Vegas, quite a conference at an event so full of legendary investors it struck me how the vast majority of people we spoke with were pessimistic about the u. S. Market at least in the near term future. Gary why is that in and do our guests today hold the same view . We welcome chief investment strategist Liz Ann Sonders and morris mark, and we were all, actually, at the salt conference. Morris, lets start with you in terms of the markets today. You dont see things as negative as some of the other participants that conference did, do you . No, i think its a fairy valued market fairly valued market. I think theres great opportunity for really terrific businesses to build value, and theres a lot of problems for businesses that are going to be taken advantage of by those great businesses. Well, you have invested, youre the envy of many investors because many of the stocks that worked last year were talking about facebook and google and amazon youre a value investor, but you owned a lot of these stocks, and you continue to own them. Whats the thesis besides them working, why do you own them . Yeah. We dont own of course, we want them to work, but i think we really want to own great businesses. Were very cog cognizant of val, but to us, value is the present value of future cash flow properly discounted. You dont want to pay too much for that, but none of these companies, not even amazon if you look at it in terms of its Free Cash Flow multiple, are expensive. And conversely, theyre really super businesses. If i were to look at google and facebook, for example and they are important investments to me, theyre the two most Important Media companies in the world. There are a lot of other great media businesses, including fox. But both of these companies, essentially, operate throughout the entire world excluding china. So they can leverage their asset base, their database, their software, their skills and, in fact, benefit from the fact that they control networks that are worldwide. Maria so youre doing what any great investor would do, and that is looking for growth in a lowgrowth world. Liz ann, let me turn that to you. Where do you see the growth today, and would that be a place not necessarily a specific stock, but spaces, industries, would that be a place to actually put money to work in . Yeah. I think you do want to have a cyclical bias in portfolios right now. I think the pickup in the economy that we anticipate is going to come. Financials, i think, are interesting. I can take the fed at their word that they are going to continue to inch up interest rates, so weve had an outperform rating on financials for a while. Got a little bit painful there for a short period, but i think that makes sense. And technology, actually, i think is one of the primaries where you can find growth at a reasonable price. Those are the two sectors we have favorable ratings on. Gary you know, morris, were going to talk later in the program of the tech bubble of 99, and when i think about those stocks that are working right now and continue to work, how do you know when to exit a stock like that . Whats the sell signal when the growth is no longer paramount and you have to worry about the right price . A lot of reasons i think two stocks like this that we sold in the last year, linkedin. A lot of the businesses that they acquired did not contribute to the companys growth, and it was a very, very generouslyvalued stock. So when you see that, dont pass go, dont collect 200. Leave. Another one that we sold also was yahoo because we did a lot of work on the legal risk related to the proposed spinoff with alibaba, and we did a lot of work on alibaba, and we werent comfortable with the legal risk, and we got a lot less comfortable with alibaba. So its looking at the business. If the numbers dont work, you leave. Maria so youre looking at valuation as well as the growth prospects. In terms of valuation, why arent some of those other names like the facebook, the googles, the ones that youve owned and sort of ridden as theyve moved up, why arent you having issues about valuations there . Well, we have issues every day. Thats why we go to work every day, and we love it. Its a great opportunity maria but you dont see the same situation there that you do in, like, a linkedin. Absolutely not. Facebook, one, you have a very entrepreneurial ceo who owns a lot of stock, so hes your partner. Seems to be dedicated to building the respective businesses that it owns. And if you look at it, it has literally billions of users as of the last quarterly report. They said that about a billion of them spend 50 minutes a day on the respective networks. I think there were tv networks that would kill for that audience. Maria for sure. Gary liz ann, lets talk about active management. Morris, obviously, an active manager versus index. One of things i heard over the holiday weekend, again, and you hear it daily, is why give money to an active manager . Indexing continues to work what do you tell the schwab climates . Well, i think we are seeing a shrinkage, and i think thats a