The Fagan Financial Report

October 1st, 2023

Episode Transcript

(00:00):
Good morning, and welcome to theCapitol District's Money and Investment program. You
were listening to the fag In FinancialReport. I'm Dennis Fagan sitting here with
my son Aaron, as we doevery Sunday, but this is actually Friday
midday. UH News Talk Gate tenon one h three one w g Y.
If you want to, you know, if you have a question or
whatever, feel for you to emailus during the week at Fagan Associates dot
com. Costs five one, eight, two, seven, nine ten forty

(00:23):
four. UH find us on Facebookand find us on LinkedIn and if you
have a question, but you knowa podcast the show from time to time
to give us a break on aSunday and also to cover we seem to
cover a lot more ground. Youknow, it's nice working on Sundays.
It's also nice having Sundays off sometimes. Yeah, And what is what is
this weaponized in conference or weaponized incompetence? We were just well, we were

(00:47):
just talking about before before we goton here. What were you saying.
I was saying, how long isthe show in the first half? Yeah,
And I've told you a billion timesand you said, hey, why
why why do I need to knowthat if you if you know it right,
and Lauren calls it, I thinkit's like a new term weaponized in
competence. Like the other day,you know, what is she doing while
Jude takes a nap. That's whatI know. She's figuring out this stuff

(01:08):
weaponized in competence. So so lastweek we get our groceries picked up,
you know, so you put himin the car and then you pick them
up. That's weaponized in competence rightthere. Well, so Sam and Connor
came over my sister and we hadnachos and I used the last of the
hot sauce and I didn't put itin you know, the pick the order

(01:29):
to pick it up, like onthe edge. And so we had tacos
this week and we never had It'slike, what the heck, we don't
have hot sauce. She's like,you put it in the car, and
I'm like, well, you putthem all in the car, and it's
weaponized in competence. I don't knowhow to use it. No, hot
sauce is also caused the first worldproblem, isn't it. Yeah, Web,
I like I like it, butyou know, it just seems a
little too aggressive for the fact thatwhen I know it's it's a harsh word,

(01:51):
weaponized in competence. But I'll takeit because that is true. If
you're here. If you're not here, we're not doing the show this way.
If you're here, then you're gonnatell me twenty four minutes, which
is too talking about nothing. Well, oh with the with the cell phone.
Your cell phone's always ringing. We'resharing office and I'm on the phone,
and you're down the meeting and I'mon a phone call. In all

(02:13):
of a sudden, the phone startsblaring music, some stupid and they you
know whoever I'm on the phone,can hear it in the background. For
those of you crazy fifty five yearsyears and older, just you know,
yeah, show me some sympathy.Emailed me during the week, called me
during the week and tell Aaron he'swrong, you know, because I turned

(02:34):
I turned the cell phone off orI ever needed on. Because you don't
have kids, because when you weretwenty you'd call me all the time in
the morning, Hey, I needa ride, I need this, and
need still works, just like thevibrating still work. I won't hear that
I'm going down. I don't callyou at two in the morning, weaponized
in competence and selective here. Incompetence, it's just general incompetence exactly exactly selective

(02:55):
here, and you'll get used tothat as well. You only hear the
things you want to hear from mom. Lauren has that. So everyone has
these faults around me. But I'myou know, so Mom will go out
at night and I'll say, well, where are you going? And She'll
say, I told you twenty timesI'm going out, ay, A,
B and C. I said,I don't have to know where you're going.
I'm just kind of curious from timeto time. I just know I

(03:17):
know you're going out. It's justwhere we're going, right, But I'll
ask my amount of curiosity or doyou just you know, have a little
conversation, which you know my momcan do without lots of times, you
know what I mean. She's gotthat shoot syndrome, might call it,
you know. All right, anyways, let's get into it. We closed
out that we're closing out the firsthalf and we'll review that review, you

(03:38):
know, the impending shutdown of thegovernment and what really that means for the
stock market over the short, intermediate, long term we'll talk about uh,
you know, interest rates and wherethey exist today, but and also some
specific company news. Nike came outwith good earnings, where interest rates might
be headed, talk about you knowwhat Warren buffets saying, and also delivering

(04:00):
Alpha conference. If we get toit, we've got you. We've got
twenty more minutes in this half hourand twenty four fifty in the second half
hour. But I'm gonna go backand read from June thirtieth weekly report,
and this is the last of theweek. Stocks moved higher, So this
is June thirtieth, a quarter ago. Stocks moved higher to close out the
first half of two twenty three,once again serving a large dose of large

