle may suggest
a turn in the bond market. Sentiment is totally,
totally suggesting that the bond market’s
going to turn. Because worldwide,
everyone’s by US bonds. It’s the only place
to get yield, only place to make real money. Now, this thing
about stocks as well. So we shorted bonds,
we shorted stocks, and for all I know this is it. However, I have 20 something
indicators telling me it’s going higher. GRANT WILLIAMS: Right. MILTON BERG: So
I short July 2nd, we have a stop slightly
above the highs of July 2nd. If we’re stopped out, we
go back long stocks again. I’ll retain my bond short
because bonds have far more than cycle work involved. Bonds really, really are
giving off signals of a top. But again, if I’m wrong
I’ll get out quickly. Very important is flexibility. You must remain flexible. You must know that everything
works on probability. There’s no such thing
as 100% being correct. So stocks and bonds
are risky markets. Stocks are very risky markets. You recognize you’re
taking risk and you recognize that you will
not always be right. You also recognize that you
have to know when you’re wrong. And we have– since we’re
pinpointing turning points, it’s so much easier
to have a stop. Someone who buys because,
oh, the economy looks great, I’m gonna buy stocks– how
does he know when to get out? GRANT WILLIAMS: Yeah. MILTON BERG: Times
are gonna look great by the time
the market peaks too. But if you say I’m
buying because we believe that July 2nd was a top, or
I’m buying because I believe December 24th was a low– if it makes a low below
December 24th you’re out. GRANT WILLIAMS: You’re out. Yeah, sure. MILTON BERG: If it makes a
high above July 2nd I’m out. So that’s one of the
benefits of our discipline. GRANT WILLIAMS: So
let me ask you– because this fascinates me. This idea of emotion
and sentiment, it’s ultimately confidence. You know, greed and fear are
the extremes of confidence essentially. What do you think is more
important, confidence in economy, confidence
in the markets, or– to me, what’s become
perhaps the most important is confidence in
the Federal Reserve and confidence in what the
central banks are doing having this under control. How do you measure that
and how do you adapt to it? MILTON BERG: I agree
it’s confidence, but you always have to
remember there’s one more step. There’s confidence and action. GRANT WILLIAMS: Right. MILTON BERG: Many
people may be confident that the economy is
going to do well. But that’s not going
to allow them to buy a speculative stock on margin. See, people are either confident
or they’re not confident. It’s when the confidence
translates into actions that a top is imminent
or a bottom is imminent. If people are so confident that
the market is going much lower, they sell all their stocks and
then that turn is imminent. So confidence is one thing. We don’t measure confidence. We don’t measure
sentiment per se. We measure how sentiment
reflects in the actions. And wait until you
see the actions in the data of the market. So now you’re asking the
question, the Federal Reserve, is it the economy
or is it the market? The reality is, to
me it doesn’t matter. I don’t care if people
are going crazy buying stocks because the
Federal Reserve is easing. I don’t care if people are
going crazy selling stocks because the economy is tanking. Remember that at the
low, Warren Buffett said that the
economy’s off a cliff, his companies are
all off a cliff. That was in February of
2009, a month before the low. I don’t care if
people are selling because the economy is poor. I don’t care why they’re
buying or selling. I want it to show up in my data. So if I see investors
intelligence, for example, now in the danger
zone of 57% bulls– which historically
is a danger zone– that’s not enough of a
reason for me to sell stocks. GRANT WILLIAMS: OK. MILTON BERG: But if that’s going
to be reflected in five day volume, as an example–
this is one easy example. So that’s going to reflect in
a put-call ratio with high call buying. If that’s going to be reflected
in high volume and stocks moving to the upside– which is a narrow leadership– that will possibly give
me a high probability to trade to go short. It’s very important
to know that what economists mock about
the stock market is one of the greatest things
about trading the market. One of the things they say
is, well, the stock market has cooled 18 of the
last 5 recessions. That’s true because the
stock market is not perfect. But we’re not
trading recessions, we’re trading the stock market. So if I could trade 15 of those
18 tops without a recession I’m happy. So what the
economists are saying makes no sense to stock traders. They’ don’t realize they’re
speaking to investors. They’re not speaking
to economists. Economists want to
predict the economy. They care that the stock market
predicted only five recessions. But to someone who is
trading, all I care is if the market’s
going to be up or down. That’s number one. But secondly, when I
see that things aren’t– I want to know the things
that aren’t perfect. I don’t want to ever get
caught in to the idea that I could be perfect or
that markets are perfect. That’s when you’re
going to make a mistake. So I like the fact that
even though the economy is a very good indicator
for the stock– even though the stock market’s
a very great indicator for the economy, I’m glad
to know that’s not perfect. That shouldn’t be perfect. If anything should
be perfect, it should be the stock market
correlation with the economy. And that’s not. So it’s always important
to keep in mind, in this business
nothing is perfect. It’s all probability. We’re not perfect. I’ve been in the business
for quite a number of years and I realized– you know,
my background wasn’t finance. So I wasn’t taught by professors
or by the academics how markets are supposed to work. So I had to learn
that on my own. And fortunately I think I did a
fairly good job for my clients. And I hope to
continue doing that. GRANT WILLIAMS: Milton,
that’s the perfect place to wrap it up. We’ve talked longer
than we said we were. And I can sit here
all day because I find this stuff fascinating. But again, thank you so
much for agreeing to do this and coming to spend
the time with me. MILTON BERG: I
really enjoyed it. GRANT WILLIAMS: I’ve enjoyed
every second, thank you. MILTON BERG: I
really enjoyed it. Thank you so much. GRANT WILLIAMS: Well, I promised
you a fascinating conversation. Milton is, as I said, a very
quiet Wall Street legend. He’s a fascinating guy. And the work he does
is truly extraordinary. And it splits opinion. A lot of people say this
is all bunkum and hooey. And a lot of people
are fascinated by the work Milton does. But one thing’s for certain,
there’s a rigor to it and a discipline to it. And his performance
speaks volumes. So I hope you enjoyed that
conversation as much as I did. And I hope I can tempt
Milton to come back again. It’s taken me a long time
to get him to sit down with me for the first time. Hopefully, the gap between
this and the next time won’t be so long. – Did you know that
some of our shows, including the one
that you just watched, are available on
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Repo: How Roughly $1 Trillion Moves Overnight | WSJ

(pleasant mallet percussion music) – [Narrator] Take a look at this chart. It tracks how much banks and
others pay for overnight loans using something called
repurchase agreements. This is also known as the repo rate. These bumps right here on
September 16th and 17th have caused a really big
stir in the financial world. That’s because the repo
market is a critical part of the financial system. It provides a lot of the grease that keeps the wheels spinning, meaning it provides the cash
