Jackson Hole Preview: Will Fed Tank Markets This Week? | Chance Finucane
Summary
Market Outlook: The podcast discusses the potential impact of the Jackson Hole Symposium on markets, highlighting the possibility of a rate cut in September and its implications for equities.
Investment Strategy: Chance Finucane emphasizes the importance of diversification across sectors, warning against over-reliance on high-performing tech stocks and advocating for a balanced portfolio.
Economic Indicators: Recent disappointing job numbers and rising PPI inflation data raise questions about the strength of the economy and the likelihood of further rate cuts.
Tech Sector Trends: The pullback in tech stocks is attributed to profit-taking rather than a fundamental shift in the AI momentum narrative, with a focus on the sustainability of current valuations.
Valuation Concerns: The discussion highlights the high valuations in the market, particularly in the tech sector, and the risks associated with speculative investments driven by momentum rather than fundamentals.
Commodity Insights: Finucane discusses the stability of oil prices within a specific range and the attractiveness of gold and silver as long-term investments amid ongoing monetary expansion.
Investor Behavior: The podcast notes the increased activity of retail investors and high-frequency traders, contributing to market volatility and the potential for rapid market shifts.
Sector Concentration: The concentration of market value in a few large tech companies poses risks, and Finucane suggests a more diversified approach to mitigate potential downturns in the AI theme.
Transcript
I'm not sure where that narrative came from. That's so unlikely. Uh that's just not the way that the Fed operates. I don't know who was trying to get that going. Uh but when you saw you mentioned that that low payrolls number uh the start of August, it seemed like that narrative went away. So it could be that everyone's pricing in 50 basis points and if it doesn't happen, then there could be a short-term sell-off. Markets are sliding this week following the uh Trump and Putin and Zalinsky meetings and also following a disappointing uh jobs number uh showing 73,000 jobs created versus 100,000 expected last week. Tech stocks are leading the charge downward with Nvidia and AMD down sharply. Hot PPI inflation data is also raising questions about whether or not uh September rate cuts ahead of this week's Jackson Hole Symposium are on the table still. So, we'll talk about all those things and much more with our next guest, Chance Venukin, CIO of Oxbow Advisors. Good to have you back, Chance. Always good to see you. Hey, David. Thanks a lot for having me back on the show. Let's just start by talking about this week's market action first before we get into Jackson Hole. So, like I mentioned in the introduction, the uh stocks have been sliding a little bit. The S&P is down more than 1% since Monday at one point. It's briefly recovered today on Wednesday afternoon. Are markets disappointed that there wasn't a concrete deal with Ukraine met uh between Putin and Trump over the weekend or do you think things are sliding and cooling off in anticipation of what may happen at the Jackson Hole Symposium which will start on the 21st of August tomorrow? What we're seeing is the top 10% of performers, so the highest momentum names so far in 2025 is what's been pulling back the most in August. Uh and you're especially seeing that in the last several days. So even uh yesterday on on Tuesday uh you had uh more than 70% of the names in the index were up but the overall indices were down just because some of those big winners uh have seen pretty significant pullbacks on a short-term basis. Uh we don't know if that would continue if that's just some profit taking. Uh but uh it's going towards our thesis where we think it's better to be more diversified uh and just try to spread out uh where you're invested across more sectors, more areas rather than being so focused on what's just been winning uh so far this year. This slide in the tech stocks that you're talking about, the the leaders of the index, is this a seasonal trend or is this specific to let's say the companies or is this a valuations getting too high and people are taking profit story? What's the narrative here? Is there one? Probably I I haven't heard any specific narrative like new news in the last several days that would would cause this. It probably seems more like profit taking. Uh we wouldn't say that people are giving up on the story with AI and uh this momentum driver that's been going for the last couple of years. Uh and it's not just the tech names. There's names in the industrial sector and the utility sector that have been huge outperformers. uh if investors think they're going to be big beneficiaries of the trend in towards artificial intelligence building out. Um you know, it's something that we have a little bit of exposure to. We we're buying companies that we like for overall reasons and we think we're not overpaying for. Uh but we don't want our whole portfolio being driven by that because it's way too early to tell how all that's going to play out, who are going to be the winners and losers. Uh, and it's just it's very interesting space to follow right now that there's so much money being spent on capex to build out things like data centers that you're going to need to generate hundreds of billions of dollars in new revenue to make the math work and uh it's going to be a tall order for some of these companies to do. Well, the S&P's been breaking new highs in August. You've said in my show previously that I think if the uh stock markets retract or retrace rather to a much lower levels I think towards 5500 points on the S&P you'd be interested in getting back in. Is that still your downside target chance? Yeah, it wouldn't surprise us if there was a 25 or 30% drop in the S&P 500. We're not calling for that imminently. It's just the way that markets tend to move uh in the valuation ranges that you see. If you're trading above 22 times forward earnings in the S&P 500 today, uh there could be any sort of news that could occur to push that back towards 16 to 18 times and then you've got a better entry point to buy positions and names that you might have been following for a long time but didn't want to buy at these high prices that you're seeing today. We'll come back to um your investment uh thesis asset allocation just a minute, but I want to talk about Jackson Hole and preview that for the audience because that is happening this week. Now, we had a disappointing jobs number like I mentioned uh earlier. It came out last week. 73,000 jobs versus 100,000 expected. Combine that with higher uh PPI inflation data. Uh unemployment now ticking up to 4.2%. It looks like the economy is getting strained, at least on the surface. So, set the stage up for uh what the Fed um and other central banks may be discussing this week. It's an interesting time because you've got a couple of different things happening. So, first you've got inflation uh still well above 2%. It's closer to 3% right now on all the different inflation metrics that the Fed tracks. Uh and it seems like it's going to continue to accelerate a bit higher through the rest of the year. Now, historically, there's only a handful of times that the Fed has cut rates when inflation is near this 3% level. So, it's it's difficult to say that they would cut. Uh on the flip side, you've got right now the market's pricing in an 85% likelihood that you're going to see a rate cut in September. Uh and usually the Fed doesn't want to disappoint the market. They want to be seen as being pretty stable, pretty consistent with what's anticipated. Uh don't shock the system. So we would guess that there's going to be a cut in September. Maybe the thing that we question is uh a lot of investors are assuming additional cuts in October and December. But if inflation's accelerating back towards 3% over the next several months, uh unless you see a real drop off in employment and the labor situation in the United States, we would expect that the cut in September may be the only one this year and then rates sort of settle out on the short end uh for the remainder of 2025. What does that mean for equities if uh rates will not change significantly in either direction? We would think so there's two levels to this. one is, you know, if there's only one rate cut and then Pal says we're done or we're data dependent and if inflation trickles higher, then we're not going to cut any further after that. You could imagine there would be some disappointment uh for stock investors on that news that are anticipating more rate cuts than what may be on the near-term horizon. However, a lot of this is uh investors looking ahead to who is going to be the next Fed chairman and that assumption going into next year that it'll be someone uh who will want to be more dovish, cut rates further in line with what the uh what President Trump would like to see happen with the Fed funds rate. And so it may be that you know there if there's only one cut for the remainder of this year, it doesn't make that much difference cuz everyone's looking out 6 to 12 months anticipating that the next Fed chair is going to cut rates further. Anyway, before we continue with the video, let me tell you about a very serious threat that you're facing every day that you may not even be aware of. Most people have no idea how much of their personal information is floating around on the internet. Your address, phone number, and email can be found and sold by data brokers without you even knowing. That's why I use today's sponsor, Delete Me. 