Fed Focus, Loving + Hating Earnings Season, Bond/Stock Competition

Listen below or on the go on Apple Podcasts and Spotify

Rob Isbitts and Matthew Tuttle discuss focusing on the Fed, Magnificent Seven earnings and why a little bit of bullishness may be warranted (0:25). Loving and hating earnings season (8:30) and bonds becoming really good competition for stocks (14:00).

Transcript

Rob Isbitts: Welcome to Seeking Alpha’s Wall Street Breakfast Sunday Edition. I’m Rob Isbitts, a Seeking Alpha contributor under the profile Sungarden Investment Publishing. My friend Matthew Tuttle of Tuttle Capital Management is with me again. He’s a fellow Seeking Alpha contributor.

As we look back and look forward, tell me what’s on your mind?

Matthew Tuttle: The main things that are on my mind, there’s a ton going on, but what I’m focused on first and foremost is what’s the Fed going to do, because I think once we get through all this Middle East turmoil, assuming it doesn’t turn into a broader war, that’s going to be the main focus.

And then number 2, the Magnificent Seven earnings, because the Magnificent Seven’s like 90% of the S&P 500 returns this year. And I saw Bloomberg did an article the other day that those stocks were estimated to have earnings growth of 34%, pull those out of the market, and everything else is looking at negative earnings growth. So, I think those things are going to be very important.

I do think that the Fed is not going to raise this year. And so, once we get through all of this Middle Eastern turmoil and once we figure out why rates are spiking, I might actually be a little bit bullish at the moment.

RI: It’s amazing to me how much investing has turned into, I mean, even more than in the past, an emotion and confidence game. I remember a long time ago reading a book about investing in my early days and it said, “Well, what do people do to make decisions?”

One of the things they said is, “Look at what other traders are doing.” And I was thinking, “Well, why look at what other traders are doing? You have to make your own decisions.”

And I think more than ever, the crowd rules. And so, it almost doesn’t matter what the news or what the data shows, it’s how the market reacts to it. And that’s why – I mean, that’s why I fell in love with technical analysis. I’m sure it’s part of your story too.

But bringing it to the current market. So, look, I track a set of indicators I’ve used to filter down to buy and sell decisions for decades. I mean, they’re part of the free part of the service at ETFYourself.com. And here’s what they’re saying now. And then I’m going to get to the other side of things.

So, there’s something I call the investment climate indicator. It’s been at stormy for quite a while, most of this year, because it doesn’t just track what the Magnificent Seven is doing, it tracks overall conditions and basically, bear market rules apply. This is when wealth can be destroyed. Defensive strategies have big payoffs.

Just think about (NYSEARCA:TBF), the inverse treasury, long treasury ETF that I’ve been talking about, which has been just a monster gainer this year. But really, it’s been a stormy environment for the majority of the last three years, and then I have something called the cycle of market emojis, kind of like the cycle of market emotions.

And it’s had whatever the emoji is for denial since June 2nd of ’22. Since that time, the S&P has gone from 4,177 to 3,600, up to 4,600, and now it’s stuck in this range we keep talking about, 4,200 to 4,400. But then when you look below the surface, those are all sort of bearish tilted talking points that I just gave.

On the other hand, we know that almost everything was down last year. And you look at this year and again, apart from Mag Seven, average S&P stock is close to flat, small caps are down, micro caps are down, and a lot of individual industries and sectors are down 15% to 20% to 30%. A lot of dividend – diversified dividend ETFs are down double digits, even with the dividends accounted for.

So, there comes a point where you say, “Okay, there’s got to be some degree of cheapness out there unless the other 99% of the stock market just blows earnings this quarter, next quarter, and the quarter after. So, I see, as we see here right now, I don’t feel very bullish and I don’t have the indicators that tell me to, but you look at the next – within the next, let’s say, four to six months, maybe it’ll be time.

So, what do you think? That’s kind of my retort to you opening the door to think about being bullish.

MT: Well, yeah, and I am thinking about being bullish. I’m not bullish yet. We’ve got – so we’re doing this on Thursday. Powell just came out and made a speech. We’ve been talking on this. I don’t know exactly what he said, but I think it was basically along the lines of pausing and the market has had quite a turnaround since that speech, so they’re taking that well.

