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Chance Finucane

lines on the record: 50
first: 2022-12-05
most recent: 2022-12-05
sittings or episodes: 1
sources: podcast

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“Sure. The accounts that we manage are separate. Each client individually, we don't run a mutual fund. And the three strategies, we have a conservative income account, a high income account that's meant to generate good yields and beat the bond market, and then an equity portfolio that's supposed to generate long-term growth. And really, it's just a conversation with each client to figure out what's the right combination for their needs. So if you are interested in learning more about us at Oxford, you can go to our website at OxfoAdvisors.com or our media teams that a great job building out our YouTube channel. If you search for OxfoAvisors at YouTube.”
2022-12-05 · Forward Guidance · Cash Is King In Multi-Year Recessionary Bear Market | Chance Finucane · IDENTIFIED FROM THE TRANSCRIPT
“Cash or short term treasuries, I guess you would say, if cash isn't yielding much. But right now, I think it really pays to just continue to stay patient, monitoring everything closely. And there will be a great opportunity that comes out of this. But it's been a long time since we've had potential multi-year recession in bear market, only twice in the last 25 years. It's interesting coming in every day and following all this, but we're going to wait for a really fat pitch and a great opportunity.”
2022-12-05 · Forward Guidance · Cash Is King In Multi-Year Recessionary Bear Market | Chance Finucane · IDENTIFIED FROM THE TRANSCRIPT
“Pipelines have less volatility to the overall oil cycle since their contracts are more based off volumes that are just coming through. And even though their share prices will move a bit based off of the oil price and how investors feel, whether they're optimistic or pessimistic about that sector, there's less volatility, and yet the consistency of their cash flows with most of that being returned through a dividend to shareholders is valuable for anyone that's looking for a consistent high dividend. So that's the reason why that's the majority of our exposure to the energy sector. And then what we'll end up doing is at stretches that we start to feel really positive about the oil sector, we will add some of those exploration and production type companies, but those definitely are going to be more volatile, and those are more intermediate-term trades for us rather than long-term holdings.”
2022-12-05 · Forward Guidance · Cash Is King In Multi-Year Recessionary Bear Market | Chance Finucane · IDENTIFIED FROM THE TRANSCRIPT
“Anything that's down 90% is probably a business that doesn't fit our criteria. Our focus is really on generating a lot of free cash flow, having a solid balance sheet and being able to consistently generate that growth through a cycle. So anything that's down 90% or more, whether that's a peloton or a carvana, that's not going to meet our criteria. So out of companies that we do think are undervalued that we still own that we've had for years, you've got that Adobe and ServiceNow examples. We do still own an alphabet position that we've trimmed over the course of the year, but we still have ownership there. When you hit the lows in the market a month and a half or two months ago, we were seeing more of our stocks like Visa and MasterCard and Microsoft that were undervalued. But given this recent rise, we would say those are closer to fairly valued at this time.”
2022-12-05 · Forward Guidance · Cash Is King In Multi-Year Recessionary Bear Market | Chance Finucane · IDENTIFIED FROM THE TRANSCRIPT
“Market and you want to buy when the relative priced earnings is at a discount versus what it historically trades at. The problem is right now there's been a real push to try and hide in those sectors. And so there's not a lot of companies like that. One of the few that we used to own, but we sold for executional issues is Unilever. But those are the types of businesses that are left that might still look cheap, but you're going to have to deal with some executional problems or some aspects of their business, like for them. They have a lot of exposure to emerging markets, which is not a great environment when the US dollar is appreciating in value versus all of those emerging currencies.”
2022-12-05 · Forward Guidance · Cash Is King In Multi-Year Recessionary Bear Market | Chance Finucane · IDENTIFIED FROM THE TRANSCRIPT
“We would say is, and it actually, I think our portfolio is structured a little bit differently because we're not, we don't have to be fully invested. And if we think the best place to be is short-term treasuries that generate a four and a half percent yield, then at Oxfo, we'll sit in those securities instead. But if you're running a fully invested account or needed to be fully invested in this environment, it's your typical defensive areas. It's consumer staples and healthcare. And then you might want to get some exposure to utilities if you see long-term bond yields come down. And the final area that might be intriguing, but it's really an interesting sector to follow right now is energy since oil prices are falling substantially and yet if you look at xle the price of XLE is staying up near its highs but I used to specialize in covering the consumer staples sector that's an area where you want to look at the price to earnings ratios of those companies relative to the price to earnings ratio of the overall market”
2022-12-05 · Forward Guidance · Cash Is King In Multi-Year Recessionary Bear Market | Chance Finucane · IDENTIFIED FROM THE TRANSCRIPT
“We don't think so. It's just typically consumer discretionary is one of the first areas to peak and start going down when you see this sort of slowdown in growth. And there'll be one of the first sectors to bottom and start going up as soon as there's possibilities of a trough in consumer activity and then an increase. But for right now, you're right in the middle of this period that you'd rather be more in consumer staples or in staple type businesses within consumer discretionary like that O'Reilly Auto Parts example rather than a true discretionary purchase type company.”