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Uh we're all seeing very similar data points and so the labor environment is slowing but it's sort of an environment where there's not a lot of firing and not a lot of hiring. So you're not seeing uh any sort of catalyst that's really pushing the unemployment rate higher. And even though those payrolls numbers are getting weaker, uh population growth is slowing just because of the changes in immigration patterns. So you don't need quite as much in monthly payrolls growth to keep the unemployment rate steady. So it's nothing to really force the Fed's hand that they've really got to cut rates significantly. uh we would actually look at a rate cut as something that's going to drive the inflation rate higher and could lead to higher long-term Treasury yields. And this is something that we don't know if they're paying that much attention to, but you've got three different countries in the last two years that have cut rates and then seen their 10-year government yield move significantly higher. It's happened in Germany and the United Kingdom in the last 12 to 18 months. And then it also happened here in the US when they cut last year and you saw the 10-year Treasury yield move up by 100 basis points. So that could be the sort of thing that if you saw uh cuts on the the short end of the uh the Fed curve, but then the 10-year Treasury yield rises back towards 5% that could be something that gives equity investors pause and you could see a draw down in stocks. Okay. And one more thing here, just going back to Jackson Hole. This is an article um about uh what could happen this week. Fed chair pal's Jackson Hole speech could jolt markets. Everorn warns a 15% drop. Analysts at Evercore ISI warns that market participants might not love what he has to say. This is just their interpretation. POW is likely to indirectly signal a 25 basis point cut for a market that was eager to embrace 50 in September. Uh that would imply a half percentage point next month. the balance view would catalyze a near-term negative 7 to15% pullback into October. A lot of assumptions made in that statement. I'll just get your reaction. There was that narrative for a short time about, oh, what if it's a jumbo cut? What if they cut by 50 basis points in September? I'm not sure where that narrative came from. That's so unlikely. Uh that's just not the way that the Fed operates. I don't know who was trying to get that going. Uh but when you saw you mentioned that that low payrolls number uh at the start of August, it seemed like that narrative went away. So it could be that everyone's pricing in 50 basis points and if it doesn't happen then there could be a short-term sell-off. But from what we see since April with how quickly markets have rallied and you're seeing this speculative fervor across a lot of riskier asset classes right now, it I think investors will continue to find a way to spin this as a positive uh to try and sort of keep valuations heightened for as long as possible until there really is a breaking point. Whether it's inflation rate moving significantly higher, 10ear US Treasury yield moving significantly higher, could be any number of things. Um but valuations seem pretty full and it seems like investors are trying to find a way to to stay positive, stay optimistic. Speaking of um buying opportunities, every time uh Trump has announced a tariff since inauguration, stocks have dipped and then as you know has since recovered to new all-time highs. So now there's this narrative that every time he does announce new tariffs or some sort of escalation in the trade war that may present a buying on the dip opportunity because history has shown us that it just it's just going to recover. Those are short-term short-lived news events. How would you interpret that narrative? It's worked for investors so far to just buy the dip and it seems like it's training people on every sort of uh pullback like oh this is just going to be shortterm. Uh if you look at the very long-term history of markets, uh you go through these, you know, 15 or 20 year cycles where buying the dip works, whether that's from 1982 to 2000 or from 2009 until now. Uh but you've also got uh 10 plus year long periods like, you know, late 1960s to 1982 or from 2000 to 2013, uh where it wasn't in your best interest to be buying every dip. Uh and so at some point, buy the dip will stop working. Uh but you know, it's impossible to say when that's going to happen. We're just trying to stay disciplined and we would recommend to anybody out there to try and stay disciplined with the prices you're willing to pay uh for what assets you want to have in your portfolios and and just beware if you're getting in anything that's starting to trade too much on on speculative narration rather than fundamentals of the businesses that you own. How could you differentiate between something trading on speculative hype like you mentioned versus something trading on good fundamentals? Because the charts show the same thing. You have to really dig under the hood. So, how do you make that differentiation? Well, first there's certain criteria we're looking for. We want companies that are generating consistent positive free cash flow. Uh, you know, there are some new companies that are going public uh to a lot of fanfare, but in a lot of cases and it's just early stage for their life cycle. They're not generating any profits and it might be a great investment, but that's not a space that we want to play in because it's just difficult to forecast where those businesses are heading. So we like companies that have proven they can generate a good return on capital uh it can grow at a consistent rate uh through an economic cycle and then you can look at the trading range the history uh for those businesses and know that you you know when it's trading at a price that you think uh this is a fair valuation to pay uh rather than trying to buy something that normally trades at 20 times earnings but you decide to buy it at 40 times earnings because you like the story right now. That's where you can get yourself into trouble. Okay. And now turning to one of your slides from a recent Oxbow Advisor presentation. This goes back to your point about buying the dip. Investors being trained to buy the dip. Well, we're just 55 trading days back to the highest. This is, I believe, um, the fastest return to a new high following a 15% drop draw down in history according to your research. Watch the research, but you've published it. Anyway, um, I'll let you comment on what this means. I think this is just a it's a microcosm of how markets have trained investors over the last decade and a half. Uh that these draw downs are happening faster and faster. Um but everyone is so ready to buy in and think that everything's all okay. And somewhere in here there will be a draw down that catches people and you know might bounce back for a little bit for a short period but then it goes down to a lower low. Uh and this is the sort of thing that we saw from 2000 to 2003. we saw from 2007 to 2009. Um we're not trying to forecast when another, you know, 30% or greater drop in the market could be, but these things happen uh once or twice a decade. And it's important to keep that in mind rather than just thinking we're going to go fully into stocks and if they they drop a little bit, we're going to buy more. Uh and there's no possible way that we can be hurt by that. And I'm just Yeah, keep going. No, just the fact that people are buying back in and just thinking that, oh, we're we're going to be okay. This is just purely thinking from a positive standpoint rather than worrying about the risk side of the equation. Uh we think people are getting too skewed towards the reward rather than thinking about what happens if it doesn't play out the way that you hope. I have noticed a bit of a relationship between the number of days to recover to new highs versus the severity of the fundamental economic condition that you know preceded this drop. So for example 2002 was the dotcom bubble burst uh well 2001 rather and then recovered in 2002. 2009 was following the 2008 great financial crisis. Uh co was 2020 that was 103 days. Um, and then 2022 was kind of a shadow recession. We had two negative quarters of GDP, but the, as you remember, it was never officially declared a recession. And then now 55. One could argue nothing seriously bad happened to the economy this year compared to the prior draw down periods. I know that's just my observation. What do you think? Yeah, this example was it was a bit more uh you know it was a policy attempt um by the new administration with tariffs uh that I think when the the height of uncertainty people weren't sure what was going to happen. Uh but one thing to consider is that the businesses that have been reporting uh earnings the past couple of quarters as these tariffs have been announced and adjusted, everyone says they're going to start putting through their plans for how they're running their businesses after these tariffs are finalized, which has really started to come through since August 1st. So, it's over the next few months that you're going to see uh of that $350 billion or so that's going to be paid to the US government per year going forward. How much of that is going to fall on the foreign exporter? How much of that is going to fall on the US company that's importing those goods? And then how much is going to be passed on to the consumer? Uh there's going to be some portion of it that consumers are going to have to pay for which we'll keep the inflation rate elevated and we'll see what it does for consumer spending. Uh but that's all activity that we're going to see over the next several months. uh that you know we're it's another reason to just be mindful uh of current valuations and it's all positive from the standpoint of everybody in the market right now but it's difficult to say how this is going to play out so we want to make sure we stay balanced okay the next two slides are interesting here you're showing that institutional managers are all in again uh average cash level percentage uh down to 3.9% and uh the next slide shows that retail investors never stopped buying. Um why the difference first of all between Main Street and Wall Street in terms of buying behavior and what can we what conclusions can we draw about the differences here? Sure. So the institutional investor one we're paying attention to that last 15 18 years uh where you know the when cash levels were high those tended to be pretty good buy spots uh in the market whether it was 2008 2020 2022 uh whereas now cash levels are low. So institutional investors feel like they have to uh move all in to try and keep up with what's happening with stocks. that's usually uh you know a riskier sign that future returns may be lower than what everyone's already gotten from their their stock appreciation the past handful of years. And then on the retail side uh that's more an acknowledgement of since 2020 uh when the pandemic hit and stock trading and options trading became free on all these brokerage platforms. Uh you've just seen this huge spike in retail activity and people wanting to try and make a fortune really fast. And what's changed with how markets trade today is retail traders and highfrequency quant traders are now about 60% of the trading activity in the market. What's important Yeah. What's important about that is that these are two uh types of investors or short-term traders that really try to play positive momentum. What's working right now? How do I ride that momentum further and further higher and higher? And we're seeing that with how much the momentum factor tends to outperform when times look good. But when things break, these are two of the biggest players in the market now that sell when the momentum breaks on their their readings. And