that financial firms need to run their daily operations. When the repo market chokes
and cash stops flowing, trouble can reverberate
through the economy. That’s what happened in September, and in response, the Federal
Reserve had to step in to help, providing tens of billions
of dollars to borrowers to keep the system cranking. In the weeks since this happened, experts have called the incident
a technical malfunction, and banks, for their part, have said it could have been prevented. They’re blaming the rules
that were put in place after the financial crisis, rules intended to keep the banking system from falling apart. (dramatic mallet percussion music) (pleasant mallet percussion music) Imagine two people, Karen and Mark. Karen has $1000 and she’d like to earn some fast interest on her money. Mark has a stack of
treasury notes but no cash, so he strikes a deal with Karen. One note for $100, but there’s a catch. Mark has to agree to buy that
note back tomorrow for $101. The difference between
the price of the note on day one and day two,
that’s the repo rate. If everything works properly, Mark gets the cash he needs
right when he needs it and Karen makes some fast money. The repo market functions in the same way. You just have to replace the
Karens with money market funds and other asset managers who are looking to make a little money
without a lot of risk and replace the Marks with hedge funds, Wall Street traders, and
banks who have a lot of assets but need cash on hand to fund
their day-to-day trading. In the repo market, Karens and Marks all over the financial
system lend back and forth for short periods, often overnight, and they do this at an enormous scale. Usually, more than $1 trillion
runs through it every day. On September 16th and
17th when the rate spiked, the Karens were not willing
to trade cash for securities at the usual rate, so
the Marks who needed cash kept offering more and more and more until the Fed arrived with help. (pleasant mallet percussion music) When the Fed announced its
surprise repo operations, people wanted to know, why did the Karens suddenly stop lending? Experts point to two financial deadlines that sapped cash out of the
system on the same night, causing a crunch.
(gears snapping) September 16th was the cut-off for banks to submit their quarterly tax payments, so a lot of money that
they might usually lend in the repo market was being
sucked out of their accounts and deposited into the Treasury. September 16th was also the day that $78 billion of Treasury
debt was scheduled to settle, which just means that
another chunk of cash was being turned into
securities on that day, too. Now, some banks said the
crunch was compounded by another factor, a rule put in place after the financial crisis
to keep banks solvent. The rule, which is called
Liquidity Coverage Ratio, or LCR, requires banks to keep a
certain amount of reserves or cash on hold at the Fed at
all times, among other things. The idea was to improve the
banking sector’s ability to absorb shocks arising from
financial and economic stress. You can see it on this chart. Since the crisis, banks have stockpiled cash
in their reserve accounts. There argument is that
keeping these funds on hold makes it harder for them
to lend out cash on a dime when money gets tight. Now, for the Fed’s part,
Chairman Jerome Powell dismissed the possibility
of revisiting those rules. – If we concluded that we
needed to raise the level of required reserves for
banks to meet the LCR, we’d probably raise the level of reserves rather than lower the LCR. – [Narrator] What he’s
saying is that the Fed would rather provide
the extra funds itself than lower those liquidity
requirements for banks, and since that press conference, the Fed’s done just that. In October, it announced
it would start buying short-term treasury debt
at $60 billion a month and continue through
at least June of 2020, which means there’s
gonna be money to borrow even if the Karens stop lending again. Its aim is to boost reserves, allowing banks to stay liquid
without violating the rule, and in doing so, to keep the wheels of the financial system spinning.

How Negative Yields Work | WSJ

(gentle music) – [Narrator] This chart shows the yield on the German government’s 30-year bonds over the past few months. You’ll notice something unusual
happened in early August. The yield dropped below zero. A yield is the return
investors receive on a bond. A negative yield is the
opposite, meaning investors are receiving less money
than they originally paid. Negative yields are a
relatively new feature in the world’s bond markets,
but they’re appearing with increasing frequency. Globally, around $16
trillion worth of bonds currently carry a negative yield. Bonds are one of the safest
investments on the market. They’re staples of many
investment portfolios, from pension funds to retirement accounts. Investors like them because
of their reliable returns. So how did some bond yields go negative? And why would investors
keep putting their money in assets with negative returns? To understand negative yields, you need to understand how bonds work. Bonds are a form of debt that governments and companies issue for
various lengths of time. A bond’s lifespan can
range from a few weeks to a few decades. Bond issuers make
regular interest payments to bond holders over the asset’s lifespan. This is known as the coupon rate. But bonds are often bought and
sold on the secondary market. Their prices fluctuate, which affects what an investor can expect to earn. The yield is a calculation
of how much an investor can expect to make from
holding onto a bond bought at a particular price for a
particular length of time. The yield of a bond is
inversely related to its price. High demand in the bond
market drives up prices and drives down yields. This is largely why yields are negative. Right now, the bond market is experiencing unusually high demand. There are a few reasons for this. The first is that investors have grown increasingly concerned
about the lack of growth in the global economy. Amid low inflation, political uncertainty, and trade disputes, investors
are putting more money into safer assets, like bonds. The second is that several
central banks around the world have set their interest rates below zero. Central banks are banks
for commercial banks. So when they set negative
interest rates, commercial banks must pay them for the privilege
of holding their money. This incentivizes commercial banks to lower the interest
rates they charge to. So far, commercial banks
have been reluctant to pass that negative
rate to average consumers, but some have passed on
the cost to companies and large institutional investors. Negative rates give investors
an incentive to buy bonds rather than park their money at a bank. This drives up demand. These factors have
pushed bond prices higher and driven down yields, so
much so that they are now in negative territory and,
in some cases, even below the negative rates set by central banks. So why would investors
continue to buy bonds with negative yields? Well, if demand continues
to rise, buying now means potentially selling bonds
later at a higher price. This can help offset
losses in the short term, but the long-term implications
of negative yields could mean lower returns on pensions
and retirement accounts, meaning workers might have
to save more and work longer. Negative bond yields, and
negative interest rates in general, are viewed
as a short-term remedy to get economies moving. But with the footprint of
negative rates getting deeper and wider, investors worry
that they may be less of a temporary fix, and
more of a permanent fixture in the market. (gentle music)

What is Market Economy?