(04:24):
helping of humble pie to those whosecrystal ball wasn't quite as clear as was
hoped. Is human nature to lookfor answers, even if there are none
available. The fact is that anaverage of stock market posts back at least
ten percent, approximately once every oneand a half year. However, history
is any guide. An investor inthe SMP five hundred has nearly ninety percent
chance of making money over any fiveyear period. It therefore stands to reason

(04:46):
that it is prudent to ignore theshort term volatility, which is unpredictable,
choosing to rely on the long term, which is quite predictable. That said,
many confused violatility with risk. Itis a fact that over the short
term the financial markets can be bothvolatile as well as risky. Whoever,
the long term they are much less. So it is with this in mind
that we choose to focus on thelong term let the short term take care
of itself. We have noted overthe past month that at this point,

(05:10):
after the run up in the SMPfive hundred and then they has that composit
off the October twenty two closing lows, we believe that a minor pullback is
in order and in fact, wouldbe healthy for long term investors. So
Aaron, in the third quarter,the SMP five hundred, you know,
through through Thursday September twenty eighth,closed down three point three nine percent.
It's up a bit today, itwas down. It's down four point six

(05:32):
one percent for the month. Soactually coming into September, the s and
P five hundred was actually up forthe third quarter. Now it's down for
the third quarter three point three ninepercent. As that composit taking it on
the chin a little more than that, down four and a quarter percent makes
sense. So so my question toyou is, is that part last part

(05:53):
we believe that a minor pullback isin order? A would you consider this
minor? And B would you considerthis hell for long term investors? You
know, I think whenever you're inthe midst of something, it seems like
it's worse than it is. What'sthe S ANDP down from its highs seven
percent? Yeah, at least alittle more than that, you know.
So you know, I think thisis this is normal. I'm not too

(06:13):
worried about it. Through the closeof last week down yeah, about ten
percent. I'm sorry about ten percent. So you know, I'm not too
worried about it on the on theaggregate, I think it's necessary. I
think we have to digest the gamesthat happened in the first half of the
year, you know, we haveI think someone came out this this year
and said, you know, therevenue from AI will be about you know,
five to eight years out, SoI think we all have to keep

(06:35):
that in mind. You know,I think the route at the beginning of
the year was you know, alittle bit because there was some undervaluation,
but also because of artificial intelligence.And now I think we're you know,
I've been saying on the show,we're in the wait and see mode for
them. So, you know,I think this is healthy. I think
it's normal, and I don't seeany major risks in the next let's say
three to six months. You knowthat said a lot of debts coming do

(06:59):
next next year. I think we'regoing to see higher rates for longer.
So I think a lot of theyou know, more more growth growth companies
could get weeded out if if youknow, they have to sustain higher if
they do have to let's say,take on more debt at these higher interest
rates, that hurdle is is justthat much higher. So, you know,
I think over all the markets ingood shape. I do think we're

(07:21):
still in a you know, akind of a volatile market, though,
so volatile risk and volatility kind ofcan go short term lack of really risk
over the longer term. So youwould say this is a minor pullback,
you would say it's healthy. Youwere off last week. I got a

(07:41):
call from an individual because I reallyhammered home the the interest rate risk,
and he said, well, whatabout China, what about oil? What
about Russia, what about the debtceiling? What about what about those types
of things, and and and youknow, you know I agreed with him
to a certain extent. And yetthere was in there was a study by
ge when g was in the financialservices business, put out several years ago

(08:07):
and then looked back on the lastone hundred years in the market, and
then went back and said, youknow, the market climbs a wall of
worry. There's always going to bea wall of worry. There's always going
to be things out there, issuesout there, because they're going to cause
you not to invest. You know. I'll then circle back to a Warren
Buffett basically said interest rates exerted,we might get to this later on,
exert a huge gravitational pulling asset values. I think if you were to ask

(08:28):
Warren Buffett over the intermediate to thelong term, because you're gonna have these
issues come and go. I mean, think about three years ago was the
pandemic, five years ago, often years ago was Ebola. You know,
in between that we had Jerome Powellreplacing ben Burnett. Wasn't ben burnankey?
Was he a ben burnankey. Sowe've had a lot of different issues

(08:50):
arise all along the way over thepast decade or two, and yet you
still have the market through at sevenor eight percent a year. What is
different If you were to strike adifference now and you could, you could
say, well, China is differentnow, and I think it is a
little bit different now, or decouplingfrom China is different now. But I
think it's different now because it alsohas an impact on interest rates because as
we bring productivity home. You cansee it right now with the UAW so

(09:15):
China and the pandemic has really youknow, kind of shaken up the labor
force and move if you look atyou know who controls the balance of power
there, it's probably labor rather thanmanagement. And that's really the big,
big issue I think over the intermediateto longer term, because that affects interest
rates, effects inflation, which inturn effects interest rates, which probably keeps