that's where you can get a really fast drop in the market like we saw in April. So, we're noticing more volatility uh going both directions. And that's something that I think we're we're trying to be mindful of uh you know with how fast things can change uh if all of a sudden these key players uh decide to allocate differently. I think um institutional investors overtook retail investors in terms of dominance in the stock market sometime in the early 80s. I'm not if I'm not mistaken. Um I I don't know if your recent research is showing that maybe the pendulum is swinging. who ultimately has more impact on market performance now in 2025. We'd say it's the if majority of the trading and I think it's got to do more with the short-term trading. So there might be more institutional investors that are more longerterm traders. Um I just if you just look at uh how we invest, I mean we probably put through one or two trades per week. Uh when we uh buy something, we want to hold it on average for 3 to 5 years. We're not dealing with zero day to expiration options, which is now more than half of the options traded uh on the S&P 500 are options that go they're going to expire on the same day. And a lot of that is those retail traders uh and some of the high frequency quant traders trying to uh just make a quick buck today, tomorrow, uh and and compound it that way. We just think that's a really difficult game to play. Uh and and it's a space that's got more and more competition. we'd rather continue to look further out uh and have things that we can play out over a half decade time period. This chart shows momentum um as a factor has outperformed all the other factors on this table or this chart rather quality growth equal weight uh value uh in particular. This is an interesting recent development over the last three years. Uh I I mean look I'm looking at this chart and I'm thinking well maybe there's a paradigm shift. Maybe I should be chasing momentum for the foreseeable future. That's my first thought. Maybe evaluate whether or not I'm right or wrong. Well, these factors uh these are factors that tend to have a decadesl long period of having a little bit of outperformance uh each of them. And so the fact that one of them is doing so much better than all the others, we would actually think that at some point there will be a a mean regression where you know these these factors that have been the big underperformers will come back towards uh being neutral and then momentum which has done so well the past few years uh will end up pulling back uh towards its historic long run outperformance which is not as much as it's done the past few years. So when we look at something like this uh we look at the the factors uh you know the what we own and how it would rate on these different factors and our stock portfolio for instance uh ranks a little bit better than average on momentum. We don't want to be anti- momentum but we're not trying to keep up with with this trend. Uh we're more focused on owning highquality businesses, good balance sheets. Uh and if we can get a little bit of that uh benefit from the momentum that's been helping some of these uh stocks that have really done well the past few years, that's great. But some of these things that have gone up by multiples in a year or two, uh history would say there's going to be a significant pullback where they come back down to to earth uh the same way that even like a a Zoom communications that everybody wanted to own in 2020 and 2021 came back down to earth uh in the years following. Well, a lot of this has to do with the next slide, which is the AI trend is a primary way to play momentum right now. And I think AI is not only a momentum play, it's also a theme. Some would even argue it's um a quality sector if you take a look at some of the biggest Mac 7 stocks having gone up the most, the ones that are heavily invested in AI. So I'll let you evaluate whether or not um this is actually uh a worthwhile investment sector to look at for you. It's so AI is a trend that's got a lot of promising attributes to it. Uh it's getting used more and more by people around the world. Uh it's not so different than what the internet felt like in the 1990s and the internet transformed how everyone lives. Uh but that doesn't mean that there isn't an overinvestment in building out uh data centers like the capex buildout is really hitting numbers that are staggering. Uh just for instance, Meta which is one of the four big players that is spending more and more amounts in capex to try and uh you know keep up with this trend. Their free cash flow is going to cut in half from 2024 to 2026. They're going from 54 billion in free cash flow last year to projected 27 billion for next year. And the interesting thing to us is their free cash flow cut in half from 2021 to 2022 and their share price dropped by 75% when that happened. This time the stock price is just going higher because everyone wants to play the theme. But if there's any sort of holes in this theme, uh the free cash flow for these companies is drifting down. uh it makes it a difficult environment for valuation to act as a backs stop. Uh so you know right now the companies are getting the benefit of the doubt but uh it could be the companies that decide to get more efficient and not spend so much. It could be the market that decides you're spending too much and we're not seeing the return we would expect by now for all this spending. There could be a number of ways that this plays out poorly. uh even if AI is going to transform how everybody lives over the next 20 years, that doesn't necessarily mean that the amount of spending happening right now is prudent. When is AI stocks or when are AI stocks going to become the next Microsoft uh per your definition and I'm using that as an analogy because I know Oxbow Advisors has invested in Microsoft and it's one of your holdings. Sure. Uh Nvidia is the biggest company in the world and they're probably the biggest AI beneficiary. Uh, so it we'll see. I I think there's probably a way to view like Amazon would probably be the best example of that internet trend of of somebody that came on that was a business that started in the '9s. Uh, and there were still debates about it almost 20 years later. Um, and there were still great opportunities to buy after significant draw downs uh well into the 2010s. So that's the thing I think people that are have a fear of missing out on this AI trend over the next 10 years they're going to be significant swings up and down and there will be opportunities uh to invest. If you just think about the uh smartphone cycle which was probably one of the last big tech cycles that we had that started in 2007 with Apple introducing the iPhone. There was real debate uh in the early 2010s about Apple and you know were they going to still be able to grow. You could have bought that at a really cheap free cash flow yield in 2012. You could have bought it in 2018 uh and done extremely well. Alphabet and Facebook, those are businesses that uh had real debates on how they were going to be able to shift from desktop to mobile uh in the early to mid2010s and they managed to do it and it was a great investing opportunity. So right now when everybody's thinking about the positives may not be the best time to try and jump in uh but there will be opportunities in the future. You just need to see a pullback in this spending uh and and see how far some of these share prices are going to fall and then decide how you want to move in. Well, like you mentioned here, we're pointed out here in this slide here. Uh industrial AI valuation has no president. This is a brand new industry and we should approach it as a brand new industry from a valuation perspective. When something has no president, what do you do? Do you wait a few years for their to be a president that's set uh or do you or do you you know jump in on big companies that look good fundamentally who are also involved in this space? In other words, when something new and big hits and I'm sure AI is not going to be the last new thing on the planet, what do you do as an investor? We tend to not play. So like that dot in the top right of the chart there that are the the subset of industrial companies that are being considered AI plays and are being valued different from every other industrial company uh in the last 50 years. We just wouldn't touch those there there's the thing with those sorts of companies is they are suppliers. They're components players uh to the big AI companies that are building out these data centers. But the amount of money being spent on these data centers this year and maybe for a few more years, that's not going to last perpetually. There's going to be a cycle where there's a big draw down in the buildout of those data centers. And when that happens, these sorts of industrial companies, the utility companies that have been really propped up because they're considered to be these huge beneficiaries that can supply the build out of the data centers. Uh you're going to see a significant draw down in their share price. after the draw down if you want to take a look and see you know what does the future look like for those businesses from here there might be a few opportunities but the way they're currently priced uh it's all good news and it's difficult to generate a great return when that's your starting point okay this slide made me chuckle twothirds of the market value is hopes and dreams okay what do you mean by this how do you define what's hopes and dreams versus I I don't know nightmares I'm just kidding yeah so this is a a guy at Bloomberg who's kept this chart for a long time and He breaks uh the stock market valuation to three components. So first the the bottom section is book value. Uh the middle section is the expected earnings for the next three years uh for these companies. And then the last piece which uh ranges usually between half of the market valuation to right now being 2/3 uh is what he calls the hopes and dreams section. And that's the the future opportunity for stocks uh for these companies beyond 3 years out where it gets harder to predict uh what the future earnings will be. And that kind of just factors in the amount of sentiment in the market. Uh so when you've got the hopes and dreams component of this uh valuation metrics at half or less tends to mean that people are pretty pessimistic about the future. That's a pretty good time to start looking to add. Right now, it's 2/3 of the market valuation, which really has only been touched at the height of the.com bubble. And in 2021, uh, right when you peaked before you had that shadow recession you were talking about in 2022, we're right back at that point again. So, that just tells us to be very mindful of the valuations we're paying. Don't get caught in anything where people have sentiment too high. Yeah, I I I wonder if this yellow portion is a good leading indicator, but it looks like a coincident indicator with what stocks have actually done. Um anyway, uh let's move on now to uh another slide that's interesting. Um you have here 23 companies out of um um the S&P 500 represent 50% of the valuations here. So again, this goes back to what we're talking about concentration risk. No surprise some of the biggest tech stocks are on this list except um Walmart and Costco, Exon Mobile. That's actually the that's the list from 2000. It's the right side. Oh, never mind. Okay, Sarah. Yeah, you're right. 