2022-12-05 · Forward Guidance · Cash Is King In Multi-Year Recessionary Bear Market | Chance Finucane · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, I'd say anything that would fit in that consumer discretionary category. If we're really trying to narrow it down, businesses that are not the Walmart target example last week is perfect. Walmart, everybody loved their earnings report. They're talking about households that have over $100,000 in income. They're gaining market share there as those households are starting to spend more at Walmart. Whereas at Target, they're seeing continued deterioration in their profit margins. They're trying to get rid of inventory that's been sitting on the shelves as best they can. But it's almost unfair as a comparison because Target is a true discretionary retailer. They're not a grocery store, whereas Walmart people go for their groceries and then they”
2022-12-05 · Forward Guidance · Cash Is King In Multi-Year Recessionary Bear Market | Chance Finucane · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, as someone who works with people and is kind of tangential to the video business, Adobe does have a moat. Okay, so chance. So there are companies that have been able to pass on costs to consumers. This year they've been able to do that. And it sounds like you like the companies that have been able to do that but will be able to do that in the future. What are the sort of companies that, yes, they've been able to pass the cost on to consumers this year, but you think next year will just hit a wall because people will not have enough money to buy things and they will either raise past costs on to consumers. And, you know, this is just my opinion. I'm not saying that this is true or anything. But an example would be Chipotle where, okay, you can raise the cost of Rito from $12 to $15, but you can't raise them from $15 to $20. You're going to hit a wall. So what sort of companies there? Do you have any thought there?”
2022-12-05 · Forward Guidance · Cash Is King In Multi-Year Recessionary Bear Market | Chance Finucane · IDENTIFIED FROM THE TRANSCRIPT
“It's been a difficult year for them with rising interest rates, but we've still kept a small position. Right now, I would say that if we have a continued increase in interest rates, it might still be a little bit of a difficult time for them. But they'll be able to grow through this whole period and then coming out of whatever sort of difficult economic conditions that we deal with next year, they should be able to accelerate their growth and continue to generate lots of free cash flow.”
2022-12-05 · Forward Guidance · Cash Is King In Multi-Year Recessionary Bear Market | Chance Finucane · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, I'd say those are the best places that at Oxford that we have in our equity portfolios this time where you're just trying to preserve the returns that you've made over the last three years from 2019 through 2021. And it's a difficult period because the areas that if this is the environment we're in that will hold up best tend to be pretty fairly valued right now. We wouldn't necessarily say that O'Reilly or Visa or MasterCard are super cheap at the moment, but they do have the right characteristics that we think they're going to be able to hold their earnings and their cash flows. A couple of other businesses that we've owned for years and we've kept, but we trimmed the positions this year are Adobe in ServiceNow. And those are software businesses that, unlike a lot of software as a services businesses today that generate zero free cash flow, these are two companies that are still growing at a decent pace and have very high free cash flow margins.”
2022-12-05 · Forward Guidance · Cash Is King In Multi-Year Recessionary Bear Market | Chance Finucane · IDENTIFIED FROM THE TRANSCRIPT
“It is definitely during a recession, you'll usually see the tenure treasurer yield come down by about 150 basis points. I think this year has thrown people off a bit just with rising rates and it's taken a bit longer for maybe those conditions to develop where you'd start to see long-term yields come down. At Oxbow, we do have a small exposure to long-term treasury yields, but primarily we're still on the short end of the treasury curve and our exposure. If we started to see a real change in trend where we really believe that that more longer-term fall through a recession in the 10 and 30 year treasury yield has started to take hold, which maybe that's starting to be the case right now with where things are at. But when we start to really see that, I think we will try to have more exposure to the long treasury curve. But at this time, I think it's still a bit difficult to say if they're going to keep rising along with these increased in short-term rates as the Fed keeps raising the.”