From a market standpoint, I’m not that worried about the war in the Middle East at the moment. Markets initially care about war and then just don’t. And as long as the Magnificent Seven stocks have decent enough earnings, I could see us rallying into year-end.

I do think we’re going into a recession. I think the idea of a soft landing is crazy. I think the consumer is in way worse shape than any of these numbers that we’re seeing show. I think the jobs market is way worse, but for the moment, I think people are going to be laser focused on the Fed and non-interest rates. And if the Fed does not raise rates this year and clearly signals that they’re not going to, to me, that’s bullish.

RI: You could argue that most of the stock market is in a bear cycle right now confirmed, but you look at the stuff that’s holding it up, it could be a lot worse, I think is what you’re saying. And it sounds like maybe by taking a step further, Mag Seven and the like may be able to nurse the rest of the market through a period, which ultimately leads to a bottom which they will lead. Is that what you’re saying?

MT: So, to an extent, I think, certainly, a rising tide lifts all boats. The Magnificent Seven has become such a big part of the indices that it almost doesn’t have to lift all boats.

Again, you look at the (NYSEARCA:SPY) and the (NASDAQ:QQQ)s and you think like, “Wow, this has been a great year,” but then you look at like equal weighted indices and small caps and it still looks like a bear market.

So, when I say I’m bullish, I’m saying I’m bullish for the S&P and the NASDAQ. I don’t know what all the other stocks are going to do, but if the Mag Seven comes out and has decent earnings, if the Fed is playing ball, then I certainly think we could see a rally in the S&P and the NASDAQ.

Do you want to have small caps? I don’t know that I’m willing to go there because they’re chock-full of regional banks. And I think the regional banks have issues and higher for longer is not so great for the regional banks. So – but certainly, you could see a scenario where the Mag Seven has good earnings and all the other stocks kind of come up with the buying pressure you see. So that’s certainly possible.

RI: This is what’s happening, I think, to a lot of individual parts of the market. They have these furious rallies, which I think you would agree are a little bit more of a sign that you’re in a bearish period, at least for stocks. And they have a really strong rally. Everybody gets excited and it’s kind of like, if you have $100 and it drops to $70 and then you make 15% on it, you’re up in the low 80s, okay?

Turning $100 into $80 is not a victory. You can’t just say, “Oh, we’ll make it up in volume.” It’s like losing money a little bit at a time. To me, I think that that is where psychologically investors have to understand that when you have severe declines and then you have a pop – because it’s happening, it’s not just Netflix (NFLX), it’s happening a lot, and now we’re in earnings season, so guess what preview the next few weeks, you’re going to see a lot of this probably.

Stocks are way down, they pop on earnings, okay, and then what? What do you think? Speak to the, let’s say, the strategy involved in dealing with that type of frenetic reaction around earnings time, because I personally hate earnings season.

MT: I love earnings season, but why I love earnings season is, I don’t bet on earnings. That’s a binary bet. And I talk to the best of the best hedge fund analysts. I mean, their batting average is not good. And they’ve got access that you and I and the people listening don’t have.

So, I’m not going to bet on earnings. The only time, so, I’ve been short Zion Bank (ZION) because I think the regional banks are awful. I cut my position in half before earnings and held a small position at a big profit. So, I mean, every once in a while, I’ll do something like that if I’ve got a cushion and so far so good.

What I love about earnings is, I love playing them the next day. So, stocks that are moving, that have a catalyst, are things that I love to play. So, Netflix, I tried to short, about an hour before we got on, I got stopped out, I’m watching it, I may try to short it again.

Tesla’s (TSLA) had a big move. I have not – we had a few launches today, so I have not had time to play around with Tesla, but my favorite thing is trading stocks, either long or short, based on earnings because those stocks are going to move.

RI: So yeah, I think good advice for those who want to try to sort of play the earnings season thing. I know for years as a portfolio manager, earning season was the one risk you couldn’t avoid unless you were willing to exit long-term positions before earnings.

I still remember the day, look, I made every mistake in my career multiple times, but I believe it was IBM and Intel on consecutive days, just totally blowing earnings. And I happen to own both of them in a portfolio at reasonable valuations, but it didn’t matter. They were both down double digits. And that was around the time I started saying, “I don’t just like ETFs, I love ETFs.” Because at least you get some cover, right?