2000 2025. I was like, what? I I didn't I didn't realize those are still big. Okay. Yeah, this is this is definitely a change list. All right. So, your first reaction to the fact that it's not only just concentrated um amongst um uh the tech sector, it's also concentrated in those hopes and dreams section that we're talking about here. Yeah, I think it's it's meant to just point out the feature that you're getting if you're investing in one of these big indexes right now, whether it's the S&P 500 uh or the NASDAQ 100, is you're getting an index right now that's 40 to 50% weighted uh in the top 10 companies. And those are companies that are all, like you talked about, it's a theme, all very much on this AI theme. Uh, and if you're a big believer in it, you want 40 to 50% of your portfolio in those names, uh, and you want the majority of the outcome for your portfolio to come from whether that theme plays out the way you hope or not, then, yep, stays the way you want. But the S&P 500 is not as diversified as it used to be. Uh another way to look at this is the three defensive sectors that have always been present. The health care, consumer staples, and utility sectors used to be nearly 25% of the index uh a few years ago. Now it's more like 15%. Uh the earnings contribution of those three defensive sectors has not changed that much, but everyone's pushed into tech and away from the defensive sectors. And so you have less uh holding up. if the trade if that theme ends up not playing out how everyone hopes, we would just rather be more balanced across all the sectors, all the different types of businesses that are out there that are high quality. Uh so that, you know, if the theme ends up not being as great as everyone is hoping and anticipating, uh we still think we'll be able to perform all right and not get stuck in a significant draw down if if AI doesn't turn out as good as everyone anticipates. Okay. Now, flipping over to commodities. I want to ask you about uh oil first. So, um I believe you um anyway, here here's a chart of oil and um I'll let you comment on this chart first and foremost before we get uh your outlook. What has been going on since the start of August? Why has oil been sliding? I think last time we talked you had increased your oil or energy allocation from 10 to 15% of your portfolio. Am I correct? Yeah. Yeah. It's still uh in our high income portfolio, it's still about uh 15% of of the allocation. So, um Yeah. Go ahead. Yeah. No, I mean oil's just been trading in this range right now between you know say 55 and 80 uh for some time. Uh it could be the fluctuations could be somewhat due to geopolitical uh risk. you know, if there's possibility of a truce between Ukraine and Russia, then that sort of overhang that might inflate the oil price is now the price coming back down. That could be a cause. Uh it could be anticipation that there's a little bit slower growth uh globally. Um so that that could also be a reason. But when we're looking at this, we actually think the the volatility of oil um is not as vast as it was uh you know, a couple decades ago. And so as long as you're kind of staying in this range here, uh the the businesses that we're investing in uh are solidly profitable, generate great cash flow, a lot of them pay out good dividends. Uh it's not a super bullish scenario when when oil is trading between $60 and $70 a barrel. Uh but it's not a worst case either. So we're okay having this allocation here and it's something that uh we're thinking about for the next 5 or 10 years. uh if it's something that you know is still going to be a key part of our economy, a key need especially as emerging markets use more and more oil uh as the per capita GDP grows. Um and and we're going to want to make sure that we always have some exposure to this space uh in a little bit of a higher inflation environment than we had in the 2010s. How fairly valued are oil companies? A little bit below fair value. Uh it's it's a more volatile sector. So, we would want to see uh a little bit more of a dip in the share prices before we would add even further if we wanted to get more aggressive. Uh but when we look at what we own right now, probably trading about 5 or 10% below our fair value estimates. Um and you know, but good cash flow yields, good dividend yields. Uh we think it's a good diversifier within our portfolios to have. Okay. I know that um Oxbow Advisors has liked gold in the past. Do you still like gold as a commodity? Um at $3,300 an ounce and it's been trading at this range or in this range rather for the better half of um 2025 ever since basically April. Yes, we we do still like gold. We like silver. Uh we've got allocations to both. Uh and some exposure to commodities or companies that work uh in with both metals. And it's something that we've retained. We really haven't messed with the positions too much. We're not trying to um get too cute with it and say, "Oh, let's let's take some off the table and then we'll know exactly when to add it back on." Uh we just we think this is a good space to be uh for years to come uh as we continue to see more money printing uh especially as you're seeing money supply growth start to accelerate again uh in various developed economies. Uh gold's a good spot to be in. a good place to, you know, be able to see some growth over the long term. Uh it's always going to kind of move on its own cycle, but we like what we have. Just on the money creation front, yes, that's a good narrative for gold. It's a bullish narrative, but does that also mean that stocks will benefit if M2 climbs globally? Well, I think for the gold miners, uh they have such a checkered history, uh there a lot of them were mismanaged, uh going back decades. We think the management teams have gotten smarter uh at not overinvesting, not doing dumb acquisitions. Um so they're trying to rebuild their reputations. Uh and now that the gold price is staying above this 3,000 level, you've really started to see the gold mining stocks catch up uh and actually outperform the underlying gold price this year. So they're still trading at at pretty cheap valuations if the gold price can stay at around this range. So that's why we're holding uh those those positions. And what we would expect is if they're able to continue to generate profits this solidly because the gold price is staying this high, um there's going to be an opportunity for continued appreciation uh in the stocks just because the the current valuations are too cheap. Uh the free cash flow yields are really attractive. Uh and there's an opportunity for these management teams to return more to shareholders uh or just continue to to generate lots of profits. um that they gives them some optionality in the future. Yes, that's true. I wasn't just referring to the gold miners though. The the fact that global liquidity like you said may be accelerating, is that not a boon for the stock market overall like the S&P 500? Yeah, you're right. If if you see money supply accelerate and we were just talking about the rate cuts previewing with Jackson Hole, like if you have multiple rate cuts into year end in an environment that uh investors in riskier asset classes already are very bullish uh and you've got inflation approaching 3%. That's an environment that it could fuel uh more of a a short-term push higher and riskier asset classes. But we're not trying to win the next 6 months. uh we would actually view that as if the market pushes even higher from here to even higher valuations that would probably make us even more cautious uh and really be more careful with what could come further down the line uh if if you see additional monetary stimulation out there. Finally, your asset allocation in light of everything we've talked about. Uh what are you more overweight on right now in terms of assets or sectors and what are you more underweight on? So in our income strategies, uh the focus the the base is still uh short-term treasuries where we're still getting more or less about a 4% annual rate. And then in that high income strategy, uh we like the allocation to energy. We like the allocation to precious metals and some other commodity sectors. Uh we've also seen a little bit of an opportunity uh in shorter term corporate bonds that are investment grade rated just to get a little bit more yield than the short-term US Treasury. And then in uh our stock portfolio, the long-term growth strategy, uh we're split pretty much 50/50 between uh highquality businesses across 40 different industries uh that we think can grow at a faster rate than uh the economic growth rate at 5% nominal GDP growth that we're seeing right now. We think we've got a collection of businesses that grow faster than that, but their share prices are less volatile than the market. So from our perspective, uh we're trying to find something that we can participate uh in the majority of the upside if markets keep going higher, but we know uh we've got a portfolio that is really going to protect better on the downside. Uh if you have a repeat of like what happened in April there for a couple weeks where you had a a quick bare market, uh we want to make sure that more than anything, we're covered in that scenario. Uh and then in the meantime, the other half of the stock portfolio is is short-term treasuries, getting uh those free points uh as long as rates stay around 4%. Awesome. Thank you very much, Chance. We appreciate your time as always. Thank you for your update. Where can we go to learn more about you and your work? Yeah, if you'd like to learn more about us, you can go to our website at oxbowadvisors.com or we have a YouTube channel uh at Oxbow Advisors. We'll put the links down below. Make sure to follow Oxbow Advisors there. Thank you again, Chance. Enjoy the rest of your remaining well, the the rest of your summer that's remaining. Um I know it's getting a little bit chilly where I live. I don't know about Texas. Not here. Okay. All right. Have a good one. We'll see you next time and thank you for watching. Don't forget to like and subscribe.
