What if insider trading activity could reveal hidden market trends? Join us as we sit down with Jesse Felder, the brilliant mind behind The Felder Report, to uncover his remarkable transition from Bear Stearns to co-founding a hedge fund and pioneering financial blogging. Jesse shares his invaluable expertise in market analysis, emphasizing the underappreciated significance of insider trading and comparing today's market dynamics with the dot-com bubble era. He also addresses the ever-evolving challenges of creating engaging content in a landscape dominated by passive investing and algorithmic trading.
Next, we dive into the economic implications of insider activity with Professor Najat Sehun from the University of Michigan Business School. Leveraging her groundbreaking data, we discuss historically low net insider buying, signaling a bearish outlook from insiders. We explore sector-specific trends, the potential impact of election uncertainties, and unique insider buying activities in the small-cap space. Notably, we highlight turnaround situations like Beyond Inc., where executives like Marcus Limonis play a pivotal role in influencing these purchases.
Lastly, we tackle pressing issues like the potential misalignment between the forward PE ratio of the S&P 500 and current economic data, supported by indicators such as the Bloomberg Economic Surprise Index. We delve into macro indicators like the dollar, interest rates, and oil prices, and their effects on earnings projections. Our conversation underscores the importance of market breadth, with key signals like the Hindenburg Omen and Titanic Syndrome forewarning potential downturns. Emphasizing a conservative investment approach, we suggest diversification into energy, materials, real estate, and commodities. Wrap up the episode with heartfelt thanks to our live audience and a reminder to stay connected for future insights.
The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:08):
my name is michael guy at publisher of the lead lag
report, joining me for 40minutes roughly.
Mr jess felder, just um.
I know a little bit about you,but some people don't obviously
so introduce yourself.
Who are you?
What's your background?
Have you done your career?
What are you doing?
Speaker 2 (00:20):
currently.
Yeah, I've been writing my uhresearch report, the Felder
Report, for the past 10 yearsalmost 10 years now.
But I started my career at BearStearns back in the mid-90s.
I left to co-found a hedge fundwhere I was head trader and
co-portfolio manager and quit,coincidentally at the very top
(00:43):
of the dot-com bubble in Marchof 2000.
And moved out of LA to Oregonand since then I basically just
managed my own money, startedwriting about markets back in
about 2005.
So almost 20 years now.
Hard to believe it's been thatlong.
Speaker 1 (01:01):
And yeah, like I said , started the research product
about 10 years ago long and,yeah, like I said, started the
research product about 10 yearsago.
I'd argue you were a bit of apioneer because there were
people that were writing aboutinvesting online and doing blogs
, but they were not anywherenear as pervasive as they are
now.
The number of sub stacks andnewsletters and things like that
Take us through the journey ofstaying interesting.
Speaker 2 (01:24):
It's hard to keep content out there as frequently
as you have yeah, I think youknow, I I'm just, I think what
drives me is just curiosity.
I'm always looking for newindicators, um, and things that,
uh, you know are maybe,especially, I think, in this day
and age.
A quote that keeps coming tomind is that I'm going to bungle
(01:48):
it, but Warren Buffett saidthat.
You know, when so many peopleare trained to believe that
thinking is a waste of time, itgives a terrific advantage to
those of us who really valuethinking about markets.
And what he's talking aboutspecifically is the idea of the
efficient market hypothesisleading to the decision to just
(02:10):
go passive with your investments.
And I think you know, since hesaid that, whatever it was 25,
30 years ago, it's gotten evenmore poignant since then.
With, obviously, the you knowmore than half the assets, you
know capital assets beingcommitted to passive, there is a
huge opportunity for those ofus to kind of look at, you know,
(02:32):
look for opportunities in themarket to, you know, to use
macro or, you know, individualsecurity analysis to look for
opportunities.
So one of the ways I've donethat since the start of my
career analysis to look foropportunities.
So one of the ways I've donethat since the start of my
career, and I know you mentionedat the top, is to look at
insider activity.
To me, this is still an areathat's dramatically
(02:53):
underappreciated by mostinvestors, I think.
Well, you know, investors sellfor a variety of reasons and
buying is not always indicativeof, you know, good opportunities
.
That's absolutely true.
But in aggregate, insideractivity is very meaningful and
at times, even on an individualsecurities basis, it can be very
(03:13):
, very powerful for information.
So, you know, that's one thingthat I've studied for 30 years
and utilized, I think,effectively.
And you know, and since thenI've been kind of looking for
other types of things in themarkets that I think are
underappreciated, that can addvalue to a more active process.
Speaker 1 (03:34):
I think actually this is an interesting thing that we
can maybe debate, which is doesthinking even matter in a world
where increasingly it'salgorithmically driven,
increasingly it's just autoflows on the 401k side going to
passive vehicles?
It seems like somebody can havea thesis, ultimately have all
the reasoning right, but theoverwhelming bids that are there
(03:55):
which have nothing to do withthinking means the thinking
doesn't result in the output.
Speaker 2 (04:00):
Yeah, I mean, there's definitely times where you know
you feel like, is this, youknow, am I doing this for naught
?
Is this all my efforts, youknow, wasted Because markets
just kind of are driven?
I mean, especially, you know,recent years we've seen, you
(04:20):
know, gamma squeezes in theoptions market, the tail wagging
the dog, so to speak, in termsof just options activity and
speculation driving prices.
That's really nothing new inmarkets, though it's manifesting
in a different way.
But I mean, I saw that back inthe late 90s we were running
three different hedge fundportfolios.
(04:41):
One of them was a short onlyfund in 1999.
That was no fun and you couldsee how, you know, speculation
drove absolute madness in themarkets for a prolonged period
of time before, you know,rational analysis actually paid
off.
And you know, very similar tothat period, I think you know,
(05:02):
there was a terrific opportunityin value stocks in 2000.
So many stocks were trading atsuch extreme valuations on the
low side that there was a realopportunity to take advantage of
that and that droveoutperformance of small caps and
value stocks for a number ofyears afterwards.
I think we're sort of in asimilar situation.
(05:25):
I don't don't think the uh, thevalues are nearly as attractive
as they are today, but itabsolutely, uh, is reminiscent
of that earlier period where youfeel like you have an edge, you
have a compelling um you knowthesis regarding something and
the market's just not rewardingit.
Um, you know absolutely thatthat's one of the challenges to
(05:47):
being active in this environment.
Speaker 1 (05:51):
Yeah, and certainly if you're looking outside of
tech and then some selectindustrials, that's been sort of
the frustration I'd argue forthe last 13 years really start
around 2011.
Okay, let's touch on theinsider transaction side of
things.
First of all, just keep it barebones for those who are not
familiar about insidertransactions Insider buys,
insider sells how does it work?
(06:11):
How does the announcement sidework?
Speaker 2 (06:13):
And then what tends to be more of a powerful signal
yeah Well, when I talk aboutinsider activity, I'm basically
talking about what are the topexecutives and directors that
these public companies are doingwith their own money.
So if you are technicallyconsidered an insider, you are
one of the top managers in topmanagement at one of these
(06:33):
companies.
You're a 10% shareholder,you're a director.
You have to disclose all ofyour trading activity in a
relatively short period of time,something like 24, 48 hours or
something.
So you see, you know the buysand sells come across and
they're in real time.
It's not like you know hedgefund reporting where you know
(06:54):
we're getting the data delayedby a couple of months or
something.
You see insider activity withina day or two of it happening.
I pay almost no attention to10% owners, so large
institutional shareholders.
It doesn't really matter to meunless it's somebody with an
incredible track record.
But mostly what I'm concernedwith and even directors aren't
(07:16):
necessarily as important to mewhat is the CEO, cfo, doing with
their money?
And, for example, over the lastfew years we've seen persistent
insider buying at a stock likeEnergy Transfer, which is
basically just an energyinfrastructure company, pipeline
company, and that stock, youknow, had massive insider buying
(07:38):
and still has, until veryrecently with you know 10, 15%
dividend yield and the stock'sup you know 50 or 100% and Wall
Street has just absolutelyignored it.
But there are opportunitieslike that where you see you know
a really cheap stock and for meas a value investor, I want to
see it validated by the insiderbuying.
(07:58):
So on an individual level,that's kind of the thing that
I'm looking for.
On the flip side of that, we'veseen insiders selling at NVIDIA
since the start of June.