Welcome to the Investors Trading Academy talking
glossary of financial terms and events. Our word of the day is “Market Economy”
Market economies work on the assumption that market forces, such as supply and demand,
are the best determinants of what is right for a nation’s well-being. These economies
rarely engage in government interventions such as price fixing, license quotas and industry
subsidizations. While most developed nations today could be
classified as having mixed economies, they are often said to have market economies because
they allow market forces to drive most of their activities, typically engaging in government
intervention only to the extent that it is needed to provide stability. Although the
market economy is clearly the system of choice in today’s global marketplace, there is significant
debate regarding the amount of government intervention considered optimal for efficient
economic operations. An economy in which the greater part of production,
distribution, and exchange is controlled by individuals and privately owned corporations
rather than by the government, and in which government interference in the market is minimal.
Although a total market economy is probably only theoretically possible (because it would
exclude taxation and regulation of any kind), capitalist economies approximate it and socialist
economies are antithetical to it. Market economies are also called free economies, free markets,
or free enterprise systems.

High Growth Stocks You Can Hold Forever [4 Factors to Watch]

Investing in growth stocks has been one of
the most profitable strategies over the last several year. By the end of this video, you’ll have an
easy strategy for finding growth stocks and the four factors I use for double-digit returns. In fact, researching for the video, I found
a growth stock that might just be my new favorite investment. We’re talking growth stocks today on Let’s
Talk Money. Joseph Hogue with the Let’s Talk Money channel
here on YouTube I want to send a special shout out to everyone in our community, thank you
for taking a part of your day to be with us. If you’re not part of the community yet,
just click that little red subscribe button. It’s free and you’ll never miss an episode. I love talking investing and this is going
to be a special video on investing in growth stocks online in partnership with The Motley
Fool. I’m going to walk you through my strategy
for finding great investment ideas and some factors I used as an equity analyst. Two of the most popular investing strategies
have always been growth versus value investing and they’re really at opposite ends of what
investors are looking for. Growth stocks are companies that are expected
to grow profits quickly over the next several years, this might be because they’re in
a new and growing industry or maybe the company itself has come out with an innovative offer. Value stocks on the other hand are usually
companies in mature industries or where profits are growing more slowly. Since stock investing is about your share
of those future profits, if profits aren’t expected to grow quickly, then these stocks
are usually priced cheaply. That’s in contrast with growth stocks which
are usually more expensive because investors expect those future profits to be worth more. Now historically, value investing has yielded
higher returns versus growth stocks. Nobel laureates Fama and French studied what
they called a value premium or that little extra return investors were making on value
stocks for like 30 years. The idea was that getting a good deal on these
value stocks was more important than the hope for higher profits on growth stocks. But that rule has broken down since the last
recession. Since 2011, growth stocks have easily beaten
value stocks. In fact, the S&P growth index has increased
12% annually over the last decade against a gain of just 8.7% annually for the S&P value
index. Besides the extra return, value investors
used to cling to the idea that growth stocks were more volatile and fell harder in a stock
market crash but that also hasn’t been the case. The growth index lost 42% in the last crash
while supposedly safer value stocks plunged 50% over the period. Now I’m not going to say totally turn a
blind eye to value and buy any stock with double- or triple-digit earnings growth. There’s actually a middle ground here where
you can get growth stocks at closer to value prices and get even higher returns. I’m going to show you some of the factors
I look for to getting growth stocks at a reasonable price as well as some resources online. We’re going to be using The Motley Fool
website for a lot of this because besides just a library of stock research and good
ideas, they have some solid stock screeners I use to find growth stocks. The Motley Fool has been around since 1993
which pretty much makes it one of the first online stock research sites. Now I used the Fool while I was an equity
analyst working with venture capital firms to keep up with news around industries and
stocks. The site publishes dozens of research ideas
and articles every day including deep analysis from analysts. For beginner investors, the website has an
entire section to get you started investing from what to invest in for different goals
and how to invest on different online investing platforms. Lately, The Motley Fool has really tried to
become a one-stop site for your personal finance decisions with this section on saving and
budgeting, taxes, mortgages and credit card advice. You find the answers to just about every question
about money here. But I want to show you how I find growth stocks
from screening for some of those factors to researching companies and investing. First though, I want to hear your ideas for
growth stocks. What’s your favorite growth company right
now or how do you find growth stocks for your portfolio. So scroll down and tell us in the comments. Just like when I was a sell-side equity analyst,
I keep my eyes open for news and developments in stocks through sites like The Motley Fool. I’ll check in on the website every few days
and read through some of the free articles. Growth investing is popular on the website
and in fact it has a newsletter called Motley Fool Rule Breakers devoted to growth stocks. So when you’re looking through articles
and research for growth stocks, you’re looking for companies with a first-mover advantage
in an emerging industry. Past growth is important here but you’re