Jackson Hole Preview: Will Fed Tank Markets This Week? | Chance Finucane
Summary
Transcript
I'm not sure where that narrative came from. That's so unlikely. Uh that's just not the way that the Fed operates. I don't know who was trying to get that going. Uh but when you saw you mentioned that that low payrolls number uh the start of August, it seemed like that narrative went away. So it could be that everyone's pricing in 50 basis points and if it doesn't happen, then there could be a short-term sell-off. Markets are sliding this week following the uh Trump and Putin and Zalinsky meetings and also following a disappointing uh jobs number uh showing 73,000 jobs created versus 100,000 expected last week. Tech stocks are leading the charge downward with Nvidia and AMD down sharply. Hot PPI inflation data is also raising questions about whether or not uh September rate cuts ahead of this week's Jackson Hole Symposium are on the table still. So, we'll talk about all those things and much more with our next guest, Chance Venukin, CIO of Oxbow Advisors. Good to have you back, Chance. Always good to see you. Hey, David. Thanks a lot for having me back on the show. Let's just start by talking about this week's market action first before we get into Jackson Hole. So, like I mentioned in the introduction, the uh stocks have been sliding a little bit. The S&P is down more than 1% since Monday at one point. It's briefly recovered today on Wednesday afternoon. Are markets disappointed that there wasn't a concrete deal with Ukraine met uh between Putin and Trump over the weekend or do you think things are sliding and cooling off in anticipation of what may happen at the Jackson Hole Symposium which will start on the 21st of August tomorrow? What we're seeing is the top 10% of performers, so the highest momentum names so far in 2025 is what's been pulling back the most in August. Uh and you're especially seeing that in the last several days. So even uh yesterday on on Tuesday uh you had uh more than 70% of the names in the index were up but the overall indices were down just because some of those big winners uh have seen pretty significant pullbacks on a short-term basis. Uh we don't know if that would continue if that's just some profit taking. Uh but uh it's going towards our thesis where we think it's better to be more diversified uh and just try to spread out uh where you're invested across more sectors, more areas rather than being so focused on what's just been winning uh so far this year. This slide in the tech stocks that you're talking about, the the leaders of the index, is this a seasonal trend or is this specific to let's say the companies or is this a valuations getting too high and people are taking profit story? What's the narrative here? Is there one? Probably I I haven't heard any specific narrative like new news in the last several days that would would cause this. It probably seems more like profit taking. Uh we wouldn't say that people are giving up on the story with AI and uh this momentum driver that's been going for the last couple of years. Uh and it's not just the tech names. There's names in the industrial sector and the utility sector that have been huge outperformers. uh if investors think they're going to be big beneficiaries of the trend in towards artificial intelligence building out. Um you know, it's something that we have a little bit of exposure to. We we're buying companies that we like for overall reasons and we think we're not overpaying for. Uh but we don't want our whole portfolio being driven by that because it's way too early to tell how all that's going to play out, who are going to be the winners and losers. Uh, and it's just it's very interesting space to follow right now that there's so much money being spent on capex to build out things like data centers that you're going to need to generate hundreds of billions of dollars in new revenue to make the math work and uh it's going to be a tall order for some of these companies to do. Well, the S&P's been breaking new highs in August. You've said in my show previously that I think if the uh stock markets retract or retrace rather to a much lower levels I think towards 5500 points on the S&P you'd be interested in getting back in. Is that still your downside target chance? Yeah, it wouldn't surprise us if there was a 25 or 30% drop in the S&P 500. We're not calling for that imminently. It's just the way that markets tend to move uh in the valuation ranges that you see. If you're trading above 22 times forward earnings in the S&P 500 today, uh there could be any sort of news that could occur to push that back towards 16 to 18 times and then you've got a better entry point to buy positions and names that you might have been following for a long time but didn't want to buy at these high prices that you're seeing today. We'll come back to um your investment uh thesis asset allocation just a minute, but I want to talk about Jackson Hole and preview that for the audience because that is happening this week. Now, we had a disappointing jobs number like I mentioned uh earlier. It came out last week. 73,000 jobs versus 100,000 expected. Combine that with higher uh PPI inflation data. Uh unemployment now ticking up to 4.2%. It looks like the economy is getting strained, at least on the surface. So, set the stage up for uh what the Fed um and other central banks may be discussing this week. It's an interesting time because you've got a couple of different things happening. So, first you've got inflation uh still well above 2%. It's closer to 3% right now on all the different inflation metrics that the Fed tracks. Uh and it seems like it's going to continue to accelerate a bit higher through the rest of the year. Now, historically, there's only a handful of times that the Fed has cut rates when inflation is near this 3% level. So, it's it's difficult to say that they would cut. Uh on the flip side, you've got right now the market's pricing in an 85% likelihood that you're going to see a rate cut in September. Uh and usually the Fed doesn't want to disappoint the market. They want to be seen as being pretty stable, pretty consistent with what's anticipated. Uh don't shock the system. So we would guess that there's going to be a cut in September. Maybe the thing that we question is uh a lot of investors are assuming additional cuts in October and December. But if inflation's accelerating back towards 3% over the next several months, uh unless you see a real drop off in employment and the labor situation in the United States, we would expect that the cut in September may be the only one this year and then rates sort of settle out on the short end uh for the remainder of 2025. What does that mean for equities if uh rates will not change significantly in either direction? We would think so there's two levels to this. one is, you know, if there's only one rate cut and then Pal says we're done or we're data dependent and if inflation trickles higher, then we're not going to cut any further after that. You could imagine there would be some disappointment uh for stock investors on that news that are anticipating more rate cuts than what may be on the near-term horizon. However, a lot of this is uh investors looking ahead to who is going to be the next Fed chairman and that assumption going into next year that it'll be someone uh who will want to be more dovish, cut rates further in line with what the uh what President Trump would like to see happen with the Fed funds rate. And so it may be that you know there if there's only one cut for the remainder of this year, it doesn't make that much difference cuz everyone's looking out 6 to 12 months anticipating that the next Fed chair is going to cut rates further. Anyway, before we continue with the video, let me tell you about a very serious threat that you're facing every day that you may not even be aware of. Most people have no idea how much of their personal information is floating around on the internet. Your address, phone number, and email can be found and sold by data brokers without you even knowing. That's why I use today's sponsor, Delete Me. It scans data broker sites for your personal information and removes it. And it doesn't stop there. It keeps checking and clearing new listings throughout the year. Once you sign up, you'll get a privacy report within a week showing you exactly where your data was found and what's been taken down. It's a straightforward way to protect your privacy without having to chase every site yourself. Go to jointdeiteme.com/david and use promo code David Lynn at checkout or scan the QR code on screen right here to get 20% off all US plans. Take control of your personal data before somebody else does. you as an investor chance if let's say the Fed cuts twice or even three times this year hypothetically speaking would that actually be a bearish signal to you? Would you be worried as a fund manager? Uh because that may signal to you that the economy is weaker than what they anticipated, therefore they need to cut more. I don't think we'd assume that it means it's weaker. Uh we're all seeing very similar data points and so the labor environment is slowing but it's sort of an environment where there's not a lot of firing and not a lot of hiring. So you're not seeing uh any sort of catalyst that's really pushing the unemployment rate higher. And even though those payrolls numbers are getting weaker, uh population growth is slowing just because of the changes in immigration patterns. So you don't need quite as much in monthly payrolls growth to keep the unemployment rate steady. So it's nothing to really force the Fed's hand that they've really got to cut rates significantly. uh we would actually look at a rate cut as something that's going to drive the inflation rate higher and could lead to higher long-term Treasury yields. And this is something that we don't know if they're paying that much attention to, but you've got three different countries in the last two years that have cut rates and then seen their 10-year government yield move significantly higher. It's happened in Germany and the United Kingdom in the last 12 to 18 months. And then it also happened here in the US when they cut last year and you saw the 10-year Treasury yield move up by 100 basis points. So that could be the sort of thing that if you saw uh cuts on the the short end of the uh the Fed curve, but then the 10-year Treasury yield rises back towards 5% that could be something that gives equity investors pause and you could see a draw down in stocks. Okay. And one more thing here, just going back to Jackson