That's just off the charts.
I mean it's bigger thananything we've really seen
before.
Jensen Huang, specifically, hasbeen, you know, selling about
240,000 shares every other day,and what makes these sales
(08:21):
different than any sales he'smade in the past is, in the past
it's been related to exercisingoptions and then paying, you
know, selling off an amount ofstock in order to pay taxes and
things.
He's been just selling anon-option related you know not
exercising options to sell stock.
He's been basically selling outin the open market.
You know, like I said, about240,000 shares every other day,
(08:44):
which is, you know, a fairamount of selling.
It's the most we've ever reallyseen him do.
So I think, when you see thosetypes of extremes in insider
activity on an individual basis,it can be very telling about
what insiders believe.
Is you know the stock pricerelative to fair value or, more
(09:07):
likely, how things are trending?
Is the company more likely tokind of surprise to the upside
or on the downside in the monthsor quarters to come?
And I think that's even morepowerful when you look at
insider activity in aggregate.
Powerful when you look atinsider activity in aggregate.
Speaker 1 (09:25):
Does that tend to be more of a directional tell or
more of a relativeunderperformance tell?
Right, I mean the idea that yousee a whole bunch of selling.
Do you tend to see that stocklower 12 months from there or
just be relatively weaker?
Speaker 2 (09:41):
Yeah, najat Sehun is really kind of the person that
I've seen.
He's a professor at BusinessSchool University of Michigan.
He's done the best research youknow on insider activity, as he
was pointing out that werecently saw the least amount of
(10:09):
companies engaged in netinsider buying in the history of
his data.
So this is essentially the mostbearish reading that he's ever
seen as long as he's beentracking insider activity.
And I measure it kind of in adifferent respect.
He measures the percentage ofcompanies with net insider
buying.
(10:33):
I just take the total sell tobuy ratio, because this is
actually what he talks about inhis book.
When you take all the sellingdivided by all the buying across
all public companies, you canget a ratio and that 12-month
moving average if that ratio isreally what matters Sehun's
demonstrated that it's a good 12to 24-month leading indicator
(10:54):
of the economy, of corporateearnings and, of course, of
stock prices.
So that sell-to-buy ratio thisyear went above 25 times, so 25
times more sales than buys interms of dollar amounts this
year.
The only other two times in thehistory of my data that I've
seen this and this data comesfrom insidearbitragecom, another
(11:16):
great website to track thisstuff was in late 2021.
We saw that ratio jump over 25and it went up over 20 in that
2015 timeframe before the flashcrash in summer of 2015 and then
(11:42):
selling rise, many multiples ofbuying, like we've had, like
we've seen this year.
It's a pretty good indicatorthat insiders are bearish on the
economy, on earnings and,obviously, stock prices over the
next year or two year or two.
Speaker 1 (12:04):
Any chance that that might be driven by election
concerns around taxation,whoever's in power.
Is there anything that's maybeextenuating, that maybe makes it
not as powerful?
Speaker 2 (12:18):
of an indicator, given it's an election year.
Yeah, I don't Really.
What has been most interestingto me is not so much the selling
I think we did see probably agreater amount of selling in
2021 in terms of dollar amountbut it is the buying.
Like Sehun points out, theamount of insider buying today
is literally the lowest we'veseen in 10 years and so when you
(12:41):
adjust, that's just the dollaramount and obviously 10 years
ago stock prices were much lower.
Just that's just the dollaramount and obviously 10 years
ago stock prices were much lower.
So when you do the dollaramount of dollar buying relative
to market cap, it's like thelowest in the data.
So insiders have zero interestin buying shares.
Now that could be related to,you know, election type of type
(13:02):
of stuff, you know, I don'tthink you know it would be more
likely that they were sellingnow.
I think if they were, you know,worried about maybe capital
gains taxes going up, you know,in the years to come or
something like that, we're notseeing that.
It's just a lack of a dramaticlack of buying among insiders
right now and that tells me thatthey just don't see that the
(13:26):
value in the shares, especiallyrelated to what they believe are
their prospects over the next12 months.
Speaker 1 (13:34):
Are there, on a relative basis, certain sectors
where the buying is not as weak?
I mean, tech is a differentissue, right, but in the energy
space, are you seeing, at leastrelative to history, more buying
there?
Speaker 2 (13:46):
Yeah, I haven't really seen a ton of insider
buying in energy lately.
There's really not been muchbuying to speak of anywhere, but
I will say I haven't reallyseen any insider selling at all
in that space.
And so when we do see selling,another good example of selling
is Carvana.
Insiders have been really goodtimers of the stock.
(14:09):
I was buying Carvana, you know,under $5 a share.
You know, a couple of years ago, when you know the Garcia, you
know father and son team hadbeen buying from you know $20,
$30, $50, $40, $50 a share, allthe way down to single digits
$30, $50, $40, $50 a share, allthe way down to single digits.
Those purchases were obviouslyreally well-timed and they were
(14:31):
buying in size and it wasn'tjust the Garcias, it was other
top executives at the company,including CFO and whatnot.
Now that all of that hasswitched now completely to where
we see, you know the lastcouple of months insiders
selling at Carvana has taken offagain and so there are stocks
too that you can look at and see.
(14:53):
You know that the insiders arejust really good timers of the
stock.
You know Carvana has gone from$5 to $140 a share, so you know
it makes sense for them to takesome profits.
But I've also seen some sellingat you know CarMax and
AutoNation and you know thingslike that too.
Obviously, that is a kind of aconfirmation of what we're
(15:16):
hearing from the major auto OEMs.
You know we're saying that.
Speaker 1 (15:28):
You know consumer demand for automobiles is just
not great right now and doesn'tlook like it's going to improve
anytime soon.
How about segmenting by marketcap?
Any interesting insights as faras insider transactions for
large caps, mid caps, small caps, small caps being the most
interesting one, I thinkpossibly here.
Speaker 2 (15:42):
That's a great question.
I don't quantify it in thatregard.
But the opportunities that Ihave found are generally in that
small caps space where I dofind some interesting insider
buying.
For example, it's beeninteresting to see insider
buying at Beyond Inc, which isthe former Bed Bath Beyond space
(16:05):
.
We've seen some interestinginsider buying there.
That's kind of a turnaroundsituation.
It was overstockcom bought therights to the name Bed Bath
Beyond and the website andthings and they've done that
with a couple other things.
They brought in Marcus Limonisas the executive chairman and
he's been buying a fair amountof stock along with a couple of
(16:27):
other top executives.
So there are some turnaroundsituations in kind of that
smaller cap space where therehave been some interesting
insider buys.
But generally, yeah, I think ifthere is any kind of
bullishness, it's in thatsmaller cap realm.
Speaker 1 (16:48):
Let's tie this into earnings, which I was joking
before us going live.
They still matter, Although,oddly enough, maybe not as much
as they used to.
I was just doing a piece onSeeking Alpha, looking at a fund
that awaits by earnings andit's underperformed the S&P 500
since inception, despite ithaving large caps as a big
(17:10):
portion of it.
But where are we as far as theearning cycle in terms of
expectations and how do youthink through earnings when it
comes to a momentum drivenenvironment like this?
Speaker 2 (17:22):
Yeah, you know it's.
I think it's very interestingto look at.
Yeah, you know, I think it'svery interesting to look at
where we are in terms of.
You know, the forward PE ratioon the S&P 500 is around 21, 22.
And when you look at theeconomic data, one of my
favorite charts that I've beenlooking at right now is, you
(17:43):
know, from Bloomberg Sober, lookon Twitter, who publishes the
Daily Shot has tweeted it acouple of times too.
It basically compares thatforward PE ratio on the S&P 500
to the Bloomberg EconomicSurprise Index and right now
(18:05):
that Bloomberg Economic SurpriseIndex is literally at its
lowest levels, or was veryrecently lowest levels in years,
and it has a very tightrelationship with the Ford PE
ratio, the S&P 500, suggestingthat the Ford PE ratio should be
kind of at the bottom end ofits range right now, considering
where the economic data istrending.
Obviously it's not.
It's at the high end of itsrange.
So there's a huge gap there andI think that highlights this
(18:26):
potential area of problems forthe stock market going forward.
So right now earnings estimatesare very, very bullish,
expecting kind of, I think,double-digit earnings growth
next year, kind of towards theend, into the end of this year
and into next year.