(09:39):
the base inflation rate despite the factthat the Fed wants it at two percent,
probably is going to keep it attwo and a half or three percent
for longer than anticipated, which isgoing to keep interest rates up where where
where they are, or so maybeeven a little bit higher as we talk
about later. So I think ifyou look at the third quarter, you
look at Okay, SMP five threethirty nine, they has that down four

(10:01):
and a quarter. If we endtoday where where we are, they're both
going to be down about you know, three percent or so. You know,
I think that is exactly what wecalled for. We don't always call
for that, but I think afterthe bounce that we've had off the October
lows, you know, it's itstands to reason, and when things go

(10:22):
as they stand to reason, wedon't have like an event, exogenous event
outside of the internal workings of themarket, then the market is relatively rational.
So that rational move in the thirdquarter was hey, a bit of
a pullback, so the market didact rationally in the third quarter. I

(10:43):
think, you know, the secondbullet really on the July thirtieth, and
we'll talk a little bit about it, is the economy is at the stage
of it's like a where the federalillbe moving in smaller and smaller increments over
longer periods of time. This workingat the periphery will in turn have less
of an impact on the economy.And I think we saw that as well,
where you saw the FED pause overthe last at its last meeting.

(11:03):
It has another one coming up inearly November, and we'll see what they
do. Uh. I would notbe surprised if there was a quarter point
hike, although a lot of individualsout there are suggesting that, you know,
the FED has come far enough andthat they have to really see,
you know, what happens with theeconomy, given the beginning of student debts,
student loan payments being made, andalso it's just beginning of the lag

(11:26):
effect of all of their hikes prior. I think maybe it stands to reason
to pause. Yeah, they agreat alright, well said, thank you,
thank you, thank you. Sothen then let's let's let's look at
where we are now, Aaron,Let's look at where we are now.
Let's say with with with interest rates, uh, you know where Let's look
let's look at the yield curve now, uh, you know, universes Friday,
we have you know, what isit, the six month at five

(11:50):
point five? Yeah, and Iwant that five point six, one year
at five point six, you know, two year at five point one,
three four point seven, five fourpoint six. So you know, you're
seeing a lot of talk this thisweek of you know, maybe the you
know, five five ten year treasuryhitting five percent. Well, you know,

(12:11):
I was also reading somewhere else thatyou know, after the FED rate
hikes, the you know, theten year usually peaks within three months of
the last rate hike, so youknow, that's something I would continue to
look ahead going forward. Uh,you know, when to maybe step into
a five or ten year treasury.We don't normally really go out ten years

(12:31):
on the spectrum well that, youknow, especially since I've been working here,
because it was so it was youknow, minimal, you know,
a fraction of what it is today. But you know, I think for
some investors, you know, itstarts to get appealing to maybe lock in
rates for five years. Ten yearsis a long time. Though I agree,
this is a long time to lockand rates like I just don't like
doing that, I don't you know, ten years is a long time,

(12:54):
and especially politically nowadays, I thinkit's it's tough to lock in anything for
ten years at the at the peakat the top of our show, you
had mentioned thirty one trillion dollars indead and you know, I think thirty
percent of that's coming due next year. So yeah, so you know,
I think that's so that has supplyto the market. Yeah, so so
for the for the I guess thecasual listeners are the casual and monsters out

(13:16):
there go ahead and just go on. No no additional supply, all things
being equal, pushes interest rates upif demand stays constant, because supply and
demand determines price. And if ifthe demand for treasury stays constant and supply
goes up, then you have aprice going down. If you think of
the United States as a business,you know, think of what's what's that's

(13:39):
going to do to the debt thatyou know, the United States will have
to take on if rates continue torise, and they're going to have to
essentially refinancing quotations you know at thesehigher you know, five plus percent,
and you know, so the logyou go out on the duration of these
treasuries, I think, the moreuncertainties you have, because who knows what

(14:01):
the world's gonna look like, especiallygeopolitically, in ten years in my opinion,
Yeah, and what that impact oninterest rates will be. You know,
if we're thinking that interest rates willwill stay some somewhat elevated where they
were compared to two or three yearsago, and just as a point of
reference. Right now, we closedthe ten years at four fifty. It

(14:22):
closed out the month of June atthree eighty, closed out last year at
about three eighty, about the sameat the end of two thousand and twenty
one one fifty two. So youwere right when you said earlier. I'm
not surprise you're right, obviously,but that interest rates back then were a