Hole. This is an article um about uh what could happen this week. Fed chair pal's Jackson Hole speech could jolt markets. Everorn warns a 15% drop. Analysts at Evercore ISI warns that market participants might not love what he has to say. This is just their interpretation. POW is likely to indirectly signal a 25 basis point cut for a market that was eager to embrace 50 in September. Uh that would imply a half percentage point next month. the balance view would catalyze a near-term negative 7 to15% pullback into October. A lot of assumptions made in that statement. I'll just get your reaction. There was that narrative for a short time about, oh, what if it's a jumbo cut? What if they cut by 50 basis points in September? I'm not sure where that narrative came from. That's so unlikely. Uh that's just not the way that the Fed operates. I don't know who was trying to get that going. Uh but when you saw you mentioned that that low payrolls number uh at the start of August, it seemed like that narrative went away. So it could be that everyone's pricing in 50 basis points and if it doesn't happen then there could be a short-term sell-off. But from what we see since April with how quickly markets have rallied and you're seeing this speculative fervor across a lot of riskier asset classes right now, it I think investors will continue to find a way to spin this as a positive uh to try and sort of keep valuations heightened for as long as possible until there really is a breaking point. Whether it's inflation rate moving significantly higher, 10ear US Treasury yield moving significantly higher, could be any number of things. Um but valuations seem pretty full and it seems like investors are trying to find a way to to stay positive, stay optimistic. Speaking of um buying opportunities, every time uh Trump has announced a tariff since inauguration, stocks have dipped and then as you know has since recovered to new all-time highs. So now there's this narrative that every time he does announce new tariffs or some sort of escalation in the trade war that may present a buying on the dip opportunity because history has shown us that it just it's just going to recover. Those are short-term short-lived news events. How would you interpret that narrative? It's worked for investors so far to just buy the dip and it seems like it's training people on every sort of uh pullback like oh this is just going to be shortterm. Uh if you look at the very long-term history of markets, uh you go through these, you know, 15 or 20 year cycles where buying the dip works, whether that's from 1982 to 2000 or from 2009 until now. Uh but you've also got uh 10 plus year long periods like, you know, late 1960s to 1982 or from 2000 to 2013, uh where it wasn't in your best interest to be buying every dip. Uh and so at some point, buy the dip will stop working. Uh but you know, it's impossible to say when that's going to happen. We're just trying to stay disciplined and we would recommend to anybody out there to try and stay disciplined with the prices you're willing to pay uh for what assets you want to have in your portfolios and and just beware if you're getting in anything that's starting to trade too much on on speculative narration rather than fundamentals of the businesses that you own. How could you differentiate between something trading on speculative hype like you mentioned versus something trading on good fundamentals? Because the charts show the same thing. You have to really dig under the hood. So, how do you make that differentiation? Well, first there's certain criteria we're looking for. We want companies that are generating consistent positive free cash flow. Uh, you know, there are some new companies that are going public uh to a lot of fanfare, but in a lot of cases and it's just early stage for their life cycle. They're not generating any profits and it might be a great investment, but that's not a space that we want to play in because it's just difficult to forecast where those businesses are heading. So we like companies that have proven they can generate a good return on capital uh it can grow at a consistent rate uh through an economic cycle and then you can look at the trading range the history uh for those businesses and know that you you know when it's trading at a price that you think uh this is a fair valuation to pay uh rather than trying to buy something that normally trades at 20 times earnings but you decide to buy it at 40 times earnings because you like the story right now. That's where you can get yourself into trouble. Okay. And now turning to one of your slides from a recent Oxbow Advisor presentation. This goes back to your point about buying the dip. Investors being trained to buy the dip. Well, we're just 55 trading days back to the highest. This is, I believe, um, the fastest return to a new high following a 15% drop draw down in history according to your research. Watch the research, but you've published it. Anyway, um, I'll let you comment on what this means. I think this is just a it's a microcosm of how markets have trained investors over the last decade and a half. Uh that these draw downs are happening faster and faster. Um but everyone is so ready to buy in and think that everything's all okay. And somewhere in here there will be a draw down that catches people and you know might bounce back for a little bit for a short period but then it goes down to a lower low. Uh and this is the sort of thing that we saw from 2000 to 2003. we saw from 2007 to 2009. Um we're not trying to forecast when another, you know, 30% or greater drop in the market could be, but these things happen uh once or twice a decade. And it's important to keep that in mind rather than just thinking we're going to go fully into stocks and if they they drop a little bit, we're going to buy more. Uh and there's no possible way that we can be hurt by that. And I'm just Yeah, keep going. No, just the fact that people are buying back in and just thinking that, oh, we're we're going to be okay. This is just purely thinking from a positive standpoint rather than worrying about the risk side of the equation. Uh we think people are getting too skewed towards the reward rather than thinking about what happens if it doesn't play out the way that you hope. I have noticed a bit of a relationship between the number of days to recover to new highs versus the severity of the fundamental economic condition that you know preceded this drop. So for example 2002 was the dotcom bubble burst uh well 2001 rather and then recovered in 2002. 2009 was following the 2008 great financial crisis. Uh co was 2020 that was 103 days. Um, and then 2022 was kind of a shadow recession. We had two negative quarters of GDP, but the, as you remember, it was never officially declared a recession. And then now 55. One could argue nothing seriously bad happened to the economy this year compared to the prior draw down periods. I know that's just my observation. What do you think? Yeah, this example was it was a bit more uh you know it was a policy attempt um by the new administration with tariffs uh that I think when the the height of uncertainty people weren't sure what was going to happen. Uh but one thing to consider is that the businesses that have been reporting uh earnings the past couple of quarters as these tariffs have been announced and adjusted, everyone says they're going to start putting through their plans for how they're running their businesses after these tariffs are finalized, which has really started to come through since August 1st. So, it's over the next few months that you're going to see uh of that $350 billion or so that's going to be paid to the US government per year going forward. How much of that is going to fall on the foreign exporter? How much of that is going to fall on the US company that's importing those goods? And then how much is going to be passed on to the consumer? Uh there's going to be some portion of it that consumers are going to have to pay for which we'll keep the inflation rate elevated and we'll see what it does for consumer spending. Uh but that's all activity that we're going to see over the next several months. uh that you know we're it's another reason to just be mindful uh of current valuations and it's all positive from the standpoint of everybody in the market right now but it's difficult to say how this is going to play out so we want to make sure we stay balanced okay the next two slides are interesting here you're showing that institutional managers are all in again uh average cash level percentage uh down to 3.9% and uh the next slide shows that retail investors never stopped buying. Um why the difference first of all between Main Street and Wall Street in terms of buying behavior and what can we what conclusions can we draw about the differences here? Sure. So the institutional investor one we're paying attention to that last 15 18 years uh where you know the when cash levels were high those tended to be pretty good buy spots uh in the market whether it was 2008 2020 2022 uh whereas now cash levels are low. So institutional investors feel like they have to uh move all in to try and keep up with what's happening with stocks. that's usually uh you know a riskier sign that future returns may be lower than what everyone's already gotten from their their stock appreciation the past handful of years. And then on the retail side uh that's more an acknowledgement of since 2020 uh when the pandemic hit and stock trading and options trading became free on all these brokerage platforms. Uh you've just seen this huge spike in retail activity and people wanting to try and make a fortune really fast. And what's changed with how markets trade today is retail traders and highfrequency quant traders are now about 60% of the trading activity in the market. What's important Yeah. What's important about that is that these are two uh types of investors or short-term traders that really try to play positive momentum. What's working right now? How do I ride that momentum further and further higher and higher? And we're seeing that with how much the momentum factor tends to outperform when times look good. But when things break, these are two of the biggest players in the market now that sell when the momentum breaks on their their readings. And that's where you can get a really fast drop in the market like we saw in April. So, we're noticing more volatility uh going both directions. And that's something that I think we're we're trying to be mindful of uh you know with how fast things can change uh if all of a sudden these key players uh decide to