Now, if insiders are right,there's going to be major
disappointment on that front.
(18:47):
And when I look at that insidersell-to-buy ratio and I overlay
it over S&P 500 earnings andinsiders, I mean there's a very
high correlation there too.
When the sell-to-buy ratio goesup, earnings growth goes down.
(19:08):
And so if you kind of invertthat chart when the sell to buy
ratio is very low and insidersare very bullish, that's a very
good sign that earnings growthis going to surprise on the
upside over the next 12 to 24months.
And so we're in this period, Ithink right now, where you have
also macro indicators.
Another leading earningsindicator that I use is
(19:31):
basically just and this comesfrom Stan Druckenmiller a
composite of the dollar,interest rates and oil prices,
and that has a really good leadon earnings too.
It suggests that in order toget a real boom in earnings over
a 12 to 24-month period goingforward, we probably need a big
decline in the dollar, bigdecline in interest rates, big
(19:53):
decline in oil prices.
They've all kind of started toroll over a little bit, but not
anywhere near to the degree thatwould sustain that type of an
earnings rebound or earningsgrowth that markets are now
pricing in, so I think there's areal possibility for
(20:15):
disappointment on the earningsfront over the next few quarters
.
Speaker 1 (20:17):
All that to me sounds like, just in general, your big
picture view is you're eitherbearish or cautious about the
direction of things, that we mayhave gotten too far ahead of
earnings.
It's funny that you, if that'sthe case, which is what it
sounds like, obviously, becausethe other side of this, which is
what you are now constantlyhearing, is we're finally on the
edge of this small cap rotation.
(20:37):
Small caps are going to drivethe momentum phase next.
I'm skeptical that.
I think small caps would likelybe down less.
They still outperform.
They're due to outperform.
It's just a directional issue.
What would other than what youmentioned right, sort of a big
drop in rates and other dynamicsthat would turn the earnings
picture around?
Is there any arguments we madethat the fundamentals don't
(21:00):
matter and that it'smechanically, algorithmically
driven market, in which casemoney will go from NVIDIA into
small caps you need a smallportion of NVIDIA's market cap
to draw small caps and thatmaybe the day of reckoning for
when the market cares aboutfundamentals is just later down
the line?
Speaker 2 (21:17):
Yeah, I think that question, I think it's a really
good point and I know that MikeGreen has talked about a lot and
he's done some interestingresearch on the passive side of
things and I think he's pointedout I don't know if he has
recently, but I know in the pasthe's discussed that there's
just so much money in 401ks thatit just automatically goes in
(21:39):
from paychecks every two weeksor every month or something and
it's invested into these passivefunds.
So you really need to kind ofput a halt to that.
You really need to see arecession that results in rising
unemployment and less moneygoing into passive indexes.
(21:59):
I think and I think Mike hasargued that we're very close to
recession right now if we're notalready in one.
If you look at the unemploymentargued that we're very close to
recession right now if we'renot already in one.
If you look at the unemploymentrate, we're very close to
triggering the SOM rule.
And then there's just a numberof other things.
Just look at corporate reports,all these consumer-facing
companies.
You know, when McDonald's isseeing same-store sales decline
(22:22):
even though they're raisingprices, I mean that traffic is.
That means traffic is down.
You know, pretty significantlyat McDonald's.
It means people are strugglingand I know there's this, this
idea out there that you know,yes, there's a K-shaped economy,
but so long as the upper arm ofthe K is strong and that's, you
know, the wealthy consumersthat have, you know that own
(22:44):
assets and own real estate thatthe economy will do fine.
But I would argue that it's notso much that that's always the
case.
Right the upper arm of the K,they're always going to do fine,
no matter what it's.
It's really the the trend inthat lower leg.
Right, I mean the direction ofthat trend, because we saw when,
(23:05):
when, that, when the lower K,the folks in the lower K, given
a bunch of cash during thepandemic, right, we had this
massive boom.
And I think now that they'restruggling really points to that
.
Yeah, the risk of recession iselevated right now, I know I
mean nominal GDP is still verystrong, but there's a chance
that inflation, you know, couldtrend higher through the end of
(23:26):
the year while nominal growthcontinues to trend lower,
resulting in you could see somereal negative growth numbers.
And if you combine that withsome rising unemployment, which,
as we normally see once theunemployment rate starts rising
for a period of time, as it hasrecently.
(23:48):
It typically trends higher.
It doesn't, you know, doesn'trise and then just plateau at a
level.
It usually trends in thatdirection.
As you know, bill Dudleypointed, it becomes a
self-reinforcing thing, you know, to the downside.
So I think that if we are closeto recession, you could start
to see some of that passivemoney.
(24:08):
You know that monthly orbi-weekly money um really start
to slow down as as the jobmarket cools and and that would
be, uh, your sign, that, uh,that, uh, that uh price
insensitive buying um is is nolonger able to prop markets up
in the way that it has.
Speaker 1 (24:28):
I'm sharing on the screen a post you reposted
showing JOLTS data.
And JOLTS are obviouslyinversely correlated to the
unemployment rate, so it doeslook like that's a pretty firmly
entrenched trend.
Speaker 2 (24:41):
Yeah, one of the most cyclical sectors I think you
can pay attention to is housing.
Yeah, one of the most cyclicalsectors I think you can pay
attention to is housing and Ithink, within a lot of the
recent data that we've seen,hiring and housing is dropping
off a cliff.
We're seeing very low interestamong buyers and purchasing.
If you do see a slowdown inconstruction, which would only
(25:04):
be reasonable given the trend inno-transcript it has to be like
the asset allocation play, thenwould be to bet on duration to
some extent yeah, you know I Ithink in a normal cycle
(25:29):
absolutely, um, I'm I've notbeen able to get bullish on
bonds, uh, this cycle, for thesimple fact that the deficit is
already so large right, I thinkit's the largest you know
deficit, post-war deficit thatwe've seen during an economic
expansion ever in terms offiscal deficit to GDP.
(25:51):
You go into recession andthat's going to blow out the
deficit even wider and you know,obviously the Fed could come in
again and that's probably partof their job is to make sure the
smooth functioning of thetreasury market.
But if, like I say, if we'veseen the low for the inflation
prints this year and I think youknow kind of the year-over-year
(26:16):
, you know comps suggest thatthat's very possible, that you
know comps get more difficultthrough the to the end of the
year and there are signs withyou know costs, you know
shipping costs and things goinghigher.
There's a case to be made thatenergy prices could move higher
gas and oil, that you know weget some pickup in inflation
(26:38):
again.
It's going to be difficult forthe Fed to be as proactive in
terms of intervening in thetreasury market, lowering
interest rates, all these thingsthat they have in the past, if
inflation proves a little morepersistent than markets may
currently expect.
So I think it's telling thatyou know Warren Buffett has
(27:02):
famously bought at this point inthe cycle.
You know bought when he'sloading up on cash.
He's famously bought used tozero coupon bonds as a way to
kind of make that bet onduration.
He's doing the exact oppositethis time by becoming the
biggest buyer of treasury billson the planet.
(27:22):
So I think you know Buffettdoesn't want to own any duration
.
I think Stan Druckenmiller'stalked about the same and Stan
has said that his career wasmade on trading the bond market.
It wasn't shorting stocksduring declines, it was betting
on bonds in a majorly leveragedway when recession was coming.
He's saying kind of the samething that it's really tough to
(27:45):
bet on duration when you havethese other risks out there in
terms of the amount of debtissuance and supply demand
issues.
So I think yeah, normally Iwould say yeah, it's time to bet
on duration this cycle.
I don't know if it's going towork as well as it has in the
past.
Speaker 1 (28:02):
Another thing you had reposted from Sentiment Trader,
which looks at the percentageof NASDAQ 100 stocks that are
more than 10% off their eyes,rather below their eyes.
Let's talk about breadth,because the breadth point is
something I've been hammeringmyself for over a year, this
kind of between.
When I talk about, I equatebreadth with small caps, because
(28:26):
there's many more small capnames than large cap names, just
by definition.
I know people have differentways of thinking about breadth,
but to me it's very much reallya small cap, relative weakness.
It hasn't really mattered allthat much.
The divergence, I think you canargue it lasted for longer than
anybody.
Certainly I thought it would.
But does breadth still matterat all?
Speaker 2 (28:47):
I believe.