2022-12-05 · Forward Guidance · Cash Is King In Multi-Year Recessionary Bear Market | Chance Finucane · IDENTIFIED FROM THE TRANSCRIPT
“It could if inflation and interest rates stay higher, then yeah, that would end up being an issue that is going to be factored in valuations. It was even like in the 90s and early 2000s, the average inflation rate was close to 3%. So our historical data points that we use include some of that time horizon that you had that sort of mid single digit price earnings ratio. So it's possible you stay in that range, but if inflation starts to average out in that sort of higher level, then you're going to end up needing to factor that in and probably accept some lower valuations and need an even deeper discount to what the historical valuations were before you'd want to move and start buying things.”
2022-12-05 · Forward Guidance · Cash Is King In Multi-Year Recessionary Bear Market | Chance Finucane · IDENTIFIED FROM THE TRANSCRIPT
“Right, so you said 16 to 17 price to earnings ratio is median or average over the past 25 to 30 years. I'm going to take a guess that if you extend it to the past 50 or even 60 years to the 1970s, that the average price to earnings ratio goes way lower. And so when inflation is persistently high and interest rates and treasury bond yields are persistently high as well, the bar gets even higher. So you start maybe even get some single digit price to earnings ratios. Is this forecast that your estimation of price to earnings ratio is that based on inflation returning to 2%? And if it is, let's say the new 2% is 4% for inflation, does that change things for valuations and why?”
2022-12-05 · Forward Guidance · Cash Is King In Multi-Year Recessionary Bear Market | Chance Finucane · IDENTIFIED FROM THE TRANSCRIPT
“Per share in earnings estimated for the SP 500 next year. That's probably got to start drifting its way lower towards about $200 per share. And when you get a combination of those, probably somewhere in the low 3,000, the S&P 500 would be when we'd start getting more intrigued and start seeing more opportunities that we like.”
2022-12-05 · Forward Guidance · Cash Is King In Multi-Year Recessionary Bear Market | Chance Finucane · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, just for historical perspective, 16 to 17 times earnings is the average for the S&P 500. If you look back 25 or 30 years. So if you think the earnings growth forecast for the market is pretty good, then paying average might be okay. And you can find a few names that are trading at an undervalued level that you're confident in the growth. It's different right now because you're trading at an average valuation, but the earnings growth and the economic growth forecast is slowing and getting worse, which is why we're hesitant to put a lot more cash and liquidity to work. So typically you're looking at probably 14 times earnings in below in a recessionary bear market, its bottom that as low as 11 to 13 times. So typically when you start seeing something like that happen, you're going to see more of a capitulation that sends it more to those levels. And you're going to see that earnings number right now, I think we're still sitting at around 200.”
2022-12-05 · Forward Guidance · Cash Is King In Multi-Year Recessionary Bear Market | Chance Finucane · IDENTIFIED FROM THE TRANSCRIPT
“What would evaluation be at such that you feel like you would be getting compensated for the risk? And let's just say the 10-year treasury is about 4%. So that's basically a price-to-earnings ratio of 25. And then so the SMP 500, that's a price to earnings ratio of 17, which sounds good. And it's even better because S&P 500 earnings grow, at least they normally do. Not if you're in a recession. But of course stocks are way riskier. So you have to be compensated for that. You're saying 17, still too expensive. What would be cheap enough for you on a price to earnings ratio, which, by the way, for people listening is just how much companies are making...”
2022-12-05 · Forward Guidance · Cash Is King In Multi-Year Recessionary Bear Market | Chance Finucane · IDENTIFIED FROM THE TRANSCRIPT
“Probably the same, or even maybe even a little bit more bearish since we've had this rally in the last month. Ted and I may speak a little bit differently, but our view is one of the same in terms of how the portfolios are run. So from our perspective, we see an equity market that's trading at above 17 times earnings with an earnings number in that PE ratio that we think is still too high. And if we're looking for more of a bottom or an end to this bear market, you're usually going to trade at a cheaper valuation and the earnings need to come down a bit from what expectations are still a bit too lofty. And then on the same side in the income space, right now we think treasuries are the best place to be. But when we see spreads widen, then we'll get more opportunities to invest in other types of bonds and in other asset classes, whether it's convertible securities or other preferred stocks or even some common stocks that have high dividend yield.”
2022-12-05 · Forward Guidance · Cash Is King In Multi-Year Recessionary Bear Market | Chance Finucane · IDENTIFIED FROM THE TRANSCRIPT
“Basically, a 700 basis point spread, but we're still sitting at around 450 basis points today. So you've got some room to go. And I think that suggests to us that there's more capitulation that still needs to set in on the part of investors across all asset classes before you get those opportunities.”