really looking for that opportunity the company is using to grow sales and profits over the
next few years. We’ll use the example of Intuitive Surgical
here, a maker of robotics in the healthcare industry. By 2005, the shares had already jumped 500%
just in the last two years. This was a company that was revolutionizing
healthcare but the shares were trading for 42-times earnings so scaring off all the value
investors. But it went in the Rule Breakers portfolio
because of its competitive advantage in this emerging industry and the potential. Shares are now trading near $500 each after
a three-for-one stock split last year and a total return of 3,500% since 2005, that’s
a 32% annual return against a 7% annual return on the S&P 500. Beyond just looking for news and analysis
for growth stocks, I’ll also use a stock screener to find a short-list of potential
investments. There are more than 3,000 U.S. companies that
trade on the markets and many more foreign stocks so using a quick screener for important
growth factors is going to help us narrow the list down to candidates we can research
further. So I’ll click through to the Stock Screener
within Motley Fool Stock Advisor. You’ll see they have a lot of pre-defined
screens here that can give you some ideas. For example this Starter Stocks is a great
list of bellwether names, really best of breed companies in their industry that give you
a core portfolio for solid returns. I’m actually going to be talking about starting
investing and building a portfolio of these forever stocks, companies you can hold forever,
in our next video so make sure you subscribe to the channel so you don’t miss it. We’re going to go back to the screener though
because I want to use some of these filters on the left to find my own ideas for growth
stocks. There are quite a few criteria you can use
here to narrow your list. For growth stocks, I’ll start with high
or positive conviction here. These are stocks that the analyst has a high
confidence in the upside return, maybe the company has that strong competitive advantage
or management is on the ball. I’m also going to toggle on small-cap and
mid-cap here. Now that’s not to say that large companies
cannot also be growth stocks. Huge behemoths like Amazon and Netflix have
just exploded over the last couple of years but I would say it’s more likely for smaller
companies to grow faster for longer. Amazon is nearly a trillion-dollar company
and grew sales 31% in 2017 to $178 billion which is absolutely astounding but that same
growth is going to mean making $400 billion in sales by 2020 so those big numbers get
harder to hit. Instead I’m looking for scrappy smaller
companies that are hungry to grow and have a solid runway ahead of them. Finally here I want to toggle on this revenue
growth of 25% and 50% or higher to find those true growth stories. Now you could just go with the 50% growth
and higher but I want to keep my list a little larger and 25% sales growth is still very
strong. So that gives me 13 candidates for my growth
stock portfolio. If you click through you’ll find the most
recent analysis on the stock as well as an interactive chart. Now you can put these stocks in a portfolio
or you can add them to your watchlist and follow them a while. I like to look a little more into the financials
for each stock and compare them on 4 key fundamentals. This is going to include a deep review of
the company’s financial statements, it’s sales growth, debt and cash flow. I’m also going to be looking at management
and plans for the future. You can get all the financial statements and
usually an investor presentation for any company by doing a Google search for the company name
plus investor relations. So I’ll look first at a few things on their
financial statements. I’m looking at revenue growth and growth
in operating income on the Income Statement. I want to see that sales are growing but also
that operating income is growing quickly too and not that the company is spending so much
money to make those higher sales. I’m also going to look at the balance sheet
at total cash and long-term debt. A lot of growth companies will take on massive
amounts of debt to finance growth and then get into trouble if sales aren’t high enough
to make payments. Arista here has $1.5 billion in cash and zero
debt which is pretty amazing for a growth company. Finally, I’ll look at the Cash Flow from
Operations on the Cash Flow Statement. The income statement, those sales and earnings,
can actually be fairly easily manipulated by management to make the company look better. You see a lot of this because investors only
focus on earnings. Looking at the cash flow statement though,
this is actual cash in and out of the business, gives you a truer picture of growth. So we see that Arista Networks has grown cash
flow from operations nearly six-fold over the last few years and has been pretty consistent
in its capital expenditures, that’s the investment spending in the company. While I’m on the company’s investor relations
page, I’ll look for any investor presentations to download. This is going to give me a qualitative look
into management’s thinking and future plans for growth. I’ve got to tell you, looking through the
financial statements and a presentation for Arista Networks, I really like this stock
and will be adding it to my growth portfolio. Finding good growth stocks is a more than
just buying anything with higher sales growth but the whole process will take less than
a couple of hours and you’ll have a solid portfolio that can provide double-digit returns
for years. Check out that some of the research on The
Motley Fool for some ideas, I’ll leave a link in the video description below, and don’t
forget to share your ideas for growth stocks in the comments below. We’re here Mondays and Wednesdays with the
best videos on beating debt, making more money and making your money work for you. If you’ve got a question about money or
investing, just scroll down and ask it in the comments and we’ll answer it in a video.

How to Find the Best Growth Stocks

Chris Hill: Hey, everyone! Thanks for joining
us! I’m Chris Hill, here with Chief Investment Officer Andy Cross. Welcome to Fool Global
Headquarters here in Alexandria, Virginia. We’re going to be taking your questions.
Go ahead and type those into the chat box. First, we need to talk about monster growth
stocks. Last time we were in the studio, we were talking about dividend-paying stocks.