So I mean, I believe it's oneof the most important tells you
could want in terms ofunderstanding the strength, the
persistence of the underlyingtrend in the market.
So right, a healthy market isdriven by the, you know, greater
percentage of components withinthe index.
A not so healthy trend isdriven by, you know, fewer and
(29:10):
fewer stocks driving theperformance.
And so one of the things that Ilook at to kind of understand
this is and I've written aboutfor years now is I look at the
Hindenburg-Ohman and the Titanicsyndrome, which are two, I
think, important signals ofunderlying trend strength.
You know, an individual signaldoesn't matter to me.
(29:33):
I mean, a lot of people like totalk about it.
Wow, hindenburg-ohman wastriggered yesterday.
One signal doesn't matter.
But when you look at them overlike I said, I look at insider
activity over 12-month look-backperiod I think 12 months we saw
50 Titanic syndromes triggeredacross the NYSE and the NASDAQ.
(30:02):
The only other times we've seen50 was in November of 2021,
right before the 22 bear marketwas in January of 2018.
And 2018 was a really difficultyear for the stock market and
at the top in 2000.
These are the last 30 years,the only times we've seen 50
(30:23):
Titanic syndromes and I shouldprobably explain what this is.
A Titanic syndrome, just like aHindenburg omen, is triggered
when you have a stock marketwithin a new high, something
like you know within a couplepercent or within you know the
last 10 days or something, stockmarkets hit a new high and the
number of new lows issignificantly elevated, like
(30:44):
over.
In case of the Hindenburg Omen,I think it's two and a half
percent of all issues traded.
So you shouldn't be seeing anumber of new lows, new 52-week
lows, you know growing at a timeand especially, you know,
crossing a threshold, that typeof a threshold when the stock
market's making new highs, it'sbasically a sign of growing
(31:08):
disparity, growing divergenceunder the surface of the market.
So when you have a large numberof stocks making new lows, it's
a sign that you're seeing thesekinds of divergences that
aren't indicative of a healthytrend.
So the fact that we've seen 50Hindenburg omens over the last
12 months and that's a very rarelevel sorry, excuse me, titanic
(31:29):
syndromes it's a very level ofbreadth, rare level of breadth
divergence, I think is anotherimportant warning signal that
the uptrend in the stock marketis just not healthy right now
and typically how we see thisresolved is by a reversal to the
downside.
Now it could be anything fromlike.
What we saw in 2018 wasbasically just a period of kind
(31:51):
of sideways action.
Although the fourth quarter of2018 was roughly 20% decline, it
could be a 22 bear market right.
That was another precedent.
And it could be something likewe saw with the dot-com bust
after 2000.
Top market went in kind of athree-year tailspin.
(32:13):
From that point I do think itcan be resolved in a number of
ways.
Speaker 1 (32:24):
But right now it's telling you that the upside is
potentially not sustainable.
How do you execute all that?
I mean, I myself make it verypublic that even when I'm at
peak bearish I say don't short.
That's just me, because I'vedone back tests.
I know it doesn't work all thetime, but if you have a mindset
(32:45):
like yours and I'd say also likemine, where you're justifiably
concerned, even though it hasn'tplayed out just yet, how do you
play it?
Speaker 2 (32:57):
I think what I like to say is I think everybody has
their own version of whataggressive looks like and what
conservative looks like, and Ithink with these types of
signals, I think it's importantto understand.
From my opinion, it makes senseto lean conservatively, as,
whatever that looks like for you, I agree with you.
For most people, short sellingis not a good idea.
(33:20):
I've always said it's thedouble black diamond of
investing.
It's very difficult and even ifyou do it well, you're one of
the best in the business, you'regoing to lose money most of the
time.
So short selling is probablynot wise for most people, nor is
getting out of the marketentirely, but I do think
(33:41):
probably for most people.
Looking at, what does truediversification mean in this
type of environment?
Right, 500, for example, it'sabout as concentrated, if not
more concentrated, than it'sever been in these stocks that
(34:02):
are probably most vulnerable to,you know, bear market type of
type of activity.
So if you feel like you're,you're, you know, diversified by
just owning the S&P 500, or youknow something along those
lines, you may want to thinkabout, well, maybe still owning
equities but diversifying moreinto other areas of the market,
right, I mean, for me it'sfascinating that you know energy
(34:25):
and materials, the flip side ofthe technology.
Overweight is a dramatic, youknow, underweight, historically
rare underweight in energy andmaterials.
Rare underweight in energy andmaterials.
And these are the areas which,if you believe, as I do, that we
(34:47):
are in the early years of acommodity super cycle, you
probably want to diversify intothose areas that are so
significantly underweight.
Also makes a ton of sense toown other asset classes besides
equities.
Right, as I mentioned, you knowBuffett owns a massive amount
of treasury bills.
The yield is great, gives thema lot of optionality if there
are more opportunities that comeup in the stock market through
(35:07):
a decline.
But I think for most peoplethey're dramatically
under-invested in real assets.
So you know, real assets wouldclassically be real estate,
precious metals and commodities,and not to mention tips and
those types of things.
So I think generally, preciousmetals and commodities make the
(35:30):
most sense in that area andinvestors are just dramatically
underinvested in those things.
Speaker 1 (35:37):
Investors are just dramatically underinvested in
those things and we can talkabout why there might be a kind
of a secular shift in thatdirection in the years to come,
if you'd like.
Yeah, let's expand on that,because I'm of the same mindset.
I mean, for me it's partiallyrelated to the idea that I think
China probably economically haseither bottomed or is close to
bottoming and that would beenough at the margin to just get
(36:00):
some commodity excitement goingagain.
Can you expand on your viewthere?
Speaker 2 (36:04):
Well, I mean from a cyclical perspective.
I published a chart, or posteda chart on Twitter last week.
It came from Simon White fromBloomberg, who pointed out that
most people believe thatcommodities go down in a
recession.
Right, this is why people areselling commodities right now.
The truth is, commoditiesdecline in the lead up to
(36:25):
recession and then go sidewaysat the start of recession and
actually rise through therecessionary period.
So by the time you've come tothe conclusion, oh wow, we're in
recession, you've alreadymissed the bottom in commodities
.
And so I think, from a cyclicalperspective, if you do believe
(36:46):
we are very close to recession,it's probably a great time to
buy commodities.
But from a secular standpoint, Ithink one of the most important
things to pay attention to isjust the capital cycle.
Where is money flowing?
Because when the majority ofmoney flows to one area, returns
necessarily go down in theyears to come in that area.
Vice versa, so when areas ofthe markets that are starved for
(37:11):
capital over a period of timegenerally see the most wonderful
returns going forward.
Because, you know, let's justlook at the commodity cycle, for
example, right in the energyspace, when the Fed lowered
interest rates to zero after thegreen financial crisis, energy
companies borrowed a ton ofmoney, went on this huge
(37:32):
fracking boom, invested inmassive supplies.
Oil prices crashed Since thattime really since the 2014 oil
crash these companies have beenstarved of capital for about a
decade now, and so that theinvesting into energy
infrastructure and productionand all these kinds of things
has been very low, and that setsthe stage for wonderful returns
(37:56):
going forward.
You could say the opposite abouttech stocks.
So, after the dot-com bust, foryears, tech stocks were kind of
starved of capital, and thereturns that we've seen over the
prior 10 years, the last 10years, were the result of those
companies being starved forcapital and returns in the space
going up in a dramatic way.
But right now, right, we'reseeing the opposite.
All the money is going intodata centers and NVIDIA chips
(38:19):
and all these things.
There's a massive amount ofcapital going into space that
will necessarily depress returnsfor years to come, and so I do
think we're in the middle of asecular shift where investors
are going to be transitioningfrom wanting to own technology
stocks to wanting to owncommodities, and that will drive
a super cycle over the nextfive to 10 years.
(38:39):
Let's talk about the FelderReport.
Speaker 1 (38:43):
as we wrap up here, talk about your research.
What have people got access?
Speaker 2 (38:47):
Yeah, that's a nice plug.
On my website, mike, Iappreciate it.
It's thefelderreportcom.
I put out a weekly email.
It's just all it does isfeature the five kind of
articles or charts or thingsthat I found during the week
that I that I found mostinteresting.
A lot of times it's thatcommodities chart type of a
(39:08):
thing or an article about.
Lately I've been focused on AIand hype versus reality in AI,
but yeah, that's just free tosign up for.