(14:43):
fraction of what they are now.Even at the end of two thousand and
nineteen pre COVID, the ten yearsstood at one ninety two. So i've
interest rates two and a half timeswhere they were not quite two and a
point three times where they were atthe end of two thousan in a nineteen
pre COVID, and hire where theywere probably even pre great recession. They're

(15:07):
higher than where they're not the closeof two thousand and seven, the ten
years a four or eight. We'resitting at four fifty one. So I
don't I agree with you. Idon't think it pays to go out ten
years. I think there's too muchuncertainty over the ten year. And yet
I will say that if you thinkabout it, if interest rates get to
five percent on the ten year andyou say to yourself. Okay, I

(15:30):
want a four percent distribution rate,even if you adjust for let's say three
percent inflation. Let's say again theseare not the exact numbers, but at
three percent inflation takes to five yeardown to four point eight five percent adjusted
for inflation after one year, aftertwo year four point seven four point five
five four point four four point oneover the next two years, so over

(15:52):
the next six or seven years beforeyou actually get inflation adjusted distributions back to
four percent. If you're retired,and let's say sixty two, you get
to bay age seventy and have inflationadjusted return. So I think at some
point in time the ten year marriageto look. But right now, let's
say you're getting you're getting good returnout of let's say the two year right
through to the five year, thefive years at four eighty season fighters at

(16:15):
four four, yeah, four eightyfour sixty, and the two years at
five to ten. So you getto lock in some return without looking at
a money market which changes daily butalso is much more much more aligned with
the federal funds rate, you know, so to FED. And would you
say the Feds rates begin to peak, how long it within three months?

(16:37):
Months right, and the FED cutsabout eight months after the last rate hike
two so you know, you know, so we're getting I think we're getting
there. But the economy is continuingto really you know, I wouldn't say
fire on all cylinders, but it'sbut it's but it's doing pretty well.
Some data coming out next week,I think jobs, jolts data is coming
out. I think a lot ofthings that I can't think of what else

(17:00):
at the top of my head,but that that will also give us a
you know, I think, anidea of what the Fed will do in
the next few months as well.So there, so there is the third
quarter in a nutshell minor pull back, not unexpected. We enter the fourth
quarter. Now we enter the fourthquarter, and that's I think. What
you have to say too, isyou know what you said something to me,

(17:21):
like, you know, if themarket was up two percent going through
here, what would if you wereup to yeth percent? What would people
do? But well, well something, what's the mark? What's the SMP
up like fifteen or something? Yeah? Yeah, well lear let me let
me, let me let me framewhat you're about to say, not to
answer your question, but year todate, excuse me, the SP five
is up twelve percent, They haslike up twenty six. The total market

(17:45):
indexs up eleven thirty seven, theRussell two thousand up one eighty eight.
Excluding the largest seven stocks, theSMP is flat. Now, let's say
year up two percent for the year. As either an individual or a professional
investor, you're a professional and anindividual, actually, but go ahead,
you do what do you do inthe third quarter? What fourth quarter?
Going into the fourth quarter? Hedid try to play catchup? Do you

(18:07):
say to yourself, Okay, let'ssay you're aware that X the largest seven,
the S ANDP is flat. Yeah, that's tough. You know,
we really don't play catchup. Wedon't do that here. We never do.
So it's hard to say what wouldpeople do. But if I were
to play catchup, yeah, i'dprobably Well, no, let's say you
were an individual investor. Let's sayyou're just out there. Or let's say
let's say your professionals, who's goingto get calls from the pile into energy?

(18:30):
In fact, would you realize whatI was doing? Yeah, but
I mean, we don't do that. But energy is probably, you know,
my my favorite sector really right now, I think from a value standpoint,
and you know it's two three,four year outlook, one hundred percent
overweighted an energy. Remember, energyis only about five percent of the S
and P played energy all year,and it was done about twelve percent about

(18:51):
three to six months into the year. We've been, you know, kind
of picking up energy. I thinkit is a nice balance with our in
a larger holdings, which are largecap technology. So you know, I
think energy is a value play,but I also think it can be a
growth play going forward. So Ireally like energy. That's what I would
probably would do if I had,if I had to catch up. But
I mean, I don't I don'tthink that's advice. It's you know,

(19:14):
you look at I agree with that. Like I think if you barbelt energy
and you know technology, you knowenergy, and you know, I would
I would go broader than just technology. Really, I would go communication services
and technology and consumer discretionary because consumerdiscretionary would hold would hold Amazon. I
think if you first of all,I think you need to be a little

(19:34):
bit more stock specific than just broadother than energy. I think energy you
can you can pretty much buy theXL which is the it is Chevron and
Xon, so Xeni a new hightoday. But you know, at the
same time, if I was anindividual investor, why I paid a point
one percent expense ratio And you cankind of mimic it, right, you