A lot of benefits to dividend payers, including the stability. A lot of big companies,
stable businesses that aren’t really going anywhere. Today, we’re talking about monster growth
stocks. A little bit more risk involved, but also the rewards when the growth
stocks pay off are really incredible. Andy Cross: Chris, that’s right. When you
think about the areas of the market over the last 10, 20, 30 years, it’s really pivoted
to these big growers, both earnings and sales, companies that can grow and compound over
time, that eventually reflects in the stock price. That part of the market, especially as
technology has become more and more prevalent, has really started to be the place where investors
are going for the return. We started to see the shift away from dividends, more towards
companies that can really grow sales and earnings at very high rates for very
long periods of time. Hill: You and I were talking before we
started taping — a lot of times, it breaks down into those two basic categories. You’ve got the
companies that are turning a profit, and they are compounding those profits. You’ve got
the companies that maybe aren’t profitable yet, but they’re growing that top
line revenue in an incredible way. Let’s start with the earnings compounding.
Particularly for people who are new to investing or they’re just starting out, they’re may
be a little bit more comfortable with companies that are profitable right out of the gate.
Cross: Yeah, that’s right, Chris. When you think about the theory of investing,
it’s that a company generates profits, and over time, those profits
accrue back to the shareholders, and the shareholders win
by the stock outperforming and performing well, based on how fast and
how long those companies can grow the earnings. I consider these excellent, these earnings
compounders. Companies such as Starbucks, Visa, Home Depot, Ulta Beauty,
Booking Holdings — the owner/ operator of Priceline. These are companies that, just looking over
the last 10 years, Chris, have grown earnings north of 20%, 25%, 30% per year. If you look
at the stock performance, it often tracks that earnings growth. These are well established
companies that really, over time, can grow earnings at very high rates and
they can reinvest that capital back. The sales growth may not be nearly as high,
but because of the way the business models work and the markets they’re serving, they can
grow those earnings for very long periods of time. I call those earnings compounders.
Hill: Let’s take a couple of those businesses and dig into them a little more. You think
about, whether it’s a company like Visa or Booking Holdings, better known as Priceline,
not only are they compounding machines, but they’re also in industries and taking advantage
of trends that have a long runway in front of them. In the case of Visa, it’s more and
more people not using cash, going digital. In the case of Booking Holdings, that was
a company that got out early in the trend of online travel booking, and really expanding
not just here in the U.S., but around the world. Cross: When you think about a company like Home Depot, which has benefited so much from
the growth in housing, even through the financial crisis — and that crisis was driven by a bubble
in the housing market. Companies that can really benefit from those growth trends,
they can grow sales — and all these companies do grow sales, but really, what I think investors
have been rewarding them for over time is the growth in the earnings. Those earnings
that they can redeploy, invest back into the business, to continue to grow the business
at higher and higher rates, and they can expand their margins over time. Not many companies
can expand margins for five, 10, 15, 20 years over time. So, when you think
about the ability for these companies to be more profitable over time,
that ultimately is going to end up showing the earnings growth, and investors are going
to reward that. The companies I mentioned, they’ve been able to do it for sometimes 10,
20 years at a clip. Those kinds of companies can ultimately lead to an
investor having a very nice portfolio. Hill: The other type of growth stock that
we were talking about earlier was the ones who are growing sales. They’re growing that
top line revenue. They’re not profitable yet, but they see a pathway towards that profitability.
Again, for a lot of investors, it’s a little unsettling to be like, “OK, they’re not actually
making money. I’m taking a leap of faith that at some point, they’re going
to be able to turn that on.” Cross: The market, I think, rewards those
sales growers. These are the companies that, when people think traditional high-growth
stories, these are the ones I’m talking about. The Shopifys of the world, the Oktas,
Appian — those are all recommendations here at The Motley Fool — Twilio, Ellie Mae, although
Ellie Mae is profitable; Splunk, MercadoLibre. These are businesses that can grow 25%,
30% at a clip. Very high level. They may not be making money now, but based on experience
and the leadership teams, investors have the patience to be like, “OK, it’s OK. I eventually
will see those profits accrue to me and accrue to the business. I’m going to benefit that way.”
In the meantime, they’re going to continue to grow sales at very high levels and the
stock gets continually rewarded for that performance. Then you see this performance like we’ve seen
for so many businesses over the last five years, especially those based on technology.
Hill: Another thing you mentioned to me before we started taping was the companies that are
essentially hybrids of the two we just talked about. Maybe the most obvious example is Amazon,
which was not profitable for so many years. A lot of people on Wall Street saying, “When are
these guys ever going to make any money?” Now they’re doing that in a pretty solid way.
They’re not the only ones who are those hybrids of earnings compounders and
being able to grow that top line. Cross: Chris, these are what I call the
hybrid heroes. These are the kinds of businesses that can really make your portfolio. A company
like Salesforce, Amazon, Netflix, a company I follow, EPAM Systems. Facebook was actually
one of these right out of the gate when it came public. It was very profitable. Apple,
the same way. Grows sales at 20% a year for 10 years, and earnings at 27%.
When you think about it in context, Chris, the average company in the S&P 500 probably
can grow sales at maybe 5% to 10% over time. Profits at about the same level because they
can’t expand margins. But these businesses, like Salesforce, you just look at what it’s
done growing sales 29% a year for 10 years, and earnings more than 30%. And that obviously
has been rewarded in the market by patient investors, like those, hopefully, watching the show,
and who have listened to our advice here. These are the kinds of businesses,
they’re attacking markets; they have leadership teams that are principled, aggressive; they’re delighting
customers; and they can grow these sales and turn that right into profits over time.
And that ultimately helps shareholders. Hill: I’m glad you mentioned the management.
That’s something that we always love to see here at The Motley Fool, is great management,
management that has a stake in what they’re actually doing at the business. Ideally,
it’s a founder-led company, but not all of these companies that we’ve talked about are necessarily
founder-led. That doesn’t mean they don’t have great growth potential.