Right there on the website Ialso put out some premium
products.
I read a weekly market commentthat kind of is a lot more
detailed, with kind of the stuffthat I'm coming across and
curious about and a weekly chartbook and trade ideas that are
(39:33):
typically driven by that insideractivity.
Speaker 1 (39:38):
Everybody.
Please make sure you check outthe Felder Report and appreciate
those that watch this live.
This will be an edited podcastunder Lead Lag Live on all your
favorite platforms.
Make sure you follow Jess on Xand various social media
platforms and hopefully I'll seeyou next time for another
episode of Lead Lag Live.
Thank you, jess, appreciate it.
Hey, that was fun man.
Thanks for having me.
Speaker 2 (39:58):
Cheers everybody, Thank you.
my name is michael guy at publisher of the lead lag
report, joining me for 40minutes roughly.
Mr jess felder, just um.
I know a little bit about you,but some people don't obviously
so introduce yourself.
Who are you?
What's your background?
Have you done your career?
What are you doing?
Speaker 2 (00:20):
currently.
Yeah, I've been writing my uhresearch report, the Felder
Report, for the past 10 yearsalmost 10 years now.
But I started my career at BearStearns back in the mid-90s.
I left to co-found a hedge fundwhere I was head trader and
co-portfolio manager and quit,coincidentally at the very top
(00:43):
of the dot-com bubble in Marchof 2000.
And moved out of LA to Oregonand since then I basically just
managed my own money, startedwriting about markets back in
about 2005.
So almost 20 years now.
Hard to believe it's been thatlong.
Speaker 1 (01:01):
And yeah, like I said , started the research product
about 10 years ago long and,yeah, like I said, started the
research product about 10 yearsago.
I'd argue you were a bit of apioneer because there were
people that were writing aboutinvesting online and doing blogs
, but they were not anywherenear as pervasive as they are
now.
The number of sub stacks andnewsletters and things like that
Take us through the journey ofstaying interesting.
Speaker 2 (01:24):
It's hard to keep content out there as frequently
as you have yeah, I think youknow, I I'm just, I think what
drives me is just curiosity.
I'm always looking for newindicators, um, and things that,
uh, you know are maybe,especially, I think, in this day
and age.
A quote that keeps coming tomind is that I'm going to bungle
(01:48):
it, but Warren Buffett saidthat.
You know, when so many peopleare trained to believe that
thinking is a waste of time, itgives a terrific advantage to
those of us who really valuethinking about markets.
And what he's talking aboutspecifically is the idea of the
efficient market hypothesisleading to the decision to just
(02:10):
go passive with your investments.
And I think you know, since hesaid that, whatever it was 25,
30 years ago, it's gotten evenmore poignant since then.
With, obviously, the you knowmore than half the assets, you
know capital assets beingcommitted to passive, there is a
huge opportunity for those ofus to kind of look at, you know,
(02:32):
look for opportunities in themarket to, you know, to use
macro or, you know, individualsecurity analysis to look for
opportunities.
So one of the ways I've donethat since the start of my
career analysis to look foropportunities.
So one of the ways I've donethat since the start of my
career, and I know you mentionedat the top, is to look at
insider activity.
To me, this is still an areathat's dramatically
(02:53):
underappreciated by mostinvestors, I think.
Well, you know, investors sellfor a variety of reasons and
buying is not always indicativeof, you know, good opportunities
.
That's absolutely true.
But in aggregate, insideractivity is very meaningful and
at times, even on an individualsecurities basis, it can be very
(03:13):
, very powerful for information.
So, you know, that's one thingthat I've studied for 30 years
and utilized, I think,effectively.
And you know, and since thenI've been kind of looking for
other types of things in themarkets that I think are
underappreciated, that can addvalue to a more active process.
Speaker 1 (03:34):
I think actually this is an interesting thing that we
can maybe debate, which is doesthinking even matter in a world
where increasingly it'salgorithmically driven,
increasingly it's just autoflows on the 401k side going to
passive vehicles?
It seems like somebody can havea thesis, ultimately have all
the reasoning right, but theoverwhelming bids that are there
(03:55):
which have nothing to do withthinking means the thinking
doesn't result in the output.
Speaker 2 (04:00):
Yeah, I mean, there's definitely times where you know
you feel like, is this, youknow, am I doing this for naught
?
Is this all my efforts, youknow, wasted Because markets
just kind of are driven?
I mean, especially, you know,recent years we've seen, you
(04:20):
know, gamma squeezes in theoptions market, the tail wagging
the dog, so to speak, in termsof just options activity and
speculation driving prices.
That's really nothing new inmarkets, though it's manifesting
in a different way.
But I mean, I saw that back inthe late 90s we were running
three different hedge fundportfolios.
(04:41):
One of them was a short onlyfund in 1999.
That was no fun and you couldsee how, you know, speculation
drove absolute madness in themarkets for a prolonged period
of time before, you know,rational analysis actually paid
off.
And you know, very similar tothat period, I think you know,
(05:02):
there was a terrific opportunityin value stocks in 2000.
So many stocks were trading atsuch extreme valuations on the
low side that there was a realopportunity to take advantage of
that and that droveoutperformance of small caps and
value stocks for a number ofyears afterwards.
I think we're sort of in asimilar situation.
(05:25):
I don't don't think the uh, thevalues are nearly as attractive
as they are today, but itabsolutely, uh, is reminiscent
of that earlier period where youfeel like you have an edge, you
have a compelling um you knowthesis regarding something and
the market's just not rewardingit.
Um, you know absolutely thatthat's one of the challenges to
(05:47):
being active in this environment.
Speaker 1 (05:51):
Yeah, and certainly if you're looking outside of
tech and then some selectindustrials, that's been sort of
the frustration I'd argue forthe last 13 years really start
around 2011.
Okay, let's touch on theinsider transaction side of
things.
First of all, just keep it barebones for those who are not
familiar about insidertransactions Insider buys,
insider sells how does it work?
(06:11):
How does the announcement sidework?
Speaker 2 (06:13):
And then what tends to be more of a powerful signal
yeah Well, when I talk aboutinsider activity, I'm basically
talking about what are the topexecutives and directors that
these public companies are doingwith their own money.
So if you are technicallyconsidered an insider, you are
one of the top managers in topmanagement at one of these
(06:33):
companies.
You're a 10% shareholder,you're a director.
You have to disclose all ofyour trading activity in a
relatively short period of time,something like 24, 48 hours or
something.
So you see, you know the buysand sells come across and
they're in real time.
It's not like you know hedgefund reporting where you know
(06:54):
we're getting the data delayedby a couple of months or
something.
You see insider activity withina day or two of it happening.
I pay almost no attention to10% owners, so large
institutional shareholders.
It doesn't really matter to meunless it's somebody with an
incredible track record.
But mostly what I'm concernedwith and even directors aren't
(07:16):
necessarily as important to mewhat is the CEO, cfo, doing with
their money?
And, for example, over the lastfew years we've seen persistent
insider buying at a stock likeEnergy Transfer, which is
basically just an energyinfrastructure company, pipeline
company, and that stock, youknow, had massive insider buying
(07:38):
and still has, until veryrecently with you know 10, 15%
dividend yield and the stock'sup you know 50 or 100% and Wall
Street has just absolutelyignored it.
But there are opportunitieslike that where you see you know
a really cheap stock and for meas a value investor, I want to
see it validated by the insiderbuying.
(07:58):
So on an individual level,that's kind of the thing that
I'm looking for.
On the flip side of that, we'veseen insiders selling at NVIDIA
since the start of June.
That's just off the charts.
I mean it's bigger thananything we've really seen
before.
Jensen Huang, specifically, hasbeen, you know, selling about
240,000 shares every other day,and what makes these sales
(08:21):
different than any sales he'smade in the past is, in the past
it's been related to exercisingoptions and then paying, you
know, selling off an amount ofstock in order to pay taxes and
things.
He's been just selling anon-option related you know not
exercising options to sell stock.
He's been basically selling outin the open market.
You know, like I said, about240,000 shares every other day,
(08:44):
which is, you know, a fairamount of selling.
It's the most we've ever reallyseen him do.
So I think, when you see thosetypes of extremes in insider
activity on an individual basis,it can be very telling about
what insiders believe.
Is you know the stock pricerelative to fair value or, more
(09:07):
likely, how things are trending?