longterm, secular trend. The key, obviously, is which active manager gary yes. So i think were probably overstored in a lot of that space, but i think there is still a tremendous amount of talent. It may be a smaller number than existed before, and i think for a lot of investors taking a passive approach probably does make sense as opposed to either trying to do it on their own or trying to find some of those high quality managers. Fundamentally, though, i think with correlations coming down broadly from a macro perspective and the opportunity for active overpassive is here right now. Gary all right, well be right back with more. Up next, navigating the investing world amid the most volatile and uncertain election in history. How you can trump the trends. Well take that to two of the sharpest minds on wall street when we return. Stay tuned. Esurance does Homeowners Insurance a smarter way, which saves money. They offer a diy home inspection, which you do yourself, which saves money. They offer a single deductible, so you dont pay twice when Something Like this happens, which saves money. They make it easy to bundle home and auto, which reduces red tape, which saves money. And they offer claim forgiveness, so if you make a claim, you could save money. Esurance was born online and built to save. And when they save, you save. Thats home and Auto Insurance for the modern world. Esurance, an allstate company. Click or call. Maria welcome back to wall street week. We are talking with Liz Ann Sonders and morris mark today. We cant talk about the economy without talking about this once in a lifetime president ial election and how it will impact your money. Do you see an impact to stocks, to the markets, morris, depending on who wins this election . Yeah, i think so. The way we look at it, and im trying to be simple in this analysis, we think the market is what it is, and if hillarys, to us, a conservative candidate. If she were the next president , the environment we have is the environment well have. Maria so youre talking about 2 economic growth. Exactly. The real question mark is the republican candidate. Hes got some really good ideas, hes got some oh other things hes said which frighten people, and you just dont know whether he will implement the good ideas or not. Hes going to have to convince people that his good ideas will make sense, and hell implement them. Maria so it could be great, it could be horrible. Exactly. [laughter] and i think its really important. Gary do you think thats going to happen in the next several months . Is this going to become an issuesrelated campaign . Im not a political forecaster. Im just saying as an investor what im interested in is will we see Growth Initiatives from our government . I dont think anything will change if were in one direction. But we need things like Corporate Tax reform. We have 2 trillion sitting offshore thats not doing anything either for us or for the world. If we can resolve some of those questions without screwing up international relationships, i think the economy would explode. Gary liz ann, at schwab where individual investors are at the forefront, how important is the election in terms of what theyve been doing and how they anticipate moving their investments around . I dont think its important yet in terms of what theyre doing, but its the majority of questions im getting now when im out on the road. So i think its an uncertainty factor. A lot of the concern surrounds trade given that regardless of who we get, there seems to be uniformity in terms of views on trade which i think is at least on the surface at this stage a net negative for both the economy and the market. But ultimately, its a function of we actually have to hear some actual policies in more detail from the trump side. I think the concern is how far left does Bernie Sanders pull hillary, and if assuming shes the candidate, does she move more toward the center. The other thing that is unique is that this is an eightyear cycle here that were in. People talk about the fouryear president ial cycle, the third year being the best. We bucked that last year, obviously. But theres also sometimes an eightyear cycle where you have an eightyear twoterm president so that the election becomes an open election. And in the eightyear cycle, the only year historically that the market is down on average is year eight because of that natural uncertainty. I would add theres even more because of lets just call it the unique nature of this election. Maria well, you know, you really havent heard a lot of talk about tax reform from the hillary camp. You do hear it from donald trump, although were getting mixed messages in terms of what that might look like. But his Corporate Tax rate in his tax plan is saw . 