YouSaid · the spoken record

Warren Pies

lines on the record: 78
first: 2023-10-30
most recent: 2023-10-30
sittings or episodes: 1
sources: podcast

Every line below is reproduced as it was said and linked to the record it came from. Nothing here is summarised or generated. Directory · Search · Corrections

“As you pointed out, the smaller cap stocks have been selling off as yields have risen. So now the narrative is, oh, the large cap stocks that are immune because the large cap stocks, tech stocks have rallied. But you and I both know that two years ago, three years ago, the companies that would hurt from rising rates were Apple and the overpriced tech stocks and the value stocks like the banks would do well because big banks benefit from rising rates. It just goes to show that you can't believe everything that you hear. Tell us how you're thinking about the economy and recession. I know you've been doing a lot of very rigorous quantitative work on the housing market and how that can be a catalyst for a recession. Why do you think the US economy hasn't had a recession so far? And are you in the recession camp now or are you only dipping your toe in that pond?”
2023-10-30 · Forward Guidance · “We’re In Uncharted Territory” | Warren Pies on Treasury Issuance, Housing Market, Oil, And Recession Risk · IDENTIFIED FROM THE TRANSCRIPT
“Yes, the mega caps are immune to higher interest rates to a certain extent, but the valuation side and the flow side, they're not immune.”
2023-10-30 · Forward Guidance · “We’re In Uncharted Territory” | Warren Pies on Treasury Issuance, Housing Market, Oil, And Recession Risk · IDENTIFIED FROM THE TRANSCRIPT
“On their balance sheet, even these mega cap stocks, they're not immune to this. They're going to get caught up in this valuation. If I had to guess what's going on with these reactions to earnings, I think you've had a lot of investors hide out in these stocks for the operational reasons that they're immune to interest rates. And they're now starting to realize that there's also a valuation headwind that comes from higher interest rates. The third thing is going to happen over a long enough timeframe is the flows problem. So you'll have these investors like pension funds and structural asset allocators who make this incremental move. If you look at household equity holdings, pension equity holdings, they're on a multi-decade high level relative to bonds with the tenure at 5% above, you're going to get a rotation out of those pools of capital from stocks to bonds. And so operation.”
2023-10-30 · Forward Guidance · “We’re In Uncharted Territory” | Warren Pies on Treasury Issuance, Housing Market, Oil, And Recession Risk · IDENTIFIED FROM THE TRANSCRIPT
“During COVID, there might be five stocks globally that can survive if you shut the capital markets down indefinitely. But outside of that, these stocks, the rest of the universe, small caps especially, they're reliant on capital markets in debt markets for financing. And these rates are a real, they blow up business models across the board. So there's a good reason for this relationship when it comes to small caps. And so then we've had a lot of kind of I'd say the second reason is valuations and nothing's immune to the valuation argument. When rates rise, as we said, risk premiums, equity risk premium collapses, earnings have not, foreign earnings have not risen enough to offset the rise in interest rates from evaluation perspective for stocks. And even these mega cap stocks that in some ways do benefit because they have a big cap.”
2023-10-30 · Forward Guidance · “We’re In Uncharted Territory” | Warren Pies on Treasury Issuance, Housing Market, Oil, And Recession Risk · IDENTIFIED FROM THE TRANSCRIPT
“On the downside for those indices is more traumatic. It's skewed negative than when interest rates fall. So you're seeing this kind of distribution pattern emerge where even if rates just chop around on days when they're up, there's a bigger fall and bigger downside response then when they fall upside response. So that's kind of how when we just forensically study market relationship, what we're seeing right now as far as rate sensitivity. I think there are two reasons for that. First, like we said, there's all these stocks outside of the magnificent seven, there's an operational reason for this relationship. They must access capital markets and they're going to have to roll their debt at some point in the next couple few years depending on each stock and how they're sized and position. There are only about really, and we all learn this.”
2023-10-30 · Forward Guidance · “We’re In Uncharted Territory” | Warren Pies on Treasury Issuance, Housing Market, Oil, And Recession Risk · IDENTIFIED FROM THE TRANSCRIPT
“That's correct. There is the maturity wall that everyone's talking about is much closer when it comes to small caps, mid caps in that segment of the market. So there are a couple things going on here. Number one, let's think about the sensitivities that set the table there. So Russell 2000 has a much higher negative sensitivity to rising interest rates to interest rates than the S&P 500. And then you can kind of say from that beyond that, the equal weighted S&P 500 has a little bit is somewhere in the middle and mid-caps is somewhere in the middle. So you kind of see the sensitivity to interest rates travels through market cap size and the size of the index, the way the index is constructed. I think that's for one other thing about that is you're also seeing that the moves when interest rates rise, the move.”