2022-12-05 · Forward Guidance · Cash Is King In Multi-Year Recessionary Bear Market | Chance Finucane · IDENTIFIED FROM THE TRANSCRIPT
“Right now, our focus is mainly just on the treasury market and then maybe some high quality municipal bonds. But the corporate bond space, whether it's investment grade or high yield, we usually wait until you see spreads widen between the yield for any sort of corporate bond versus the treasury market. And if you look back in history for the high yield market, you're probably looking at somewhere between a 600 or 700 basis point spread between high yield bonds and the equivalent maturity of a treasury bond. And then for the investment grade corporate bond market, probably more like 250 to 300 basis point gap. And we're just not there yet on either of those. I think one thing that we were looking at back when the 10-year treasury rate was closer to 3%, we were thinking, well, you wouldn't even think about investing in a high-yield bond until you saw a 10%.”
2022-12-05 · Forward Guidance · Cash Is King In Multi-Year Recessionary Bear Market | Chance Finucane · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, absolutely. We made a conscious point as rates on the short end have been going up to move the vast majority of our liquidity into various short-term treasuries just to ensure that there's yield being provided there rather than just sitting in a money market fund that's still giving you very little yield.”
2022-12-05 · Forward Guidance · Cash Is King In Multi-Year Recessionary Bear Market | Chance Finucane · IDENTIFIED FROM THE TRANSCRIPT
“And going back to our earlier point about how some investment managers have a larger percentage of cash, it actually is appropriate to have a larger percentage in cash when you're getting four and a half percent, basically 5%, as compared to zero.”
2022-12-05 · Forward Guidance · Cash Is King In Multi-Year Recessionary Bear Market | Chance Finucane · IDENTIFIED FROM THE TRANSCRIPT
“Of this. And then I think it's also just a reminder for everyone in general that these sorts of multi-year recessionary bear markets can play out. It's just been more than a decade since we've had the last one. So reminding people that we can stay patient walking through that the valuations aren't where we want them to be yet and just saying we don't have to jump back in. The final point about this that I think is different. And we've gotten calls and inquiries about this is It's been a long time since we've had a short-term treasury rate of over 4%. And especially when it got to four and a half percent. And when it hit four and a half, we noticed a lot more interest from people who just say, I can take four and a half percent and remove a little bit of risk. And especially when you compare it to the deposit rate, you might be getting at a bank. We've definitely seen that with more assets moving away from banks where you're not getting much of a return and you can put it in some sort of”
2022-12-05 · Forward Guidance · Cash Is King In Multi-Year Recessionary Bear Market | Chance Finucane · IDENTIFIED FROM THE TRANSCRIPT
“We've noticed a few things. First, it was interesting in March of 2020. I think the effect of people just in general thinking about their health of their financial, their finances, their portfolios, that happens when time is dragged out and you have more time to see that your asset values are coming down, you look at it more often. When we add the pandemic hit, that was only a month long. And everyone's concerned, understandably, was much more with their actual health and the health of their families rather than with their portfolios. So while we had some inquiries about how things were going, it bottomed and then started going back up so fast that really it wasn't like a typical recession like you might have seen from 07 to 09 or even during the dot-com bubble. So I think this time people are actually more attuned to what's happening in their portfolios than they were in 2020 because we've already had 10 months.”
2022-12-05 · Forward Guidance · Cash Is King In Multi-Year Recessionary Bear Market | Chance Finucane · IDENTIFIED FROM THE TRANSCRIPT
“Cut rates, and then you might see an acceleration in inflation, and everyone will have to pivot their portfolios accordingly, or that recession might get deeper in nature if he has to keep rates high because inflation hasn't gotten down to the level that he wants.”
2022-12-05 · Forward Guidance · Cash Is King In Multi-Year Recessionary Bear Market | Chance Finucane · IDENTIFIED FROM THE TRANSCRIPT
“Seems about right to us. I think the thing that's more interesting is once they get there, how long does it stay at that level? It wouldn't surprise us if inflation falls to about 4% to 5% by the middle of next year, but then stays there or stays in that range longer than people think. And if you're going to have CPI around that level, then you look at other statistics that try to strip out the extreme components of inflation. So whether you're looking at the sticky CPI or the median CPI number, things along those lines are the core inflation numbers. Those are all still looking pretty extended. And I think Chairman Powell is looking for that to get down below 4%. But if you're still staying in that 4% to 5% range, it's going to be difficult for him to take any action if we have an economic slowdown or a recession kicking in. It's going to be interesting. It's going to be on him to decide whether he wants to come.”