MT: One caveat I would put out there, look at some of these sector ETFs and look at how much they have allocated to some stocks.

RI: Oh, they’re very concentrated, yeah.

MT: You get some cover, but sometimes you don’t get maybe as much cover as you would think.

RI: Frankly, what I love about ETFs, I should say the reason I love concentrated ETFs, is because I want something in between a single stock and owning a 100 or 500 or a 1,000 to own ‘the market.’

I like the idea that I know that my risk in one security is primarily spread across 5 or 10 names, is kind of the happy medium, but that’s just me.

I can’t believe, Matthew Tuttle, that we have taken this long and we haven’t talked about the bond market. So, why don’t we finish up with that? A couple of months ago I guess it wasn’t even that long ago, I said to you the magic number or the number of the day, like my kids used to watch on Sesame Street, is 4.3%. And that was the magic number for the 10-year treasury to cross. Well, here we are at like 4.95.

I’m very happy with my TBF position, which keeps going up even when it drops back a little bit. I don’t see why things can’t go a lot higher. And a lot of it just has to do with the fact that a lot of the buyers are gone. And it’s kind of like if you’re borrowing all this money, which the U.S. has been doing for decades now, is that going to make people want to buy U.S. debt at the current level? And I’m not so sure about that, which is why I think rates can go significantly higher before the cycle is done.

And thinking back to my old days when I was an investment advisor, there’s a lot you can do with a 5-year or a 10-year treasury, locking in a return around 5% for that time and then using the rest of your portfolio, let’s say, a smaller portion of it to try to enhance that return.

So, it’s kind of like saying, you’re going to start with 5%, kind of plus or minus depending on how you do with the rest of your portfolio work. And to me, I think, we’re kind of heading back to that.

Bonds are becoming really, really good competition for stocks. And the more the market starts to see that, the more it puts a lid on the long-term potential of the stock market. And if you don’t believe me, ask people like Jeremy Grantham.

MT: And I wouldn’t ask Jeremy Grantham because he’s always bearish. But you did mention the one fly in the ointment to my I want to be bullish thesis, which is why the heck do interest rates keep going up if the Fed heads keep coming out and saying, we’re not going to raise this year?

And you brought up some potential reasons why. Who knows why that is? One of the things I’ve always learned is if the bond guys think one thing and the stock guys think something else, I’m going to go with what the bond guys think.

And there is a reason that rates keep going up and are going up right now as we speak. And I think that if you are a stock investor, you need to be extremely cautious with that.

There is a reason our ETF model portfolio is 33% in T-bills. And it does not bode well, again, for my – I want to be bullish thesis and I will not flip bullish until I see interest rates coming down. And you may be right, I may not see interest rates coming down. They may go up, up and up. And if they do, something is going to break.

If something hasn’t already broken and I mean, I know I sound like a broken record on the regional banks. But if something breaks, it’s probably going to be there.

RI: This is a time where, as a natural contrarian, you’re looking for the green shoots. You’re looking for a reason why the news isn’t all bad. I’m not a permabear, I’m just a realist. And I think you would say the same.

So, this is a time where, look, we’re going to get a lot of answers, I think, between now and the end of the year, and that’s the good part.

So, any final thoughts? You’ve mentioned a few things, the banks and your view on stocks and bonds generally. Any other sort of golden nuggets, even if it’s gold?

MT: I wouldn’t chase gold. Gold miners and silver miners are something I watch all the time because those tend to be a canary in the coal mine for something. So, earlier in the week and probably starting late last week, we were riding the gold miners. Then the silver miners got involved, we got out of our gold. We’re now in our silver. I’ll probably, depending on how this, and again, we’re talking on Thursday, how this market settles in, I’ll probably get rid of my silver, but I mean this is just a crazy day.

But I mean what I would tell people is, be careful out there. I mean, today, and we don’t know how this is going to end. But you saw the market week, Powell come out, I think, saying something about no hikes this year, the market rallied, then it sold off, then it rallied even more, now it’s selling off again.

So this is not a market for the faint of heart; if you are not extremely nimble then be extremely careful.