Is the company more likely tokind of surprise to the upside
or on the downside in the monthsor quarters to come?
And I think that's even morepowerful when you look at
insider activity in aggregate.
Powerful when you look atinsider activity in aggregate.
Speaker 1 (09:25):
Does that tend to be more of a directional tell or
more of a relativeunderperformance tell?
Right, I mean the idea that yousee a whole bunch of selling.
Do you tend to see that stocklower 12 months from there or
just be relatively weaker?
Speaker 2 (09:41):
Yeah, najat Sehun is really kind of the person that
I've seen.
He's a professor at BusinessSchool University of Michigan.
He's done the best research youknow on insider activity, as he
was pointing out that werecently saw the least amount of
(10:09):
companies engaged in netinsider buying in the history of
his data.
So this is essentially the mostbearish reading that he's ever
seen as long as he's beentracking insider activity.
And I measure it kind of in adifferent respect.
He measures the percentage ofcompanies with net insider
buying.
(10:33):
I just take the total sell tobuy ratio, because this is
actually what he talks about inhis book.
When you take all the sellingdivided by all the buying across
all public companies, you canget a ratio and that 12-month
moving average if that ratio isreally what matters Sehun's
demonstrated that it's a good 12to 24-month leading indicator
(10:54):
of the economy, of corporateearnings and, of course, of
stock prices.
So that sell-to-buy ratio thisyear went above 25 times, so 25
times more sales than buys interms of dollar amounts this
year.
The only other two times in thehistory of my data that I've
seen this and this data comesfrom insidearbitragecom, another
(11:16):
great website to track thisstuff was in late 2021.
We saw that ratio jump over 25and it went up over 20 in that
2015 timeframe before the flashcrash in summer of 2015 and then
(11:42):
selling rise, many multiples ofbuying, like we've had, like
we've seen this year.
It's a pretty good indicatorthat insiders are bearish on the
economy, on earnings and,obviously, stock prices over the
next year or two year or two.
Speaker 1 (12:04):
Any chance that that might be driven by election
concerns around taxation,whoever's in power.
Is there anything that's maybeextenuating, that maybe makes it
not as powerful?
Speaker 2 (12:18):
of an indicator, given it's an election year.
Yeah, I don't Really.
What has been most interestingto me is not so much the selling
I think we did see probably agreater amount of selling in
2021 in terms of dollar amountbut it is the buying.
Like Sehun points out, theamount of insider buying today
is literally the lowest we'veseen in 10 years and so when you
(12:41):
adjust, that's just the dollaramount and obviously 10 years
ago stock prices were much lower.
Just that's just the dollaramount and obviously 10 years
ago stock prices were much lower.
So when you do the dollaramount of dollar buying relative
to market cap, it's like thelowest in the data.
So insiders have zero interestin buying shares.
Now that could be related to,you know, election type of type
(13:02):
of stuff, you know, I don'tthink you know it would be more
likely that they were sellingnow.
I think if they were, you know,worried about maybe capital
gains taxes going up, you know,in the years to come or
something like that, we're notseeing that.
It's just a lack of a dramaticlack of buying among insiders
right now and that tells me thatthey just don't see that the
(13:26):
value in the shares, especiallyrelated to what they believe are
their prospects over the next12 months.
Speaker 1 (13:34):
Are there, on a relative basis, certain sectors
where the buying is not as weak?
I mean, tech is a differentissue, right, but in the energy
space, are you seeing, at leastrelative to history, more buying
there?
Speaker 2 (13:46):
Yeah, I haven't really seen a ton of insider
buying in energy lately.
There's really not been muchbuying to speak of anywhere, but
I will say I haven't reallyseen any insider selling at all
in that space.
And so when we do see selling,another good example of selling
is Carvana.
Insiders have been really goodtimers of the stock.
(14:09):
I was buying Carvana, you know,under $5 a share.
You know, a couple of years ago, when you know the Garcia, you
know father and son team hadbeen buying from you know $20,
$30, $50, $40, $50 a share, allthe way down to single digits
$30, $50, $40, $50 a share, allthe way down to single digits.
Those purchases were obviouslyreally well-timed and they were
(14:31):
buying in size and it wasn'tjust the Garcias, it was other
top executives at the company,including CFO and whatnot.
Now that all of that hasswitched now completely to where
we see, you know the lastcouple of months insiders
selling at Carvana has taken offagain and so there are stocks
too that you can look at and see.
(14:53):
You know that the insiders arejust really good timers of the
stock.
You know Carvana has gone from$5 to $140 a share, so you know
it makes sense for them to takesome profits.
But I've also seen some sellingat you know CarMax and
AutoNation and you know thingslike that too.
Obviously, that is a kind of aconfirmation of what we're
(15:16):
hearing from the major auto OEMs.
You know we're saying that.
Speaker 1 (15:28):
You know consumer demand for automobiles is just
not great right now and doesn'tlook like it's going to improve
anytime soon.
How about segmenting by marketcap?
Any interesting insights as faras insider transactions for
large caps, mid caps, small caps, small caps being the most
interesting one, I thinkpossibly here.
Speaker 2 (15:42):
That's a great question.
I don't quantify it in thatregard.
But the opportunities that Ihave found are generally in that
small caps space where I dofind some interesting insider
buying.
For example, it's beeninteresting to see insider
buying at Beyond Inc, which isthe former Bed Bath Beyond space
(16:05):
.
We've seen some interestinginsider buying there.
That's kind of a turnaroundsituation.
It was overstockcom bought therights to the name Bed Bath
Beyond and the website andthings and they've done that
with a couple other things.
They brought in Marcus Limonisas the executive chairman and
he's been buying a fair amountof stock along with a couple of
(16:27):
other top executives.
So there are some turnaroundsituations in kind of that
smaller cap space where therehave been some interesting
insider buys.
But generally, yeah, I think ifthere is any kind of
bullishness, it's in thatsmaller cap realm.
Speaker 1 (16:48):
Let's tie this into earnings, which I was joking
before us going live.
They still matter, Although,oddly enough, maybe not as much
as they used to.
I was just doing a piece onSeeking Alpha, looking at a fund
that awaits by earnings andit's underperformed the S&P 500
since inception, despite ithaving large caps as a big
(17:10):
portion of it.
But where are we as far as theearning cycle in terms of
expectations and how do youthink through earnings when it
comes to a momentum drivenenvironment like this?
Speaker 2 (17:22):
Yeah, you know it's.
I think it's very interestingto look at.
Yeah, you know, I think it'svery interesting to look at
where we are in terms of.
You know, the forward PE ratioon the S&P 500 is around 21, 22.
And when you look at theeconomic data, one of my
favorite charts that I've beenlooking at right now is, you
(17:43):
know, from Bloomberg Sober, lookon Twitter, who publishes the
Daily Shot has tweeted it acouple of times too.
It basically compares thatforward PE ratio on the S&P 500
to the Bloomberg EconomicSurprise Index and right now
(18:05):
that Bloomberg Economic SurpriseIndex is literally at its
lowest levels, or was veryrecently lowest levels in years,
and it has a very tightrelationship with the Ford PE
ratio, the S&P 500, suggestingthat the Ford PE ratio should be
kind of at the bottom end ofits range right now, considering
where the economic data istrending.
Obviously it's not.
It's at the high end of itsrange.
So there's a huge gap there andI think that highlights this
(18:26):
potential area of problems forthe stock market going forward.
So right now earnings estimatesare very, very bullish,
expecting kind of, I think,double-digit earnings growth
next year, kind of towards theend, into the end of this year
and into next year.
Now, if insiders are right,there's going to be major
disappointment on that front.
(18:47):
And when I look at that insidersell-to-buy ratio and I overlay
it over S&P 500 earnings andinsiders, I mean there's a very
high correlation there too.
When the sell-to-buy ratio goesup, earnings growth goes down.
(19:08):
And so if you kind of invertthat chart when the sell to buy
ratio is very low and insidersare very bullish, that's a very
good sign that earnings growthis going to surprise on the
upside over the next 12 to 24months.
And so we're in this period, Ithink right now, where you have
also macro indicators.
Another leading earningsindicator that I use is
(19:31):
basically just and this comesfrom Stan Druckenmiller a
composite of the dollar,interest rates and oil prices,
and that has a really good leadon earnings too.