2022-12-05 · Forward Guidance · Cash Is King In Multi-Year Recessionary Bear Market | Chance Finucane · IDENTIFIED FROM THE TRANSCRIPT
“And so, what I've seen is in the second quarter of next year, second quarter of 2023, you're looking at 1% revenue growth, more or less, and basically flat to down 1% earnings per share growth in the second quarter. But I did see, I just extrapolated and figured out what the second half earnings per share guidance is that's embedded. If you look at the full year earnings per share for the S&P 500, and if you're assuming flat growth for the first half, you're still expecting it looks like between 6% and 9% earnings per share growth for the full year 2023. So that means you're expecting anywhere from 10 to 15 percent EPS growth for S&P 500 companies, which we just don't quite see how it's going to get there, but maybe no one's looked out that far yet to realize those numbers have to come down.”
2022-12-05 · Forward Guidance · Cash Is King In Multi-Year Recessionary Bear Market | Chance Finucane · IDENTIFIED FROM THE TRANSCRIPT
“The second quarter next year, even with nominal GDP growth, probably going to still be three to five percent. So shows you that things are starting to slow. What we notice is in the second half of next year, it's still double-digit earnings growth that's expected. And that just doesn't quite fit for us that we think that's going to be able to hold up. But I think that's just the short-term nature of street analysts where they're really only looking out a couple of quarters at a time.”
2022-12-05 · Forward Guidance · Cash Is King In Multi-Year Recessionary Bear Market | Chance Finucane · IDENTIFIED FROM THE TRANSCRIPT
“Well, when you get to the actual earnings that's being reported, by then, usually company management teams have talked their way down to a number that the majority of them are going to be able to beat whatever that earnings expectation is. So they reported 4% year-over-year earnings growth across all the S&P 500 companies. And that looks okay considering that was about what was expected. But you only had to go back six months earlier and analysts were expecting 10% year-over-year growth for the third quarter. It's not surprising to us that you miss by that much versus what was expected six months ago. But it's usually those looking out six, 12 months and seeing what's baked in and kind of realizing it's probably too optimistic. So what's interesting to us is that over the next three quarters through the second quarter of 2023, that's already flattened out to where analysts are pretty much expecting flat growth. And they're even only expecting 1% revenue growth.”
2022-12-05 · Forward Guidance · Cash Is King In Multi-Year Recessionary Bear Market | Chance Finucane · IDENTIFIED FROM THE TRANSCRIPT
“Next thing or the next thing that's going to happen will be the drop in earnings guidance going into next year. And we actually saw some good data that just looks at previous recessionary bear markets. And it's usually this next six months, probably from here through about May, that you're going to start to see an acceleration in earnings downgrades. And investors are usually waiting for company management teams to actually say that explicitly in earnings calls. They're not going to do it themselves. So even though we're starting to see a bit of a negative revisions in earnings expected for the first half of next year, we think it will be an acceleration going into the rest of 2023.”
2022-12-05 · Forward Guidance · Cash Is King In Multi-Year Recessionary Bear Market | Chance Finucane · IDENTIFIED FROM THE TRANSCRIPT
“I don't think the vast majority of other funds out there are nearly as conservative as we are just because I used to work at a firm like this. And I think most mutual funds and ETFs have a mandate to essentially be fully invested. And when you see those numbers like record amount of cash for equity money managers, that means that the cash level has gone to five or six percent. It's not that it's gone to 20 or 30 or 40. And we understand the mandate for those funds and why they run it that way. That would suggest to us that they still are invested in a lot of these sort of popular stocks in the last decade or for whatever reason they're sitting in stocks somewhere out there across all these sectors. And I think everyone's kind of waiting to see if they've gotten through this period where, okay, the Fed will stop raising rates. Maybe they pivot and start cutting rates and everything will be fine. But in our estimation, the”
2022-12-05 · Forward Guidance · Cash Is King In Multi-Year Recessionary Bear Market | Chance Finucane · IDENTIFIED FROM THE TRANSCRIPT
“So, yeah, I know I sort of threw a lot at you, and it was kind of a confused thought. But do you think others, do you think it's accurate that others in the investment business are as sort of conservative as you? Because the thinking is, oh, if everyone has already sold, there's no one left to sell.”