2023-10-30 · Forward Guidance · “We’re In Uncharted Territory” | Warren Pies on Treasury Issuance, Housing Market, Oil, And Recession Risk · IDENTIFIED FROM THE TRANSCRIPT
“Cap stocks. When people say, Oh, Apple interest rates are actually good for Apple because they have so much cash and because they term their debt out to 2050, that's not really true for a lot of small cap stocks and nano cap stocks, is it?”
2023-10-30 · Forward Guidance · “We’re In Uncharted Territory” | Warren Pies on Treasury Issuance, Housing Market, Oil, And Recession Risk · IDENTIFIED FROM THE TRANSCRIPT
“And that is the big cap tech stocks, and obviously a lot of the fate of the tech stocks to some degree is the fate of the entire stock market. I've been focusing a lot on banks and regional banks. And it shouldn't surprise viewers. I've talked to some pretty bearish folks on banks and regional banks over the past six months. So I had, I guess, somewhat bearish expectations. The earnings of the banks and regional banks to some degree have exceeded my very bearish expectations, but the stocks have actually collapsed. So you're seeing the same thing going on in banks, even as credit, which is a lagging indicator has performed better. Warren, tell us more about the market cap relation between small cap stocks and how they're responding to interest rates. You've got some great charts just showing how it is quite a historic sell-off in small cap stocks, looking at the Russell 2000, as well as how the beta, the correlation to the 10-year treasury is much higher for the mid-cap and small.”
2023-10-30 · Forward Guidance · “We’re In Uncharted Territory” | Warren Pies on Treasury Issuance, Housing Market, Oil, And Recession Risk · IDENTIFIED FROM THE TRANSCRIPT
“Couple that with the market structure knowing that the rest of the market is already in a pretty significant downtrend, Russell 2000 below its 2022 lows S&P 493 and equated S&P down on the year. It's a really dicey situation to have these big cap tech stocks going reacting this poorly to ostensibly positive news coming into year end. I don't think it makes a Q4 sand on rally, whatever, much less likely.”
2023-10-30 · Forward Guidance · “We’re In Uncharted Territory” | Warren Pies on Treasury Issuance, Housing Market, Oil, And Recession Risk · IDENTIFIED FROM THE TRANSCRIPT
“Answer your first question, yeah, when it is the polar opposite of what happened in March, April 2020, when you see awful earnings reports and poor guidance in all of the bearish boxes checked and yet stock prices firm and rally, that's a classically bullish sign. It's whatever you want to call it for Jason Shapiro, call it a news failure. It's when you get a piece of news that goes one way and then your asset that you're watching moves the other way. It's a key tell for markets that something the trend is changing. Then on the other hand, what we're seeing right now is what I would call bearish news failure. So we've had really positive earnings for these big cap tech stocks. We saw this in NVIDIA last quarter too. And at the same time, the stock prices can't hold gains. And so this is a really, this is a very bearish development. And then when you”
2023-10-30 · Forward Guidance · “We’re In Uncharted Territory” | Warren Pies on Treasury Issuance, Housing Market, Oil, And Recession Risk · IDENTIFIED FROM THE TRANSCRIPT
“Exactly, yeah. I mean, that was a big, so one of the things if you go back to 2022 when we were asking ourselves, one of the big things we've been trying to triangulate is was that October bottom the bottom. And we've spent a lot of time because so much has happened since then that doesn't happen in a typical stock market bottom in the year following a typical stock market bottom. But one thing that we needed to see was forward estimates rise. So we did, we were able to check that box at least a little bit here. So that's why it was important for us. I think important was an important signal to market participants to see, okay, we are, there is some kind of cyclical upturn in earnings coming next year. And whether you believe that's possible or not, and it aligns with your macro view is another thing. But at the very least, the analysts were baking that to stocks.”