15 . So if the market starts figuring out or believing that were going to have a corporate rate of 15 , you want to buy stocks with both hands . You bet. Maria thats what i figured. I look more at cyclicals. We have a cyclical play which is housing. We think housing is Getting Better regardless, and it make sense here. But if that were to happen, i think Housing Starts would explode. Big market move. Gary you know, morris, you said if you dont do macro, macro will do you. Right. Maria i love that quote. Gary i want to speak to both of you about this because its been so hard for big investors, institutional investors, professional investors to not have a macro viewpoint. How do you do it . Well, you keep reading the newspaper, and you recognize the fact that were not running a macro fund, were trying to find good businesses. And we just really want to make sure those businesses will be good in most reasonable environments. You look for key issues. You listen to people like Liz Ann Sonders, and you pay attention. Gary and so when a macro issue might impact a name, a position in the portfolio, you have to then evaluate what possibly could happen or you wait to see a change in the Business Model as a result . I think both, gary. I mean, youre always judging probabilities. Gary right. And since its very hard to assess those kinds of probabilities, you just watch it really closely. But i think the first question you ask yourself today, is there systemic risk. Gru gary right. If there is no systemic risk, you can stick with the business and wait and see what happens. Gary gary yeah. Liz ann, macro to you is what . Its everything as a topdown person, thats what i pend all of my time doing. Whats remarkable to me is the yawning gap between macro reality and macro perception. And i think we have such a strong muscle memory of not only the most recent financial crisis, but the fact that it came within a tenyear span of the last crisis and brutal bear markets that what we find from a macro perspective is they either think were still in a recession, or they feel that the world is going to come to an end next tuesday at 3 00. The focus on the negative, whats the next shoe to drop, whats the next black swan is really remarkable, to me. And i dont think the macro environment has been extraordinary, certainly, from a Global Growth and the unis certainty related to uncertainty related to central bank policy, but i think the reality is a bit better than what the gary its been refreshing to actually hear from people who are investing, making money in this environment and doing it successfully. Thank you both, morris maria can i ask one before you go, the fed. Is the fed going to raise rates june 15th . I dont think theyre going to do it in june. Im pretty sure theyre going to do it in july. And as of now, i dont think thats a good thing. Maria liz ann . I think they will, and i think it may be a better thing than people believe from a confidence perspective. Gary thats what they were saying in december, so we hope youre right. Liz ann sonders, morris mark for joining us. Well be right back. Is Silicon Valley partying like its 1999 . Aztec Companies Hit record valuations in the billions, some experts say were looking at another market bubble. Our allstar panel weighs in next. Stay tuned. V gary welcome back to wall street week. Is Silicon Valley partying like its 999 . 1999 . More and more Tech Companies getting valuations exceeding a billion dollars. Maria many of those companies have yet to turn a profit. People like mark cuban and carl icahn have questioned these sectors. To our fox allstars on whether we are witnessing a technology bubble, we welcome Deirdre Bolton and charles payne. What do you think, charles, bubble or no bubble . Unicorn, sure, i think theres a maria the private companies. Heres the thing i think is really interesting, and its a twopronged thing. If this blows up on rich tech investors, its okay with me. What i dont like is to extract all the value out of these things and foist them upon the public as an ipo. Maybe alibaba could be to a earn degree an example of that. I dont like this new model of all the great gains happening in the private sector, and then they go ipo at these rich valuations, and i hope that the public gets hip to that. Actually, i would like to answer that because i do think most of the risk is happening in the private market. Even the venture capitalists are slowing down, theyre looking for this hybrid between boot strapping and the big v. C. Money where they may never get their money back. Lets face it, as far as bringing new issues to market, its really slowing down. So this bubble is a little bit kinder to the public investor, people buying stocks. Its a little bit more difficult for the pros, but thats what they get paid for. Gary well, theres two things that Mutual Fund Holders probably dont realize. A lot of them are actually buying these shares in the private companies because they felt after 1999 and 2000 that they needed to participate. So a lot of the Public Mutual funds are buying td ameritrade, fidelity maria buying things like uber, snapchat, valued incredibly. Gary charles, we just had morris mark on the program, and hes talking about facebook, you and i were just chatting earlier. Youre looking at Mutual Fund Companies that are, by definition, maybe in medical technology or they may be in international, and