2022-12-05 · Forward Guidance · Cash Is King In Multi-Year Recessionary Bear Market | Chance Finucane · IDENTIFIED FROM THE TRANSCRIPT
“There's not a lot right now. I mean, I mentioned the short-term treasury's example for the conservative investor in the high income strategy that we run where we're really trying to beat the bond market and trying to get about a mid-single digit yield for that portfolio holder through dividends and coupons. Beyond short-term treasuries, we also like”
2022-12-05 · Forward Guidance · Cash Is King In Multi-Year Recessionary Bear Market | Chance Finucane · IDENTIFIED FROM THE TRANSCRIPT
“Hurt their capital ratios and forced them to have to raise equity or do other things that wouldn't be in the best interest of shareholders. So historically, I think we've tried to stay away from the banks just because they're more of a trade than a long-term opportunity. And we try to have a little bit more of a longer-term outlook with our equity portfolio. And when you're dealing with that much financial leverage and the fluctuations in an economic cycle, there's usually better ways to get that exposure without all that leverage that you're taking on by owning a bank.”
2022-12-05 · Forward Guidance · Cash Is King In Multi-Year Recessionary Bear Market | Chance Finucane · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, the thing that I think gets missed is usually if you have rising interest rates, that's a sign of an improving economy and rates are going up because you have nominal and real GDP growth increasing. But if you're heading into a recession and exactly what we're dealing with right now, when you have an inverted yield curve, that's the wrong environment for banks that want to be able to pay a low short-term rate on deposits than be able to lend at a higher or longer term rate. And that's not the environment they have right now. The other thing that I think they might be dealing with over the next year or two is even though they're much better capitalized than they were in 2008, they are dealing with a lot of unrealized losses on their loan books, mortgages, things like that that I think they're saying they're just going to let it run to maturity and that allows them to avoid having to realize those losses through their income statement. But if something ever forces their hand to have to realize some of those losses, that might”
2022-12-05 · Forward Guidance · Cash Is King In Multi-Year Recessionary Bear Market | Chance Finucane · IDENTIFIED FROM THE TRANSCRIPT
“Exactly, exactly. And for Apple, I think it's holding up well, although we imagine there might be some weakness in their earnings heading into next year just because they are still selling consumer hardware products that you might see a bit of a softness in demand, even though they're still getting some growth from their services business, although that's decelerating a bit as well. It's just when you become that large, it's going to be hard to keep that secular growth running at the same pace it had in years past.”
2022-12-05 · Forward Guidance · Cash Is King In Multi-Year Recessionary Bear Market | Chance Finucane · IDENTIFIED FROM THE TRANSCRIPT
“When Alphabet was able to grow right through even later bear markets, when Facebook was around, it was able to grow right through a difficult environment like that. The digital ad market was maybe 10%, 20% of total advertising, whereas now digital advertising is more than half of the advertising marketplace. And advertising is going to move with GDP growth. So if you're going to see nominal GDP coming down, then it's probably going to be a more difficult environment. And that's what we're seeing right now for Alphabet, Meta, and others within that social media space.”
2022-12-05 · Forward Guidance · Cash Is King In Multi-Year Recessionary Bear Market | Chance Finucane · IDENTIFIED FROM THE TRANSCRIPT
“Going to be interesting through this next 12 to 18 months. I think that's the case maybe for a couple of them, but the difference is the growth rates have slowed for these businesses. So we had looked at this data going back the last 15 years of bear markets or market corrections that we've experienced. It's about five or six different periods like this. And companies like Alphabet and Microsoft outperform the S&P 500 in every single one of those downturns. So it does tell you that there's a lot of consistent cash flow that's generated. Right now, I think the reason why they're underperforming is, one, the valuations that they were starting with this time around, I think we're more excessive. So they've been coming down. The rising interest rate environment is a bit new. If you start to see long-term interest rates come down, I think they'll perform a bit better. But the last thing, especially in the digital advertising market, is if you look back at 2008,”
2022-12-05 · Forward Guidance · Cash Is King In Multi-Year Recessionary Bear Market | Chance Finucane · IDENTIFIED FROM THE TRANSCRIPT
“Well, there's a difference between auto parts and O'Reilly is the best run auto parts retailer. So actually when you see a decline in new car sales and used car sales, that means that drivers around the world are keeping their current cars and it means they're going to have to fix them when things go wrong. And so the best description I ever saw from another firm is that the auto parts retailers like O'Reilly or AutoZone think of it like healthcare for cars. They're going to be able to generate a lot of consistent cash flow and doesn't mean that their stock's going to automatically go up, but they're typically going to be more immune, especially compared to other retailers. It's interesting with the consumer discretionary sector. Most of those businesses see a real drop off in consumer demand, but Otto O'Reilly is one of those ones that we'll be able to hold up through a cycle like this.”