What are some of the other factors investors, viewers, should be watching for
when they’re looking for growth stocks? Cross: Chris, you teed off our conversation
talking about the market opportunity. One thing that we look for, and I think many of
us at The Motley Fool understand, is trying to find companies that are serving a market
that is really growing, that will continue to grow for many years, is going to be changing,
and that a company can operate in the growth market, deliver the kind of services that
are going to be able to take market share in a growing market. If you have that combination
of a market that’s expanding and a company that can take more and more market share,
often from legacy performers and maybe a little bit more of the staid companies that aren’t
acting as aggressively, that’s probably the biggest factor I look for. I look
for these market opportunities. And then, like you said, you want the founders
who have a lot of ownership in the business, ideally. That’s been great. We mentioned some
of those earlier on. And the financial performance can’t be overlooked. Unique companies that
can deliver the solutions, and into a financial model that ultimately is going to continue to support
the sales growth and the financial performance. One thing David Gardner looks for when he talks about his six signs of a Rule Breaker,
one of the very first ones he looks for is this idea of a top dog and a first mover.
So, someone who’s really going after a market and basically inventing the market. Salesforce
basically invented the market for customer relationship management software and cloud-based
solutions. We can see where that market is today. If you can find teams and businesses
that are operating these big market opportunities, they do have these first-mover characteristics
and they have both a management team that can deliver the solutions that customers
want and the financial model that can back it. That right there is the secret sauce
for finding great growth companies. Hill: You mentioned the financial performance
of the company. That ties into another thing that David Gardner says he likes to look for,
which is the stock appreciation. A lot of times, investors look at a growth stock that’s
had a great six months, 12 months, that sort of thing, and it’s easy to think,
particularly with a lot of financial media saying, “Boy, that thing’s had a great run.” So, naturally,
we think, “OK, I don’t want to jump in now. I want to wait for it to dip.” But actually,
share price appreciation in the past is something he likes to look for.
Cross: Statistically, studies have shown in the short term, it’s actually a good way
to be able to invest and find some of these great growth companies. In our perspective,
the twist we add to it is, as long-term shareholders, so many of the media that you talked about,
Chris, calling a company totally overvalued, or a company that has gotten ahead of itself,
or, “Oh, I missed it! It’s up 35%, maybe a double, and I missed that opportunity.” Well,
those are companies that tend to have been performing well, as I just talked about,
the financial performance. If they’re performing well, that’s often — not always, but often
— a good indicator that they’re doing something right, they have good management teams that
will be able to continue that success in the future. Don’t be scared by
past appreciation in the stock. What really matters is where the business
is going from here on forward and the kinds of market opportunities and solutions they’re
delivering for their customers. If that continues to have success, the stock price
often will track that success as well. You look at a stock like Salesforce,
I mentioned earlier. That stock really has never, ever looked cheap on traditional metrics.
I’m sure if you go back over the last 10 years, there were plenty of times that was called
overvalued and that the stock got ahead of itself. And yet, that stock is up almost
19X in value over the last 10 years. Hill: We’re going to be taking your questions
in just a moment. Keep those coming. I know a lot of good questions
are already in the queue. One thing I wanted to touch on before we get
to the Q&A from the audience. Some of the names that we’ve been talking about here are
names that everybody is familiar with, even if you’re not an investor. Netflix, Amazon,
Starbucks, Facebook, Apple. These are all very strong consumer brands. Some of the other
names, not really consumer brands. Salesforce, Twilio. It does seem, however, that the one
thing that those have in common is, they all have customers. Some of them are
everyday folks like you and me, but some of them, you have to look for. But it seems like what ties
them together when it comes to growth stock potential is, the customers who are buying the goods
and services are happy with what they’re getting. Cross: Yeah, absolutely,
Chris. When you think about trying to understand what may make one
business better, different than another business, one thing we do like to look at is consumer
appeal, and whether that consumer is like a you and me consumer, shopping online,
or it’s maybe a B2B business, business-to-business provider more like a Salesforce or a Twilio.
Finding companies that continue to add to their client base — Okta is one, it does customer
identity management and security solutions. Including The Motley Fool, it helps thousands
of customers manage their employee logins. That is a business that continues
to add more and more people and add solutions and grow at scale in ways that I think,
even though they’re not profitable, over time will really benefit because they continue to deliver
solutions that their customers want to have. You really have to do that. Everybody says
they can do that. But, again, and I’m talking over 10, 20-year periods. Find the businesses
and the management teams that can do that time and time again, learn from their mistakes.
Look at the mistake Netflix made with Qwikster. They don’t always get it right. And sometimes
that’s a great time to be thinking about buying the stock. But they do it more right than
wrong, and they do it for long periods of time. That’s where the founder ownership,
Chris, is so important. You have founders who own parts of that business or a large
part of that business. They have the patience and the investing base who has faith in
those founders to be able to get it right. Hill: Alright, we’ve held off long enough
in terms of taking questions from the audience. Let’s start with this. A couple of people
asking about, what are your thoughts on the upcoming class of IPOs in 2019? Next month,
we’re probably going to have Lyft and Uber going public. Airbnb expected to go public
later this year. Any of those get you more excited than the others?
Cross: I think Slack is also slated to be in there. They’ll be in that class at
some point. I think that’s exciting. All those businesses, they’re very popular and they’re
large businesses. One thing, historically, when we look at our results here at
The Motley Fool, trying to find these businesses that are a little bit on the smaller side —
not the big, large, billion-dollar-plus so-called unicorns that have come public,
but maybe a little bit smaller. So many — Uber, the valuation at $60 billion or so; Lyft is
somewhere around $20 billion or $30 billion. These are very large companies. They have
the potential to grow at very high rates. But generally, when I think about growth companies,
I try to find a little bit more on the smaller side. Those companies are all going to come
out very big and large, high valuations and large sizes. They could be wonderful investments.