theyre trying to find ways in their charter to be able to own those stocks because they see the performance that theyre given, and doesnt that give you shades of 1999 . It does to a degree except the valuations arent there yet. Obviously, listen, i do a lot of portfolio reviews every week, and its so funny because i dont care what the name of it is, it could be the new Dimension Fund and the great horizon fund. They all have these great names, and you look at the top ten holdings, and eight out of ten of them are the same names. Even from a diversification point of view, the investor thinks, hey, ive got five different funds. No, you got eight different stocks. [laughter] maria so where then, charles . Let me ask you what we asked morris and liz ann just a minute ago, wheres the growth . You know, i think its more about valuation. Thats how ive been playing the market. Maria okay. I had big wins this year on buying some of these blue chip names like caterpillar not ibm hasnt really worked out, but somebody like united rental. There have been some extremely oversold, boring names out there that, in my mind, have been absolutely phenomenal to own this year. Gary deirdre, back to technology for a second. If im an individual investor, i watch the program, i listen to morris mark, and he says thats where the growth is. How do i protect myself if i want to participate, but im worried about a bubble . Well, maybe we can split the difference here. I mean, there are some public Tech Companies that are fighting for your living room, right . Microsoft actually, microsoft just announcing a v. C. Unit. But you have microsoft, you also have apple fighting for your living room, and then on the flipside you have amazon thats creating whether its these ambience sort of personal assistants, i think you just decide what you think is going to be around. Amazon, i feel like looks good, feels good, doing a lot with content maria what about valuation on amazonsome. Ons a little high i just took profits on netflix maybe a little bit early, and i am intimidated, i am worried about getting caught in these things. Id like to get a doubledigit gain in a short period of time. If youre willing to hold for five years, most of these people think theyre going to make money sooner rather than later but thats kind of their responsibility. [laughter] maria good point. Gary before the program i was thinking about amazon. Ive been in the market for 30 years now, and ive seen a lot of great Growth Companies through many, many cycles. The fact in this company and, again, the valuation issue has burned so many short sellers maria it really has. Gary but i dont think in 30 years and, again, im not talking about the valuation, im talking about the business, the revenue growth, i cant recall any business that can grow at this level, at this size this terms of the buy what you know. If you think a companys going to be around and delivering productses or services youre interested in in in five years,y not to why at the top. Maria first we thought it was buying books, the Barnes Nobles of the world, then it was about retail, theyre coming out with original movie content. Theyre taking market share from all sorts of industries. Gary but you have to worry about the valuation. Because when they get hit, they get hit. When amazon has a bad quarter, thats the kind of thing where the average person would probably sell at a panic. Same thing in netflix. Ive had to wait for it to recover 100 points. The good news is it didnt take long you did very well with apple. I took your advice. [laughter] we say buy what you know, but do we really know and thats another question. We know, like, amazons got a lot of initiatives, but i think in a lot of these cases beyond these five or ten names, we dont really know what these Tech Companies i like netflix too, especially after that meeting. Gary what about apple here . I mean, we cant argue that the valuation on apple is not attractive. No, you cant maria well, it its come way d. Thats been the argument for years. Particularly metrics like your pe ratio. Having said that, i think some of the ancillary players that have exposure to apple is apple innovatiing that seems like the bigger question. If they buy netflix, maybe they get to innovate to buy acquisition, which works just as well. Maria any impact going into the election . Not yet. [laughter] maria deirdre, charles, amazing insights, as always. Gary gary next week, bob nardelli along with jim chanos. You wont want to miss it. John they are the major party nominees, finally we have alternatives to trump or clinton. Thirdparty candidates. We need a green president. John who . The third party i say makes sense is the libertarian. This is the Largest Convention in Libertarian Party history. [cheers] thousands just gather to choose libertarian nominees for president and vice president. This is a chance where likeminded people can come together and try to make the world a better place. Very exciting for the libertarians. Johnfr
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