It suggests that in order toget a real boom in earnings over
a 12 to 24-month period goingforward, we probably need a big
decline in the dollar, bigdecline in interest rates, big
(19:53):
decline in oil prices.
They've all kind of started toroll over a little bit, but not
anywhere near to the degree thatwould sustain that type of an
earnings rebound or earningsgrowth that markets are now
pricing in, so I think there's areal possibility for
(20:15):
disappointment on the earningsfront over the next few quarters
.
Speaker 1 (20:17):
All that to me sounds like, just in general, your big
picture view is you're eitherbearish or cautious about the
direction of things, that we mayhave gotten too far ahead of
earnings.
It's funny that you, if that'sthe case, which is what it
sounds like, obviously, becausethe other side of this, which is
what you are now constantlyhearing, is we're finally on the
edge of this small cap rotation.
(20:37):
Small caps are going to drivethe momentum phase next.
I'm skeptical that.
I think small caps would likelybe down less.
They still outperform.
They're due to outperform.
It's just a directional issue.
What would other than what youmentioned right, sort of a big
drop in rates and other dynamicsthat would turn the earnings
picture around?
Is there any arguments we madethat the fundamentals don't
(21:00):
matter and that it'smechanically, algorithmically
driven market, in which casemoney will go from NVIDIA into
small caps you need a smallportion of NVIDIA's market cap
to draw small caps and thatmaybe the day of reckoning for
when the market cares aboutfundamentals is just later down
the line?
Speaker 2 (21:17):
Yeah, I think that question, I think it's a really
good point and I know that MikeGreen has talked about a lot and
he's done some interestingresearch on the passive side of
things and I think he's pointedout I don't know if he has
recently, but I know in the pasthe's discussed that there's
just so much money in 401ks thatit just automatically goes in
(21:39):
from paychecks every two weeksor every month or something and
it's invested into these passivefunds.
So you really need to kind ofput a halt to that.
You really need to see arecession that results in rising
unemployment and less moneygoing into passive indexes.
(21:59):
I think and I think Mike hasargued that we're very close to
recession right now if we're notalready in one.
If you look at the unemploymentargued that we're very close to
recession right now if we'renot already in one.
If you look at the unemploymentrate, we're very close to
triggering the SOM rule.
And then there's just a numberof other things.
Just look at corporate reports,all these consumer-facing
companies.
You know, when McDonald's isseeing same-store sales decline
(22:22):
even though they're raisingprices, I mean that traffic is.
That means traffic is down.
You know, pretty significantlyat McDonald's.
It means people are strugglingand I know there's this, this
idea out there that you know,yes, there's a K-shaped economy,
but so long as the upper arm ofthe K is strong and that's, you
know, the wealthy consumersthat have, you know that own
(22:44):
assets and own real estate thatthe economy will do fine.
But I would argue that it's notso much that that's always the
case.
Right the upper arm of the K,they're always going to do fine,
no matter what it's.
It's really the the trend inthat lower leg.
Right, I mean the direction ofthat trend, because we saw when,
(23:05):
when, that, when the lower K,the folks in the lower K, given
a bunch of cash during thepandemic, right, we had this
massive boom.
And I think now that they'restruggling really points to that
.
Yeah, the risk of recession iselevated right now, I know I
mean nominal GDP is still verystrong, but there's a chance
that inflation, you know, couldtrend higher through the end of
(23:26):
the year while nominal growthcontinues to trend lower,
resulting in you could see somereal negative growth numbers.
And if you combine that withsome rising unemployment, which,
as we normally see once theunemployment rate starts rising
for a period of time, as it hasrecently.
(23:48):
It typically trends higher.
It doesn't, you know, doesn'trise and then just plateau at a
level.
It usually trends in thatdirection.
As you know, bill Dudleypointed, it becomes a
self-reinforcing thing, you know, to the downside.
So I think that if we are closeto recession, you could start
to see some of that passivemoney.
(24:08):
You know that monthly orbi-weekly money um really start
to slow down as as the jobmarket cools and and that would
be, uh, your sign, that, uh,that, uh, that uh price
insensitive buying um is is nolonger able to prop markets up
in the way that it has.
Speaker 1 (24:28):
I'm sharing on the screen a post you reposted
showing JOLTS data.
And JOLTS are obviouslyinversely correlated to the
unemployment rate, so it doeslook like that's a pretty firmly
entrenched trend.
Speaker 2 (24:41):
Yeah, one of the most cyclical sectors I think you
can pay attention to is housing.
Yeah, one of the most cyclicalsectors I think you can pay
attention to is housing and Ithink, within a lot of the
recent data that we've seen,hiring and housing is dropping
off a cliff.
We're seeing very low interestamong buyers and purchasing.
If you do see a slowdown inconstruction, which would only
(25:04):
be reasonable given the trend inno-transcript it has to be like
the asset allocation play, thenwould be to bet on duration to
some extent yeah, you know I Ithink in a normal cycle
(25:29):
absolutely, um, I'm I've notbeen able to get bullish on
bonds, uh, this cycle, for thesimple fact that the deficit is
already so large right, I thinkit's the largest you know
deficit, post-war deficit thatwe've seen during an economic
expansion ever in terms offiscal deficit to GDP.
(25:51):
You go into recession andthat's going to blow out the
deficit even wider and you know,obviously the Fed could come in
again and that's probably partof their job is to make sure the
smooth functioning of thetreasury market.
But if, like I say, if we'veseen the low for the inflation
prints this year and I think youknow kind of the year-over-year
(26:16):
, you know comps suggest thatthat's very possible, that you
know comps get more difficultthrough the to the end of the
year and there are signs withyou know costs, you know
shipping costs and things goinghigher.
There's a case to be made thatenergy prices could move higher
gas and oil, that you know weget some pickup in inflation
(26:38):
again.
It's going to be difficult forthe Fed to be as proactive in
terms of intervening in thetreasury market, lowering
interest rates, all these thingsthat they have in the past, if
inflation proves a little morepersistent than markets may
currently expect.
So I think it's telling thatyou know Warren Buffett has
(27:02):
famously bought at this point inthe cycle.
You know bought when he'sloading up on cash.
He's famously bought used tozero coupon bonds as a way to
kind of make that bet onduration.
He's doing the exact oppositethis time by becoming the
biggest buyer of treasury billson the planet.
(27:22):
So I think you know Buffettdoesn't want to own any duration
.
I think Stan Druckenmiller'stalked about the same and Stan
has said that his career wasmade on trading the bond market.
It wasn't shorting stocksduring declines, it was betting
on bonds in a majorly leveragedway when recession was coming.
He's saying kind of the samething that it's really tough to
(27:45):
bet on duration when you havethese other risks out there in
terms of the amount of debtissuance and supply demand
issues.
So I think yeah, normally Iwould say yeah, it's time to bet
on duration this cycle.
I don't know if it's going towork as well as it has in the
past.
Speaker 1 (28:02):
Another thing you had reposted from Sentiment Trader,
which looks at the percentageof NASDAQ 100 stocks that are
more than 10% off their eyes,rather below their eyes.
Let's talk about breadth,because the breadth point is
something I've been hammeringmyself for over a year, this
kind of between.
When I talk about, I equatebreadth with small caps, because
(28:26):
there's many more small capnames than large cap names, just
by definition.
I know people have differentways of thinking about breadth,
but to me it's very much reallya small cap, relative weakness.
It hasn't really mattered allthat much.
The divergence, I think you canargue it lasted for longer than
anybody.
Certainly I thought it would.
But does breadth still matterat all?
Speaker 2 (28:47):
I believe.
So I mean, I believe it's oneof the most important tells you
could want in terms ofunderstanding the strength, the
persistence of the underlyingtrend in the market.
So right, a healthy market isdriven by the, you know, greater
percentage of components withinthe index.
A not so healthy trend isdriven by, you know, fewer and
(29:10):
fewer stocks driving theperformance.
And so one of the things that Ilook at to kind of understand
this is and I've written aboutfor years now is I look at the
Hindenburg-Ohman and the Titanicsyndrome, which are two, I
think, important signals ofunderlying trend strength.
You know, an individual signaldoesn't matter to me.
(29:33):
I mean, a lot of people like totalk about it.
Wow, hindenburg-ohman wastriggered yesterday.
One signal doesn't matter.