2022-12-05 · Forward Guidance · Cash Is King In Multi-Year Recessionary Bear Market | Chance Finucane · IDENTIFIED FROM THE TRANSCRIPT
“Focus on more defensive sectors that you think you have a lot of visibility that earnings and cash flow is going to be able to hold up. And for us, we'll look for advantaged businesses that have a history of being able to generate consistent cash flow all the way through an economic cycle, including a recession. So businesses like that that have done well for us this year would be like Visa, MasterCard, or O'Reilly Auto Parts.”
2022-12-05 · Forward Guidance · Cash Is King In Multi-Year Recessionary Bear Market | Chance Finucane · IDENTIFIED FROM THE TRANSCRIPT
“Sure. So for us, we have three strategies for our clients depending on their situation. We have a conservative income strategy that just tries to invest in very safe bonds, usually short-term treasuries or high-grade municipal bonds. And that's actually, I would say, the short-term treasuries is where we're seeing the best risk reward right now. It's been a long time since you could get a four and a half percent yield with essentially no credit risk, no default risk. And compared to where we see equities now, we don't see a lot of upside at these valuations. We're still more concerned with the downside. Beyond that, and our other strategies where we're trying to generate more income for clients or in our equity portfolio, we're really focused on high quality businesses or asset classes that have clear visibility on their cash flows. So if you are an equity investor that has to be fully invested, which we don't have that mandate, we keep a lot of liquidity during an environment like this, you really want to be focused on.”
2022-12-05 · Forward Guidance · Cash Is King In Multi-Year Recessionary Bear Market | Chance Finucane · IDENTIFIED FROM THE TRANSCRIPT
“Sure. I think you've kind of hit on both points. So absolute levels are low. But I think especially the way we look at investing, it's that rate of change number that matters probably even more to us because you're trying to figure out where things are heading over the next six, 12, 18 months. And if you're starting to see that rate of change turn, especially after kind of going down for several years and now it's starting to perk back up. And if we think the economy is going to slow and you could see an increase in layoffs, that's all going to suggest that those delinquencies will keep going higher. You can't extrapolate that to some automatically high level. But as long as you're seeing that go in that direction, we would expect there'd be more pain in the future. And if you're not seeing the valuations you want in that sector, then it wouldn't be a time to really get excited or try to do anything from an investment standpoint.”
2022-12-05 · Forward Guidance · Cash Is King In Multi-Year Recessionary Bear Market | Chance Finucane · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, I would definitely share your view there. Chant, there are many different ways to measure it, but I think so ally financial delinquencies and just in general financial businesses of lending delinquencies are on the rise, but they're on the rise from essentially zero. So I think in the case of ally financial, the trend looks horrible, but delinquencies are actually still below 2019 level. So how do you sort of think about that where the absolute level is actually okay, but just the rate of change, I mean, if you just extrapolate that line, it looks like it's headed in a pretty bad direction. And also, what does that say about the economy?”
2022-12-05 · Forward Guidance · Cash Is King In Multi-Year Recessionary Bear Market | Chance Finucane · IDENTIFIED FROM THE TRANSCRIPT
“It does seem like a very difficult time for US car prices coming back down. I just saw a headline that Carvana is down 97% from its peak. Kind of tells you where things are at compared to when used car prices were so high. It's an area that I think you're going to continue to see weakness ally financial is another company we track. They most recent quarter they reported they were showing an increase in delinquencies. We think that's going to be a difficult area through however long this potential recession lasts. And certainly from an investment standpoint, we're not trying to go anywhere near the auto sector at this time. We don't necessarily think it's a great business to begin with to invest in, but especially not when you think you're heading into a recession.”
2022-12-05 · Forward Guidance · Cash Is King In Multi-Year Recessionary Bear Market | Chance Finucane · IDENTIFIED FROM THE TRANSCRIPT
“Right now is pretty minor, and I think that's the difference now versus what we all experience 13, 15 years ago during the fallout of the housing bubble. You don't have as many people. They have a lot more equity in their homes. And there was a lot more homeowners or people who were taking out mortgages that were able to afford those mortgages. So it seems like people right now are just staying put. And I'd imagine over time, though, you're going to have more situations, especially if you see the unemployment rates start to go up and people are going to be forced to move for a new job or they might have to relocate if they can't afford their current home if they're unfortunately lose their job. You might see more situations like that. And maybe once we start seeing more transactions, you'll see a new equilibrium level in home prices that are going to be a little bit further down than where you're seeing transactions right now.”