2023-10-30 · Forward Guidance · “We’re In Uncharted Territory” | Warren Pies on Treasury Issuance, Housing Market, Oil, And Recession Risk · IDENTIFIED FROM THE TRANSCRIPT
“2023 earnings estimates were stabilizing more or less but in 2024 and why were they going up that's a good question i mean it was multiple expansion mainly um yeah that was that was part of the reason with the stock market as we saw uh really it was it was mostly multiple expansion during the big summer rally we saw some earnings some positive earnings revision but it was much more multiple expansion and then when you look at what the earnings growth was really coming from margin expansion it was 80 margin expansion is from what we saw so when when you back it all out the market was making a really big bet on margins widening to record levels in 2024 we never really found that to be a bet we wanted to make it was it was unconvincing to us”
2023-10-30 · Forward Guidance · “We’re In Uncharted Territory” | Warren Pies on Treasury Issuance, Housing Market, Oil, And Recession Risk · IDENTIFIED FROM THE TRANSCRIPT
“So, this year Earnings expectations for 2024 were going down for the first half of the year, but wasn't true that earnings expectations for 2023 were going up. And if they weren't, how can the stocks have rallied so much this year?”
2023-10-30 · Forward Guidance · “We’re In Uncharted Territory” | Warren Pies on Treasury Issuance, Housing Market, Oil, And Recession Risk · IDENTIFIED FROM THE TRANSCRIPT
“PE stocks. So stocks that were already kind of cheap going into earning season actually did better coming out. But it was something like 75% of stocks sold off after earnings last Q2 season and were trending in a similar direction here for Q3.”
2023-10-30 · Forward Guidance · “We’re In Uncharted Territory” | Warren Pies on Treasury Issuance, Housing Market, Oil, And Recession Risk · IDENTIFIED FROM THE TRANSCRIPT
“Q3 during the Q2 reporting season. And it's something we really wanted to watch coming into this earnings season. And it's really come through in a bearish way is what we've seen is that these big cap stocks have not been able to hold gains despite beating earnings estimates, despite raising guidance, and despite beating on the top line. It's not just pure margin growth, which is what really the forward earnings estimates had pointed to. So the fact that all those fundamental data points come through and yet these stocks are falling apart is a real troubling thing. The stats for Q2, the only stocks that rallied were the, if you could, if you really separated the universe were the stocks that were the guidance that ingest increase a little bit, it increased the most, like the highest decile of guiders within the S&P 500. And then the other factor that helped were lower.”
2023-10-30 · Forward Guidance · “We’re In Uncharted Territory” | Warren Pies on Treasury Issuance, Housing Market, Oil, And Recession Risk · IDENTIFIED FROM THE TRANSCRIPT
“Season and how stocks reacted. Going back to it, I think the most important data point coming out of any earnings season is not any specific line item, cloud growth, anything like that. It's how does the stock react relative to what the expectations were heading into that earnings announcement? And when we went to Q2, the most alarming thing to us was there were a lot of stocks acting like we saw from NVIDIA where they rallied into that quarter, they beat estimates and the stocks that beat estimates though they fell in the same proportion to the stocks that missed estimates. So it tells us that even though we had some, yes, there were some positive earnings going into 2024, it wasn't enough. The market had gotten ahead of itself. And so that was something that flagged for us and why we didn't get more up, we didn't upgrade equities at all during.”
2023-10-30 · Forward Guidance · “We’re In Uncharted Territory” | Warren Pies on Treasury Issuance, Housing Market, Oil, And Recession Risk · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, we think our view is that around the middle of each year, the SP 500 starts trading off the next year's earnings estimates. And so that's where we start baking. We take those numbers and bake them into our valuation work. And it's been a while since forward earnings estimates have actually risen. And if you go back all through last year and actually through the beginning of this year, they were basically down to flat at best. And finally, coming out of Q2 earnings season, we've seen a small uptick in 2024 earnings estimates. And most of that's on the back of margin. So, you know, that to me, that should be all net net. That's a bullish sign. It tells us that there's some fundamental reason for the stock rally that we saw lead in the Q2 earnings. But when you dig into the earnings.”