allocate differently. I think um institutional investors overtook retail investors in terms of dominance in the stock market sometime in the early 80s. I'm not if I'm not mistaken. Um I I don't know if your recent research is showing that maybe the pendulum is swinging. who ultimately has more impact on market performance now in 2025. We'd say it's the if majority of the trading and I think it's got to do more with the short-term trading. So there might be more institutional investors that are more longerterm traders. Um I just if you just look at uh how we invest, I mean we probably put through one or two trades per week. Uh when we uh buy something, we want to hold it on average for 3 to 5 years. We're not dealing with zero day to expiration options, which is now more than half of the options traded uh on the S&P 500 are options that go they're going to expire on the same day. And a lot of that is those retail traders uh and some of the high frequency quant traders trying to uh just make a quick buck today, tomorrow, uh and and compound it that way. We just think that's a really difficult game to play. Uh and and it's a space that's got more and more competition. we'd rather continue to look further out uh and have things that we can play out over a half decade time period. This chart shows momentum um as a factor has outperformed all the other factors on this table or this chart rather quality growth equal weight uh value uh in particular. This is an interesting recent development over the last three years. Uh I I mean look I'm looking at this chart and I'm thinking well maybe there's a paradigm shift. Maybe I should be chasing momentum for the foreseeable future. That's my first thought. Maybe evaluate whether or not I'm right or wrong. Well, these factors uh these are factors that tend to have a decadesl long period of having a little bit of outperformance uh each of them. And so the fact that one of them is doing so much better than all the others, we would actually think that at some point there will be a a mean regression where you know these these factors that have been the big underperformers will come back towards uh being neutral and then momentum which has done so well the past few years uh will end up pulling back uh towards its historic long run outperformance which is not as much as it's done the past few years. So when we look at something like this uh we look at the the factors uh you know the what we own and how it would rate on these different factors and our stock portfolio for instance uh ranks a little bit better than average on momentum. We don't want to be anti- momentum but we're not trying to keep up with with this trend. Uh we're more focused on owning highquality businesses, good balance sheets. Uh and if we can get a little bit of that uh benefit from the momentum that's been helping some of these uh stocks that have really done well the past few years, that's great. But some of these things that have gone up by multiples in a year or two, uh history would say there's going to be a significant pullback where they come back down to to earth uh the same way that even like a a Zoom communications that everybody wanted to own in 2020 and 2021 came back down to earth uh in the years following. Well, a lot of this has to do with the next slide, which is the AI trend is a primary way to play momentum right now. And I think AI is not only a momentum play, it's also a theme. Some would even argue it's um a quality sector if you take a look at some of the biggest Mac 7 stocks having gone up the most, the ones that are heavily invested in AI. So I'll let you evaluate whether or not um this is actually uh a worthwhile investment sector to look at for you. It's so AI is a trend that's got a lot of promising attributes to it. Uh it's getting used more and more by people around the world. Uh it's not so different than what the internet felt like in the 1990s and the internet transformed how everyone lives. Uh but that doesn't mean that there isn't an overinvestment in building out uh data centers like the capex buildout is really hitting numbers that are staggering. Uh just for instance, Meta which is one of the four big players that is spending more and more amounts in capex to try and uh you know keep up with this trend. Their free cash flow is going to cut in half from 2024 to 2026. They're going from 54 billion in free cash flow last year to projected 27 billion for next year. And the interesting thing to us is their free cash flow cut in half from 2021 to 2022 and their share price dropped by 75% when that happened. This time the stock price is just going higher because everyone wants to play the theme. But if there's any sort of holes in this theme, uh the free cash flow for these companies is drifting down. uh it makes it a difficult environment for valuation to act as a backs stop. Uh so you know right now the companies are getting the benefit of the doubt but uh it could be the companies that decide to get more efficient and not spend so much. It could be the market that decides you're spending too much and we're not seeing the return we would expect by now for all this spending. There could be a number of ways that this plays out poorly. uh even if AI is going to transform how everybody lives over the next 20 years, that doesn't necessarily mean that the amount of spending happening right now is prudent. When is AI stocks or when are AI stocks going to become the next Microsoft uh per your definition and I'm using that as an analogy because I know Oxbow Advisors has invested in Microsoft and it's one of your holdings. Sure. Uh Nvidia is the biggest company in the world and they're probably the biggest AI beneficiary. Uh, so it we'll see. I I think there's probably a way to view like Amazon would probably be the best example of that internet trend of of somebody that came on that was a business that started in the '9s. Uh, and there were still debates about it almost 20 years later. Um, and there were still great opportunities to buy after significant draw downs uh well into the 2010s. So that's the thing I think people that are have a fear of missing out on this AI trend over the next 10 years they're going to be significant swings up and down and there will be opportunities uh to invest. If you just think about the uh smartphone cycle which was probably one of the last big tech cycles that we had that started in 2007 with Apple introducing the iPhone. There was real debate uh in the early 2010s about Apple and you know were they going to still be able to grow. You could have bought that at a really cheap free cash flow yield in 2012. You could have bought it in 2018 uh and done extremely well. Alphabet and Facebook, those are businesses that uh had real debates on how they were going to be able to shift from desktop to mobile uh in the early to mid2010s and they managed to do it and it was a great investing opportunity. So right now when everybody's thinking about the positives may not be the best time to try and jump in uh but there will be opportunities in the future. You just need to see a pullback in this spending uh and and see how far some of these share prices are going to fall and then decide how you want to move in. Well, like you mentioned here, we're pointed out here in this slide here. Uh industrial AI valuation has no president. This is a brand new industry and we should approach it as a brand new industry from a valuation perspective. When something has no president, what do you do? Do you wait a few years for their to be a president that's set uh or do you or do you you know jump in on big companies that look good fundamentally who are also involved in this space? In other words, when something new and big hits and I'm sure AI is not going to be the last new thing on the planet, what do you do as an investor? We tend to not play. So like that dot in the top right of the chart there that are the the subset of industrial companies that are being considered AI plays and are being valued different from every other industrial company uh in the last 50 years. We just wouldn't touch those there there's the thing with those sorts of companies is they are suppliers. They're components players uh to the big AI companies that are building out these data centers. But the amount of money being spent on these data centers this year and maybe for a few more years, that's not going to last perpetually. There's going to be a cycle where there's a big draw down in the buildout of those data centers. And when that happens, these sorts of industrial companies, the utility companies that have been really propped up because they're considered to be these huge beneficiaries that can supply the build out of the data centers. Uh you're going to see a significant draw down in their share price. after the draw down if you want to take a look and see you know what does the future look like for those businesses from here there might be a few opportunities but the way they're currently priced uh it's all good news and it's difficult to generate a great return when that's your starting point okay this slide made me chuckle twothirds of the market value is hopes and dreams okay what do you mean by this how do you define what's hopes and dreams versus I I don't know nightmares I'm just kidding yeah so this is a a guy at Bloomberg who's kept this chart for a long time and He breaks uh the stock market valuation to three components. So first the the bottom section is book value. Uh the middle section is the expected earnings for the next three years uh for these companies. And then the last piece which uh ranges usually between half of the market valuation to right now being 2/3 uh is what he calls the hopes and dreams section. And that's the the future opportunity for stocks uh for these companies beyond 3 years out where it gets harder to predict uh what the future earnings will be. And that kind of just factors in the amount of sentiment in the market. Uh so when you've got the hopes and dreams component of this uh valuation metrics at half or less tends to mean that people are pretty pessimistic about the future. That's a pretty good time to start looking to add. Right now, it's 2/3 of the market valuation, which really has only been touched at the height of the.com bubble. And in 2021, uh, right when you peaked before you had that shadow recession you were talking about in 2022, we're right back at that point again. So, that just tells us to be very mindful of the valuations we're paying. Don't get caught in anything where people have sentiment too high. Yeah, I I I wonder if this yellow portion is a good leading indicator, but it looks like a coincident indicator with what stocks have actually done. Um anyway, uh let's move on now to uh another slide that's interesting. Um you have here 23 companies out of um um the S&P 500 represent 50% of the valuations here. So again, this goes back to what we're talking about concentration risk. No surprise some of the biggest tech stocks are on this list except um Walmart and Costco, Exon Mobile. That's actually the that's the list from 2000. It's the right side. Oh, never mind. Okay, Sarah. Yeah, you're right. 