We’ll have to see how the financials play out. But they clearly are going after markets
that are changing and evolving and growing. That’s a good place to start thinking about
your research when you’re trying to find growth companies that over time should
be able to deliver for your portfolio. Hill: Jackie asked, “What do you think about
Nike?” A few weeks ago, we were here in the studio doing a live Q&A, and one of the things
we talked about, it was right in the wake of Zion Williamson blowing out his Nike sneakers.
Shares fell a little bit. They got some bad press. Where do you think that company is?
Cross: I think Nike’s in a great spot from a consumer appeal side, from a global brand side.
I don’t think the stock is that expensive. It doesn’t grow as fast as the companies that
we talked about earlier on the top line, but it’s exceptionally profitable, a very solid
management team. So when I think about that global appeal… Nike probably will not be
as volatile as some of these technology stocks we’ve been talking about, yet they’re utilizing
technology more and more. They continue to grow around the globe. And their competitors
have had some stumbles. The likes of Under Armour, Adidas here in the United States is
getting a little bit more traction now. But I think Nike’s in a pretty good spot to
do pretty well for the next five years. Hill: Richard asks, “With these monster growth
stocks, how does one know when to sell?” Great question!
Cross: That’s a great question! Hill: It’s different for everyone because
everyone’s got a different financial situation. Obviously, one reason to sell any stock is
if you need the money for something else. Cross: That’s right. This could be a whole
podcast for us, talking about selling. In fact, we probably already have done that.
I think the first rule is, think about not selling. If you need the money, like you said,
those are some reasons to sell. I would start with your worst performers and your lowest-conviction
stocks rather than the ones that are winning. But certainly, some of these stocks, as they
appreciate, you may wonder about when to sell, or what are my selling principles.
I think generally, I would urge you to try to sell as little as possible, try to transact
as little as possible. If you do need to sell, I would start with the ones that are underperforming
— this is what I’m doing — in your portfolio, and maybe a smaller part of your portfolio,
to raise capital you can think about deploying more in your winners rather than your losers.
Hill: A couple of people asking about the so-called FAANG stocks — Facebook, Apple,
Amazon, Netflix, Google. Di asks, “Which FAANG stock is the best buy right now?” Jim asked, “Which FAANG
stock would you shy away from right now?” Cross: Oh, gosh, two great questions! I own Facebook. I own Netflix. I think they’re both
good buys here. Facebook’s struggled, obviously. But if you look at their past quarter,
and I applaud Mark Zuckerberg for the direction that he is now thinking more towards private
interactions as opposed to public ones. I know you and Jason and I have had conversations
about that on some of the podcasts. I think our Alphabet, the investments they’re making
today, obviously, they got some bad news from the EU. I don’t think that was a huge surprise.
I like the optionality they have to invest. The one to avoid, I think it’ll be a fine
company, it just won’t grow nearly as much, although I’m very excited to see what they announce
next week, is Apple with the streaming service. That’s going to be a really new development
for them. They’re pushing more and more into that. These are businesses that can innovate
at very high levels, and their balance sheets or things of beauty. They’re just so large,
Chris, that these are companies that just are not going to generate nearly the kinds
of returns that they have in the past. Hill: I want to go back to a word you just
used because I think it’s particularly relevant to these companies. It’s optionality. By virtue
of the amount of cash on the balance sheet that Apple has, for the past decade,
people have looked at Apple and said, “Well, they could… ” They could go into this space,
they could go into that space. And technically that’s true, again,
simply by virtue of the cash. On the flip side, I look at companies like
Alphabet and Amazon, they’ve demonstrated their willingness to explore optionality.
Sometimes it doesn’t really pay off. We saw the restructuring of Google into
Alphabet a couple of years ago, and part of that was to give Wall Street and everyday investors
a little bit more transparency into their so-called Moonshot division. But it really
does seem like Alphabet and Amazon, they’ve explored optionality in a way that Apple
— this is not a knock on Apple, but Apple hasn’t really explored it in the same way.
Cross: You’re right, Chris. I think the way Steve Jobs built that company was really from
the inside. He was so principled and dedicated, sometimes tough to work with, and such a perfectionist
on the product development inside the family of Apple that they’ve really chosen to invest
their capital that way. They earn $60 billion a year, Chris. They have $85 billion of cash
on the balance sheet and they have exceptional returns on capital. They generate so much
money that they just can’t invest it fast enough, which is why they’ve
been buying back a lot of stock. Now, they’re putting a lot of money,
apparently, into this different streaming service, which is much different than selling iPhones,
which makes up 70% of the revenue. It is a change for them, and the first big one, I think,
since we’ve seen the iPod launched in the early 2000s. It will be very interesting
to see. But historically, you’re right. They have not been an acquisitive company,
where the other ones, Facebook and Google — Netflix has not been an acquisitive company,
they’ve just been able to grow because they’ve had this huge market opportunity.
So, Apple, I see this one really with slowing growth rates from the iPhone. We’re at a little
inflection point with Apple. That’s also why the stock, from a valuation perspective,
doesn’t sell nearly as expensively as the other ones. Hill: Usha asks, “Is it too late
to enter into The Trade Desk?” Cross: No. I don’t think so. This is a company
that really specializes in, one of the leaders in programmatic digital advertising, helping
clients place ads all over the web, and moving more and more off the web into TV. It’s done
exceptionally well and is continuing to grow at very high levels. Led by Jeff Green,
who was the founder and owns 11% of the stock. I don’t think it is too late to get into
The Trade Desk. Now, the company is not as small as it was when we first found it, but the
market opportunity they have and that changing market, I think it’s not too late.