But when you look at them overlike I said, I look at insider
activity over 12-month look-backperiod I think 12 months we saw
50 Titanic syndromes triggeredacross the NYSE and the NASDAQ.
(30:02):
The only other times we've seen50 was in November of 2021,
right before the 22 bear marketwas in January of 2018.
And 2018 was a really difficultyear for the stock market and
at the top in 2000.
These are the last 30 years,the only times we've seen 50
(30:23):
Titanic syndromes and I shouldprobably explain what this is.
A Titanic syndrome, just like aHindenburg omen, is triggered
when you have a stock marketwithin a new high, something
like you know within a couplepercent or within you know the
last 10 days or something, stockmarkets hit a new high and the
number of new lows issignificantly elevated, like
(30:44):
over.
In case of the Hindenburg Omen,I think it's two and a half
percent of all issues traded.
So you shouldn't be seeing anumber of new lows, new 52-week
lows, you know growing at a timeand especially, you know,
crossing a threshold, that typeof a threshold when the stock
market's making new highs, it'sbasically a sign of growing
(31:08):
disparity, growing divergenceunder the surface of the market.
So when you have a large numberof stocks making new lows, it's
a sign that you're seeing thesekinds of divergences that
aren't indicative of a healthytrend.
So the fact that we've seen 50Hindenburg omens over the last
12 months and that's a very rarelevel sorry, excuse me, titanic
(31:29):
syndromes it's a very level ofbreadth, rare level of breadth
divergence, I think is anotherimportant warning signal that
the uptrend in the stock marketis just not healthy right now
and typically how we see thisresolved is by a reversal to the
downside.
Now it could be anything fromlike.
What we saw in 2018 wasbasically just a period of kind
(31:51):
of sideways action.
Although the fourth quarter of2018 was roughly 20% decline, it
could be a 22 bear market right.
That was another precedent.
And it could be something likewe saw with the dot-com bust
after 2000.
Top market went in kind of athree-year tailspin.
(32:13):
From that point I do think itcan be resolved in a number of
ways.
Speaker 1 (32:24):
But right now it's telling you that the upside is
potentially not sustainable.
How do you execute all that?
I mean, I myself make it verypublic that even when I'm at
peak bearish I say don't short.
That's just me, because I'vedone back tests.
I know it doesn't work all thetime, but if you have a mindset
(32:45):
like yours and I'd say also likemine, where you're justifiably
concerned, even though it hasn'tplayed out just yet, how do you
play it?
Speaker 2 (32:57):
I think what I like to say is I think everybody has
their own version of whataggressive looks like and what
conservative looks like, and Ithink with these types of
signals, I think it's importantto understand.
From my opinion, it makes senseto lean conservatively, as,
whatever that looks like for you, I agree with you.
For most people, short sellingis not a good idea.
(33:20):
I've always said it's thedouble black diamond of
investing.
It's very difficult and even ifyou do it well, you're one of
the best in the business, you'regoing to lose money most of the
time.
So short selling is probablynot wise for most people, nor is
getting out of the marketentirely, but I do think
(33:41):
probably for most people.
Looking at, what does truediversification mean in this
type of environment?
Right, 500, for example, it'sabout as concentrated, if not
more concentrated, than it'sever been in these stocks that
(34:02):
are probably most vulnerable to,you know, bear market type of
type of activity.
So if you feel like you're,you're, you know, diversified by
just owning the S&P 500, or youknow something along those
lines, you may want to thinkabout, well, maybe still owning
equities but diversifying moreinto other areas of the market,
right, I mean, for me it'sfascinating that you know energy
(34:25):
and materials, the flip side ofthe technology.
Overweight is a dramatic, youknow, underweight, historically
rare underweight in energy andmaterials.
Rare underweight in energy andmaterials.
And these are the areas which,if you believe, as I do, that we
(34:47):
are in the early years of acommodity super cycle, you
probably want to diversify intothose areas that are so
significantly underweight.
Also makes a ton of sense toown other asset classes besides
equities.
Right, as I mentioned, you knowBuffett owns a massive amount
of treasury bills.
The yield is great, gives thema lot of optionality if there
are more opportunities that comeup in the stock market through
(35:07):
a decline.
But I think for most peoplethey're dramatically
under-invested in real assets.
So you know, real assets wouldclassically be real estate,
precious metals and commodities,and not to mention tips and
those types of things.
So I think generally, preciousmetals and commodities make the
(35:30):
most sense in that area andinvestors are just dramatically
underinvested in those things.
Speaker 1 (35:37):
Investors are just dramatically underinvested in
those things and we can talkabout why there might be a kind
of a secular shift in thatdirection in the years to come,
if you'd like.
Yeah, let's expand on that,because I'm of the same mindset.
I mean, for me it's partiallyrelated to the idea that I think
China probably economically haseither bottomed or is close to
bottoming and that would beenough at the margin to just get
(36:00):
some commodity excitement goingagain.
Can you expand on your viewthere?
Speaker 2 (36:04):
Well, I mean from a cyclical perspective.
I published a chart, or posteda chart on Twitter last week.
It came from Simon White fromBloomberg, who pointed out that
most people believe thatcommodities go down in a
recession.
Right, this is why people areselling commodities right now.
The truth is, commoditiesdecline in the lead up to
(36:25):
recession and then go sidewaysat the start of recession and
actually rise through therecessionary period.
So by the time you've come tothe conclusion, oh wow, we're in
recession, you've alreadymissed the bottom in commodities
.
And so I think, from a cyclicalperspective, if you do believe
(36:46):
we are very close to recession,it's probably a great time to
buy commodities.
But from a secular standpoint, Ithink one of the most important
things to pay attention to isjust the capital cycle.
Where is money flowing?
Because when the majority ofmoney flows to one area, returns
necessarily go down in theyears to come in that area.
Vice versa, so when areas ofthe markets that are starved for
(37:11):
capital over a period of timegenerally see the most wonderful
returns going forward.
Because, you know, let's justlook at the commodity cycle, for
example, right in the energyspace, when the Fed lowered
interest rates to zero after thegreen financial crisis, energy
companies borrowed a ton ofmoney, went on this huge
(37:32):
fracking boom, invested inmassive supplies.
Oil prices crashed Since thattime really since the 2014 oil
crash these companies have beenstarved of capital for about a
decade now, and so that theinvesting into energy
infrastructure and productionand all these kinds of things
has been very low, and that setsthe stage for wonderful returns
(37:56):
going forward.
You could say the opposite abouttech stocks.
So, after the dot-com bust, foryears, tech stocks were kind of
starved of capital, and thereturns that we've seen over the
prior 10 years, the last 10years, were the result of those
companies being starved forcapital and returns in the space
going up in a dramatic way.
But right now, right, we'reseeing the opposite.
All the money is going intodata centers and NVIDIA chips
(38:19):
and all these things.
There's a massive amount ofcapital going into space that
will necessarily depress returnsfor years to come, and so I do
think we're in the middle of asecular shift where investors
are going to be transitioningfrom wanting to own technology
stocks to wanting to owncommodities, and that will drive
a super cycle over the nextfive to 10 years.
(38:39):
Let's talk about the FelderReport.
Speaker 1 (38:43):
as we wrap up here, talk about your research.
What have people got access?
Speaker 2 (38:47):
Yeah, that's a nice plug.
On my website, mike, Iappreciate it.
It's thefelderreportcom.
I put out a weekly email.
It's just all it does isfeature the five kind of
articles or charts or thingsthat I found during the week
that I that I found mostinteresting.
A lot of times it's thatcommodities chart type of a
(39:08):
thing or an article about.
Lately I've been focused on AIand hype versus reality in AI,
but yeah, that's just free tosign up for.
Right there on the website Ialso put out some premium
products.
I read a weekly market commentthat kind of is a lot more
detailed, with kind of the stuffthat I'm coming across and
curious about and a weekly chartbook and trade ideas that are
(39:33):
typically driven by that insideractivity.
Speaker 1 (39:38):
Everybody.
Please make sure you check outthe Felder Report and appreciate
those that watch this live.
This will be an edited podcastunder Lead Lag Live on all your
favorite platforms.
Make sure you follow Jess on Xand various social media
platforms and hopefully I'll seeyou next time for another
episode of Lead Lag Live.
Thank you, jess, appreciate it.
Hey, that was fun man.
Thanks for having me.
Speaker 2 (39:58):
Cheers everybody, Thank you.
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