2022-12-05 · Forward Guidance · Cash Is King In Multi-Year Recessionary Bear Market | Chance Finucane · IDENTIFIED FROM THE TRANSCRIPT
“Right. So even though the price of housing has not fallen by that much, it's still extremely unaffordable just because prices remain very high and mortgage rates are so much higher than they were just two years ago. Chance, where are you seeing that in the housing market? So pretty much, we all know that the mortgage industry in terms of origination has fallen off a cliff in some cases 50% refinancing even more so, but what about the home builders? What about just the absolute level of housing itself? Where, you know, is it possible that yes, okay, the housing market has frozen essentially because no one wants to leave their homes, no one wants to move into a new home. But, you know, prices, you know, prices declines are capped at 5, 10. As I've seen some Wall Street analysts say, or number two is that, no, price declines are actually quite severe. How are you sort of thinking about things?”
2022-12-05 · Forward Guidance · Cash Is King In Multi-Year Recessionary Bear Market | Chance Finucane · IDENTIFIED FROM THE TRANSCRIPT
“Rates would be a huge part of it. And then imagine just the huge jump in prices that we had when rates were so low and you had the Fed buying mortgage-backed securities, which brought down the volatility of those valuations. So you saw a compression in the difference in the tenure treasury rate and the mortgage rate that people were able to get. So I know a lot of friends who were able to buy their first homes for a 3% mortgage rate. I'm sure you do as well. And that was a great time there for about a year or two. But now when you're jumping up to seven percent, that really slows down the activity. And some data we saw suggests that you need either 20 or 25 percent decline in home prices or a 300 basis point drop in the mortgage rate or a combination of the two to get back to a normal housing affordability level. And it probably end up being a combination of those two, but it's going to take some time for that to play out.”
2022-12-05 · Forward Guidance · Cash Is King In Multi-Year Recessionary Bear Market | Chance Finucane · IDENTIFIED FROM THE TRANSCRIPT
“Definitely slowing down. It wouldn't surprise us if a recession started in the first quarter of next year. It's a decent possibility in our mind that the first two quarters of next year could see negative GDP prints similar to the first two quarters of this year, but probably a little bit deeper negative prints than what we experienced. And one data point we just noticed was the existing home sales number, which a lot of housing data tends to be more leading of an indicator. The existing home sales, whether you're looking at the absolute level it's fallen to or the year-over-year decline that we're seeing down about 30% year over year, that's pretty much exactly where you were heading into the start of the recession in December of 2007. And it's just interesting, you rarely see numbers get that far down and wouldn't surprise us after we get to the holidays if you start to see negative numbers.”
2022-12-05 · Forward Guidance · Cash Is King In Multi-Year Recessionary Bear Market | Chance Finucane · IDENTIFIED FROM THE TRANSCRIPT
“See things slowing. I think a lot of people would agree that inflation likely peaked in June when it hit that 9% year over year number. But I guess maybe what was the head fake that the three people off was those two quarters of negative GDP prints in the first half of this year. Technically, you could qualify that as a recession if it stays that way after future revisions. But that's not going to be really the typical recession experience that we've seen in decades past. We actually think that's more likely to occur sometime in 2023. And as much as there's been a slowdown in real GDP growth, it's as much this hiking in interest rates across the curve that we think has been a big reason for the drawdown in asset valuations in the equity market, bond market, and even starting to see that in commodity prices.”
2022-12-05 · Forward Guidance · Cash Is King In Multi-Year Recessionary Bear Market | Chance Finucane · IDENTIFIED FROM THE TRANSCRIPT
“So we're recording the afternoon of November 21st, and a lot is going on. I feel like chance this entire year people have been talking about a recession, a recession, a slowdown, a slowdown. And that has materialized. Yes, we've had two consecutive cores of negative real GDP, but it doesn't feel like the economy is slowing down as many had thought. What is your outlook on just the general health of things? How are you seeing things?”
2022-12-05 · Forward Guidance · Cash Is King In Multi-Year Recessionary Bear Market | Chance Finucane · IDENTIFIED FROM THE TRANSCRIPT