2023-10-30 · Forward Guidance · “We’re In Uncharted Territory” | Warren Pies on Treasury Issuance, Housing Market, Oil, And Recession Risk · IDENTIFIED FROM THE TRANSCRIPT
“Going to have a recession, and bond yields are going to rally, bond prices are going to go to the moon. That call, which has aged so horrifically over the past 18 months, you are not in that, obviously, you know, you have not been in that camp, but you're still not there yet. You're just saying the risk reward for bonds is getting more attractive. We're approaching fair value. We could be there already and relative to other assets, the long-term return profile is more attractive. I want to get more into fixed income with you. later, Warren, but just sticking with the stocks point. So tell us about the earnings expectations that have gone along the S&P 500 as the stock market has rallied from its lows one year ago and this really interesting point about the guidance that you make you know i'm anecdotally studying individual companies like google had what i thought was a decent quarter and you know their cloud growth was less than expected but still 20”
2023-10-30 · Forward Guidance · “We’re In Uncharted Territory” | Warren Pies on Treasury Issuance, Housing Market, Oil, And Recession Risk · IDENTIFIED FROM THE TRANSCRIPT
“And so, and that's in a normalized Fed funds rate, this puts a lot on the table we can dissect it, but the bottom line is the fed dot plot says that the terminal rate where they're going to end, where rates are going to settle is 2.5%. So I think that's a low. I think that'll come up. So we've put that at 3%, assume a 3% terminal rate, and then go back to that 120 basis point spread that exists usually between the tenure and the Fed funds rate, that puts fair value for the 10 year somewhere around four and a quarter. So you say nominal GDP, it looks a little bit expensive the 10 year versus Fed funds rate and what we think terminal rates are going to be might look a little cheap. So all in all, it's fair value on the 10-year.”
2023-10-30 · Forward Guidance · “We’re In Uncharted Territory” | Warren Pies on Treasury Issuance, Housing Market, Oil, And Recession Risk · IDENTIFIED FROM THE TRANSCRIPT
“The bottom line is these have been strong earnings announcements, more or less across the board. In most of the stocks, I can't hold any gain. It tells us that the best case scenario had already been priced in to those stocks. And so there was nothing left. There was no other buyers left. And so we're seeing that as we come through this earnings season with breadth already down because of the rates issue. It really makes the stock market, it puts the stock market in a precarious position. And so that's really the stock side bond side. We've looked at bonds were overvalued and they're no longer overvalued. Look at nominal GDP. Our nominal GDP model says the 10 year should be at about 5.1%. Here we are, just a hair under that. If you think about where does the, how does the tenure relate to the Fed funds rate? Historically, the 10 year settles out about 120 basis points above the Fed fund.”
2023-10-30 · Forward Guidance · “We’re In Uncharted Territory” | Warren Pies on Treasury Issuance, Housing Market, Oil, And Recession Risk · IDENTIFIED FROM THE TRANSCRIPT
“Exactly, and the way we are looking at breadth to be very specific is the percentage of stocks in the S&P 500 that are above their 200-day moving average. And so rates tick higher in that percentage goes lower. And it's been a very, they're tied at the hip really. It's been a strong correlation between a negative correlation between breadth and yields. And what that really does is it hollows out the market structure underneath the stock market. So really, it puts more and more pressure on these mega cap tech stocks. And now we're going through the earnings season. And essentially these stocks that have been carrying the market, you know, they're great companies. No one wants to deny that. They have great balance sheets. Everyone knows deposits. But when they come out and they beat on bottom line, they beat on top line. The guidance has been pretty good. I mean, everyone's trying to pick nits on these specific earnings announcements now.”
2023-10-30 · Forward Guidance · “We’re In Uncharted Territory” | Warren Pies on Treasury Issuance, Housing Market, Oil, And Recession Risk · IDENTIFIED FROM THE TRANSCRIPT
“So, yeah, QRA quarterly refunding announcement how much duration the treasury is going to put into the market to fund itself. And then when you say breadth, breath is broadly, you define it, but how much of the market is rallying? So if every stock is going up in a bull market, that is a very wide participation, a lot of breadth, wide breadth. Now where it's the S&P 500, the magnificent seven and it's the S&P, the other 493 companies in the S&P are somewhat flat on the year. It's fair to say that's narrow breadth. And you're saying there's a correlation between the sell-off and rates, rates going higher, and bond yields going higher and narrow breadth.”
2023-10-30 · Forward Guidance · “We’re In Uncharted Territory” | Warren Pies on Treasury Issuance, Housing Market, Oil, And Recession Risk · IDENTIFIED FROM THE TRANSCRIPT
“Doing one thing in the rest of the market is doing another. And really, from that second half of year, July 31st date, there's been a very strong correlation between the rise in yields and the fall and breadth. You also can see the rise in yields correlating with the fall in the Russell 2000. Russell 2000 obviously is stripped of all of that mega cap kind of exposure.”