2000 2025. I was like, what? I I didn't I didn't realize those are still big. Okay. Yeah, this is this is definitely a change list. All right. So, your first reaction to the fact that it's not only just concentrated um amongst um uh the tech sector, it's also concentrated in those hopes and dreams section that we're talking about here. Yeah, I think it's it's meant to just point out the feature that you're getting if you're investing in one of these big indexes right now, whether it's the S&P 500 uh or the NASDAQ 100, is you're getting an index right now that's 40 to 50% weighted uh in the top 10 companies. And those are companies that are all, like you talked about, it's a theme, all very much on this AI theme. Uh, and if you're a big believer in it, you want 40 to 50% of your portfolio in those names, uh, and you want the majority of the outcome for your portfolio to come from whether that theme plays out the way you hope or not, then, yep, stays the way you want. But the S&P 500 is not as diversified as it used to be. Uh another way to look at this is the three defensive sectors that have always been present. The health care, consumer staples, and utility sectors used to be nearly 25% of the index uh a few years ago. Now it's more like 15%. Uh the earnings contribution of those three defensive sectors has not changed that much, but everyone's pushed into tech and away from the defensive sectors. And so you have less uh holding up. if the trade if that theme ends up not playing out how everyone hopes, we would just rather be more balanced across all the sectors, all the different types of businesses that are out there that are high quality. Uh so that, you know, if the theme ends up not being as great as everyone is hoping and anticipating, uh we still think we'll be able to perform all right and not get stuck in a significant draw down if if AI doesn't turn out as good as everyone anticipates. Okay. Now, flipping over to commodities. I want to ask you about uh oil first. So, um I believe you um anyway, here here's a chart of oil and um I'll let you comment on this chart first and foremost before we get uh your outlook. What has been going on since the start of August? Why has oil been sliding? I think last time we talked you had increased your oil or energy allocation from 10 to 15% of your portfolio. Am I correct? Yeah. Yeah. It's still uh in our high income portfolio, it's still about uh 15% of of the allocation. So, um Yeah. Go ahead. Yeah. No, I mean oil's just been trading in this range right now between you know say 55 and 80 uh for some time. Uh it could be the fluctuations could be somewhat due to geopolitical uh risk. you know, if there's possibility of a truce between Ukraine and Russia, then that sort of overhang that might inflate the oil price is now the price coming back down. That could be a cause. Uh it could be anticipation that there's a little bit slower growth uh globally. Um so that that could also be a reason. But when we're looking at this, we actually think the the volatility of oil um is not as vast as it was uh you know, a couple decades ago. And so as long as you're kind of staying in this range here, uh the the businesses that we're investing in uh are solidly profitable, generate great cash flow, a lot of them pay out good dividends. Uh it's not a super bullish scenario when when oil is trading between $60 and $70 a barrel. Uh but it's not a worst case either. So we're okay having this allocation here and it's something that uh we're thinking about for the next 5 or 10 years. uh if it's something that you know is still going to be a key part of our economy, a key need especially as emerging markets use more and more oil uh as the per capita GDP grows. Um and and we're going to want to make sure that we always have some exposure to this space uh in a little bit of a higher inflation environment than we had in the 2010s. How fairly valued are oil companies? A little bit below fair value. Uh it's it's a more volatile sector. So, we would want to see uh a little bit more of a dip in the share prices before we would add even further if we wanted to get more aggressive. Uh but when we look at what we own right now, probably trading about 5 or 10% below our fair value estimates. Um and you know, but good cash flow yields, good dividend yields. Uh we think it's a good diversifier within our portfolios to have. Okay. I know that um Oxbow Advisors has liked gold in the past. Do you still like gold as a commodity? Um at $3,300 an ounce and it's been trading at this range or in this range rather for the better half of um 2025 ever since basically April. Yes, we we do still like gold. We like silver. Uh we've got allocations to both. Uh and some exposure to commodities or companies that work uh in with both metals. And it's something that we've retained. We really haven't messed with the positions too much. We're not trying to um get too cute with it and say, "Oh, let's let's take some off the table and then we'll know exactly when to add it back on." Uh we just we think this is a good space to be uh for years to come uh as we continue to see more money printing uh especially as you're seeing money supply growth start to accelerate again uh in various developed economies. Uh gold's a good spot to be in. a good place to, you know, be able to see some growth over the long term. Uh it's always going to kind of move on its own cycle, but we like what we have. Just on the money creation front, yes, that's a good narrative for gold. It's a bullish narrative, but does that also mean that stocks will benefit if M2 climbs globally? Well, I think for the gold miners, uh they have such a checkered history, uh there a lot of them were mismanaged, uh going back decades. We think the management teams have gotten smarter uh at not overinvesting, not doing dumb acquisitions. Um so they're trying to rebuild their reputations. Uh and now that the gold price is staying above this 3,000 level, you've really started to see the gold mining stocks catch up uh and actually outperform the underlying gold price this year. So they're still trading at at pretty cheap valuations if the gold price can stay at around this range. So that's why we're holding uh those those positions. And what we would expect is if they're able to continue to generate profits this solidly because the gold price is staying this high, um there's going to be an opportunity for continued appreciation uh in the stocks just because the the current valuations are too cheap. Uh the free cash flow yields are really attractive. Uh and there's an opportunity for these management teams to return more to shareholders uh or just continue to to generate lots of profits. um that they gives them some optionality in the future. Yes, that's true. I wasn't just referring to the gold miners though. The the fact that global liquidity like you said may be accelerating, is that not a boon for the stock market overall like the S&P 500? Yeah, you're right. If if you see money supply accelerate and we were just talking about the rate cuts previewing with Jackson Hole, like if you have multiple rate cuts into year end in an environment that uh investors in riskier asset classes already are very bullish uh and you've got inflation approaching 3%. That's an environment that it could fuel uh more of a a short-term push higher and riskier asset classes. But we're not trying to win the next 6 months. uh we would actually view that as if the market pushes even higher from here to even higher valuations that would probably make us even more cautious uh and really be more careful with what could come further down the line uh if if you see additional monetary stimulation out there. Finally, your asset allocation in light of everything we've talked about. Uh what are you more overweight on right now in terms of assets or sectors and what are you more underweight on? So in our income strategies, uh the focus the the base is still uh short-term treasuries where we're still getting more or less about a 4% annual rate. And then in that high income strategy, uh we like the allocation to energy. We like the allocation to precious metals and some other commodity sectors. Uh we've also seen a little bit of an opportunity uh in shorter term corporate bonds that are investment grade rated just to get a little bit more yield than the short-term US Treasury. And then in uh our stock portfolio, the long-term growth strategy, uh we're split pretty much 50/50 between uh highquality businesses across 40 different industries uh that we think can grow at a faster rate than uh the economic growth rate at 5% nominal GDP growth that we're seeing right now. We think we've got a collection of businesses that grow faster than that, but their share prices are less volatile than the market. So from our perspective, uh we're trying to find something that we can participate uh in the majority of the upside if markets keep going higher, but we know uh we've got a portfolio that is really going to protect better on the downside. Uh if you have a repeat of like what happened in April there for a couple weeks where you had a a quick bare market, uh we want to make sure that more than anything, we're covered in that scenario. Uh and then in the meantime, the other half of the stock portfolio is is short-term treasuries, getting uh those free points uh as long as rates stay around 4%. Awesome. Thank you very much, Chance. We appreciate your time as always. Thank you for your update. Where can we go to learn more about you and your work? Yeah, if you'd like to learn more about us, you can go to our website at oxbowadvisors.com or we have a YouTube channel uh at Oxbow Advisors. We'll put the links down below. Make sure to follow Oxbow Advisors there. Thank you again, Chance. Enjoy the rest of your remaining well, the the rest of your summer that's remaining. Um I know it's getting a little bit chilly where I live. I don't know about Texas. Not here. Okay. All right. Have a good one. We'll see you next time and thank you for watching. Don't forget to like and subscribe.