However, with all these growth companies, Chris, one thing I do want to emphasize is
that we have to understand that these will come with some volatility. When they tend
to miss earnings, maybe, whether it’s theirs or the analysts’, the stocks will sell off
very aggressively at times. You just have to be able to withstand that in your portfolio
and not get scared away from owning these businesses. Lastly, when you do
buy them, make sure you really are buying them with a five, 10, 20-year
time horizon. I’m not kidding, think about this as a 20-year hold or 15-year hold,
because that’s the way you’re going to be able to sustain the volatility that will come with
owning some of these growth stocks. Hill: A few people asking about Tesla. A few
more people asking about Square. Let’s start with Tesla. Where is Tesla
right now, as yousee it? Cross: Oh, gosh! I don’t own the stock.
I know it has a lot of mixed opinions here inside the company. I think when you look at what
Elon Musk is doing, I’m impressed with him just from the mission that he is taking on.
The business as it tries to continue to generate — it’s actually been a very high-growing
sales company, but not profitable. This is one of those sales superstars over the
last five, 10 years. Now, they’re starting to get a little bit more profitability.
I think if you want to be an owner of Tesla, by all means, you could buy the stock.
That’s one that is definitely going to be more volatile, and it’ll be more volatile with every
communication Elon Musk makes. Hill: To the point you were making earlier
about management, there are some businesses out there, some that we like a whole lot,
that are even more of an investment in the leader of the company than they are in the
business. If you’re investing in Tesla, you’re all in on Elon Musk.
Cross: I think you have to be. You cannot, in this case more so than maybe almost
anywhere else, very hard to separate — even though, they did separate the CEO and the
chairman positions for him. Very hard to separate Elon Musk from Tesla.
As far as Square goes, I think the world of Jack Dorsey and what he’s trying to build
over there. Payments is a spot that’s getting a lot of attention and more and more competition,
and they have been able to really build a sustainable advantage, I think, that continues
to grow over time, even though there’s a lot of money going into the fintech space that’s
attacking and challenging them when it comes to payments. What they’re
building is pretty exceptional. Hill: As we talked about earlier with Visa,
Square is playing in that war on cash space. From everything I’ve read, in terms of customers,
the small merchants, the small businesses across America that use
Square really seem to like it. Cross: I think so. I’m using it more and more
as I shop. Heck, a dog groomer came to our house to groom our dog, and I think I used
Square when I paid for her. Square is a business that, they can grow these gross payment volumes
25%, 30% per year, and the profitability curve is just really starting to show up. This is
a business that I could very much see over the next five, 10 years, this one
moving into the hybrid hero level. Hill: Edward asks, “For small companies that
are not yet profitable, what can people look at to value the business?”
Cross: Sales growth. For these companies, when you think about Oktas and Appians, ultimately,
it’ll come down to sales growth for them. With sales growth, especially if you’re in
the technology space, you get a lot of the scale, and the profitability will come down
the line. Companies now have, from technology, the ability to be more profitable sooner than
maybe historically. And they have different ways to be able to manage
that profitability. It comes down to sales growth. I think it comes down also, one thing I watch
more and more is customer acquisitions. If the company does report customer acquisitions,
the number of customers they have, making sure they can continue to add to their
customer base because it will show that they’re in a market that, A, is growing, hopefully;
and B, that they’re actually growing with that market, or ideally taking market share.
Hill: We’re going to have to wrap up in just a moment. But first, I know next week,
you’re going on a well-deserved vacation. Kudos to you, have a great time!
Cross: Thank you! Hill: The market still proceeds,
even though you’re not going to be around. Cross: That’s right.
Hill: So let’s get to a couple of stocks that are reporting earnings next week.
We’re going to start with Ollie’s Bargain Outlet. Fourth quarter report is going to come out
next Tuesday. Think whatever you want about how they will maintain… what are they? Cross: Semi-lovely. Hill: The semi-lovely locations that they
operate. Stock’s up 35% over the past year. Cross: It’s actually pulled back a little
bit. Had a great run, I think as of last fall it was up 70% or 80% for the year. This is
a company that operates about 300 of these semi-lovely stores that sell excess inventory
and close-out inventory. It’s been able to grow. It’s been one of these profitable and
sales growing companies, a small company that’s able to continue to have a niche that they
have been able to excel at. Almost all their stores are on the Eastern Coast area.
Sales estimates for the quarter coming up 12%. That was a deceleration over a year ago.
But earnings per share estimates up about 37%. Things that I’ll pay attention to is, again,
this is going to the store to buy your stuff. This is not an online purchase. But they
did introduce a new app. They want to see how their most loyal customers,
Ollie’s Army, almost nine million consumers that have joined Ollie’s Army, and how the app integrates
with their buying habits. Will they expand? They say their market opportunity is maybe
900 locations. That’s up from 300. I want to see if they’re going to expand that to other
spots they think they can grow the Ollie’s company. Hill: OK, from bargain
outlets to global consulting, very different businesses. Accenture
reporting second quarter results on Thursday. This is a stock that’s basically flat over the
past year, although long-term, Accenture’s been a good stock to own.
Cross: It’s a really great businesses. $100 billion company. They specialize in technology
and strategic digital consulting for some of the largest companies in the world.
They help with things like the internet of things or digital security. They talk a lot about
making these investments in the new businesses, and that’s cloud and security and digital.
That now represents about 60% of their sales. I want to see if they’re going to expand that.
That’s up, it continues to grow. I want to see how far they can expand that. This is
a business that has more than $4 billion on the balance sheet with very little debt.
They just announced an acquisition recently, Digital Storm, this week or maybe last week.
They generate maybe $4 billion in earnings a year. They buy back maybe $2.5 billion worth
of stock. For Accenture, I want to see how they continue to deploy that
cash to be able to grow that business. Hill: Have a great vacation next week! Cross: Thank you! Hill: Andy Cross, thanks so much for
being here! Thank you so much for watching! Please click the subscribe button down below
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I’m Chris Hill. Thanks so much for watching! We’ll see you next time!