2023-10-30 · Forward Guidance · “We’re In Uncharted Territory” | Warren Pies on Treasury Issuance, Housing Market, Oil, And Recession Risk · IDENTIFIED FROM THE TRANSCRIPT
“Yields have been the proximate cause of the sell off. And we can kind of see that. I think market structure really reveals that. And when I look back, if you think about it, the market, stock market peaked on July 31st. That was the date the Treasury came out with their QRA and announced how they were going to fund the deficit in the government in Q3 and then projected for Q4. That's when yields started to break out above 4%. And once we got above 4% on the 10 year, that's when you started seeing the equity market really have a hard time digesting that. And ultimately stocks and bonds are competing for investment dollars. And when the risk-free rate goes up, stocks look relatively less attractive. And so you can see that really in the breadth. And so this is where we've started really zero in because you have this market structure. Everyone's kind of familiar with now where the top seven mega cap tech stocks.”
2023-10-30 · Forward Guidance · “We’re In Uncharted Territory” | Warren Pies on Treasury Issuance, Housing Market, Oil, And Recession Risk · IDENTIFIED FROM THE TRANSCRIPT
“September 21st. And so that was when the tenure is about 4.5. And then we increased bond exposure again at 4.8 and then again at 5%. And I'm talking about the 10 year here in each one of those cases. And so we are now coming into Q4. We are now officially overweight bonds with the move at the once we had 5% last week. We went overweight. And underweight commodities, underweight stocks, overweight, slightly overweight cash. And that's basically our position, looking ahead. Our basic thesis is that the risk reward for if you're going to have a Q4 rally or even beyond that really favors bonds over stocks, you know, because I think there's this idea that seasonality is starting to line up for a stock rally. And I think that it all points back to rates. I don't think we get a stock rally here unless rates come down.”
2023-10-30 · Forward Guidance · “We’re In Uncharted Territory” | Warren Pies on Treasury Issuance, Housing Market, Oil, And Recession Risk · IDENTIFIED FROM THE TRANSCRIPT
“Long bond yields and the 10 year yield, but there's certainly value that's emerged here on the 10-year. And then if you look at on the commodity side, oil was about $70, $75 entering the second half of the year. We had a record, multi-year record hedge fund short positioning within the crude oil market, which is really a key indicator for us. At the same time, Saudis were holding so much oil back from the market and basically foreseen deficits through the summer. And so our view is that the Saudis were going to force these speculators to cover their short positions, drive the price up. We thought our analysis said we'd be about $100 a barrel was our target for the second half of the year. We basically got to $98 on data Brent, which is our benchmark. And we flipped, we first started dialing down our commodity exposure and putting increasing our bond exposure.”
2023-10-30 · Forward Guidance · “We’re In Uncharted Territory” | Warren Pies on Treasury Issuance, Housing Market, Oil, And Recession Risk · IDENTIFIED FROM THE TRANSCRIPT
“Just to put a real flying point on it, coming into the second half of the year, we were significantly underweight bonds. Cash was actually our biggest position. Commodities was the largest amongst assets. And then stocks fell in between those two. And so I really think that the biggest change has been just price. There are no bad assets, only bad prices is kind of a saying that we go by. Bonds enter the second half really, but what was the 10-year at like 3.8 or something like that? We had a negative term premium. And here we are at roughly 5% on the 10 year from multiple valuation angles. We thought bonds were overvalued back then and they've become more or less, I'd say, fairly valued at this stage of the game. It doesn't mean that yields can't go higher or won't go higher. I kind of doubt that we've seen the absolute high.”
2023-10-30 · Forward Guidance · “We’re In Uncharted Territory” | Warren Pies on Treasury Issuance, Housing Market, Oil, And Recession Risk · IDENTIFIED FROM THE TRANSCRIPT
“Absolutely. It's great to be back here. I think, I don't know if the last time I was here, but I know I was one of your first guests, and so it's been great to watch your show flourish.”
2023-10-30 · Forward Guidance · “We’re In Uncharted Territory” | Warren Pies on Treasury Issuance, Housing Market, Oil, And Recession Risk · IDENTIFIED FROM THE TRANSCRIPT