(19:55):
know so. But but but Iagree with I think the energy you can
buy, you know, right acrosthe board. I think if you take
a look at the other sectors,I think you've got to be a little
bit more specific. I just don'tthink you can buy technology. I don't
think you've got consumer discretion your communicationservices. But that said, I think
when you get on anything anything otherthan energy, as opposed to those other

(20:15):
three sectors, I think you're barYou have a nice barbell as to a
secular grower. And you said whenyou're looking for value, But I think
I think the true growth of thatsector has not been priced in over the
next three, four or five years. Remember you can't say you can't you
you know, we're double the weightingof the S and P five hundred energy,
which is great, but it's stillonly ten percent. Well why aren't

(20:37):
you twenty or thirty? Because youknow you have to have correlation to the
market. I will say too thatif you look at the market in the
fourth quarter. This August and September, which are historically very poor months for
the market, have really played outright according to script. So if you
if you think going forward, Ithink I think I think there are investors

(20:59):
both individual and professor professional and everybodydenies it, but it's a fact.
If you look at statistics, youknow, uh, you know cash flows,
you know flow cash flow statistics thatpeople do try to play catch up,
and I think the last thing youwant to do, and we do
not do it as and it willdo some tax loss harvesting in the fourth
quarter. We try to do itthroughout the year. We'll accelerate down the

(21:19):
fourth quarter with some people, butI will say that they're they're Statistically people
do try to catch up professional investors, especially in the fourth quarter, because
they're well aware of the calls they'regoing to get if they lag a benchmark
substantially. Yeah, so I thinkyou're going to have that. Historically,

(21:40):
Historically August and September and the firsthalf of October are relatively poor. You
know, we're close enough. Wehave about ten percent cash. We'll keep
working that down for our clients.Were continue to invest in treasuries. We're
lengthening that out with intermediate term bothcorporates and treasuries through Vanguard through their ETF.

(22:02):
The care expense ratios below point ohfive percent. So those are some
things we're doing right now. Butbut but the market has acted rationally.
This is this is nothing different thanwhat happens in most years, going back
twenty forty fifty seventy years, Septemberis a poor month. September was a
poor month. August is also apoor month. You know, back back

(22:22):
to that June thirtieth missive or whatever, the weekly that we put out and
put pardon for the pages rustling,but sign us up for the dog days
of summer. Well that's also whatyou know, that's what I was kind
of getting out. I was reading. It's you know, at the beginning
of the show, we said,you know, are you happy here?
And you know it's also it's youknow, tougher when you're going through it.

(22:45):
But you know, we've been readingback on this. You know you
have to remember that, you know, yeah, yeah, I'm happy where
we are here, and it wasit was a little bit expected, and
the market goes through things like this, and I think you always have to
remember that. I think that's what'stough with people now, even just with
like Schwaba Lanz Schwab makes you signup for their Shava lance when you open
an account. Now, now everysingle person knows that they can check their

(23:07):
account every single day, and youknow that gets boring. I love seven
pounds Tuesday to Thursday. Yeah right, I had a routine screening colonoscopy.
And that's too much information for sure. But you know, if you look
at stuff every day, I thinkI'm sure I'd fly away in the wind
in twenty or third not twenty orthirty days. Thirty days, you know.
So so you're right, you hadpeople. So Schwab does require that,

(23:30):
Yeah, not not if you wantto go paperless. So yeah,
I think you know, you haveto remember that these happen. It doesn't
mean that the market's going to bedown twenty percent. Every time you get
a you know, five ten percentpullback. That just about does it for
the second half. Furnutes minute backin the second half, the government shutdown
Nike's earnings, Peloton deals with dealwith Lulu, Lemon, Bill Ackman,

(23:53):
a lot of different things seeking outfor Right now, it's ten thirty on
the station Dependifi for news, weather, information, new stock A ten three
one WG in here with my sonAaron, as we do every Sunday right
here from ten to eleven right hereon news Talk A ten and one oh
three one w g Y. Thisis a podcast, So don't call in
if you want to give us acall during the week five one, eight,
two, seven, nine, ten, forty four one eight hundred two

(24:14):
seven three six zo two six,check us out on the webit, faganasset
dot com, or like us onFacebook. Do you have any questions?
You know, that's usually a goodtime. We're trying to you know,
making sure that we have the informationneeded. In the first half hour,
we covered you know, the thirdquarter, and I think it was a
healthy pullback in the third quarter,and in and I talked about that.
I think this is important too.It's from CNBC, but it says,
you know, Bank of America's strategists