2023-04-16 15:20:00 ET
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- 2:00 - Fed rhetoric and interest rates
- 4:50 - Recent bank earnings, what it means for the financial sector.
- 8:15 - Charles Schwab ( SCHW ) absorbing TD Ameritrade is a big deal nobody's talking about.
- 12:00 - Compelling investments in energy sector.
This is an abridged conversation from Seeking Alpha's Investing Experts podcast recorded on April 14, 2023.
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Transcript
Rena Sherbill: Talk of what the Fed may or may not do in a few weeks. How are you thinking about it? It's April 14. How are you thinking about this past week and going into next week ?
Kirk Spano : Well, the dark period for the Fed starts next week, I believe. And I don't think that there's going to be much different expectations from what I gave you last time. I think that we see a quarter point increase. I think that the jobs numbers yesterday support that. But I think the rhetoric out of the Fed this week supports that. And I think more and more of the experts and people who really are Fed watchers have come around to my way of thinking.
I think the interest rates are going to be higher for longer. I don't see a single rate cut this year. I think the market, especially the retail market has been very wrong. We are in the midst of what I would consider the great normalization. And the story that I tell the investment group subscribers over at Margin of Safety Investing is this. There was a lunch between Ben Bernanke and David Einhorn and a bunch of other investors and hedge fund guys, I think Ackman was there, where Bernanke said, I don't expect interest rates to normalize in my lifetime.
Well, I think he was probably right, except COVID hit. And we put in $10 trillion or $11 trillion into the economy, between monetary and fiscal stimulus, which was more than we needed. But again, I've argued that that was pulling forward the eventual baby boomer bailout that we probably were going to need, which I think we've mitigated at this point. So we've raised interest rates aggressively for about a year now. People are like, well they have to go back lower. And I think eventually they do lower interest rates.
And I think that, because of the financing of the debt, you're going to have to see interest rates on the Fed side come down to around 3%, because you need those to be net zero. They need to be real zero. So if inflation is 2% to 3%, then you can't have a Fed funds rate and longer term treasuries much above that. Otherwise, it gets very expensive for the government to finance the debt. So you need a real interest rate in that zero to one range. Otherwise, it just gets too expensive.
So that will eventually happen. But in the next year, I don't think so. I think that all the indicators, especially employment, show us that a soft landing is not only possible, but I think it's probable. I think that if we get a recession that's short and shallow, events can change that.
RS: What would you say at this point, I think the headlines point to some positivity out of banks like Citigroup ( C ) and Wells Fargo ( WFC ) and JPMorgan ( JPM ), and what would you -- how would you contextualize those earnings and what big banks are bringing to the marketplace? And then maybe speak for a second about how this affects regional banks or how it doesn't affect regional banks?
KS: Anybody listening to the earnings today, I think they had to be pretty impressed from Citigroup today... By the way, the earnings calendar at Seeking Alpha, it's spectacular.
RS: We work very hard on that.
KS: I've used 10 other ones. And I'm looking at this, and I'm not trying to plug this. I'm just looking at it, and it's so easy, and it has the companies with the earnings for the day, last quarter EPS, whether it be hit or miss, expectations, the estimates. It's really pretty well laid out.
KS: It was impressive. They beat the trading profits in the bond market. So they were able to offset potential portfolio stresses that they could have had if they went too long and broke the rules of banking and bought at long and lend at shorts. You are supposed to do it the other way, right. So if you take a look at that, I think the big banks are in really good shape, because they're all going to have similar experiences with more trading in the bond market.
I think most of them from what I've seen, did not go very long on the duration for their bond portfolios. So I think the big banks are in really good shape. Now I don't think they're going to take over or absorb any of the regional banks to get in trouble because I don't think you want to see the bigger banks, the big banks get bigger. I think the more likely scenario is that they provide some of the funding to help these regional banks get over the hump, like they did for First Republic ( FRC ), right. They got a $30 billion lifeline.
I think the mergers and acquisitions are coming in the regional banks, as several of the CEOs probably say, we're in a position where we're vulnerable, even though we like our bank, and I like being the CEO, and I like being the Chairman. But it probably makes sense for us to merge some of these regional banks to create more national banks. And they'll find a way to get paid, right. So they'll have their change of control bonuses and whatnot. And that's always a big deal, right? If the executives don't get paid, then they tend not to do anything until they can get paid. That's just the nature of the corporate beast.
So I think the regional banks are going to see a lot of M&A. Even among the good ones.
I think the regional banks are in great shape. In the long run, I don't think that means that you can't see prices go down 10%, 20%, 30% more, as we realize what the dilution is going to look at, in the, -- say maybe the bottom quintile of that group, right.
So you're going to have your four, five, six, seven, eight regional banks that really do come up on hard times. They're going to have to dilute a massive amount, probably. I think, First Republic needs 80% to 90% dilution . I don't see how they avoid it. If they do that that's some miracle of capitalism and smart regulation and a Fed that takes care of them, I guess. But to me, First Republican needs 80% to 90% dilution, which we talked about last time, but I think that's largely reflected in the share price already.
RS: One of the stocks that has come out in the fallout of the Silicon Valley Bank ( OTC:SIVBQ ) implosion that a lot of investors were talking about is Charles Schwab ( SCHW ) and they announce earnings at the beginning of next week. We had CashFlow Hunter, a Seeking Alpha analyst, on a few weeks ago talking about Schwab and why he likes them in light of everything that's happened.
I'm curious, I don't mean to get set on one stock, but there's something about Schwab that I think is representative of the financial sector. And I'm curious just what your thoughts are on a company like that, given everything that's happening.
KS: This TD Ameritrade takeover is a super aggressive move. And they're going to have to get some economies of scale from that, which I don't know that there's money to be had, because both operations are running pretty lean.
I think Schwab has a lot of their staff out of Chicago. TD Ameritrade, I think has a lot of staff down in Phoenix area. I don't know that there's a lot that they can close down, because we bring in all these advisors and retail clients from the TD Ameritrade platform, you still need a lot of customer service. And while AI is going to help that and whatnot, that conversation is important for an investor to have with themselves, because what are their margins going to look like after this merger is complete?
Now the problem everybody's talking about now is how is their portfolio of their own assets going to operate and what our trading profits going to look like in the future? I'd say probably a lot like the past. We'll just keep going through cycles. And when Schwab gets beat up in share price, because there's a down cycle, it just means that there's an up cycle coming. And I think that's probably true for them.
What I don't know is, will Schwab get cheaper yet? They are down about 40% over the last year or so. I haven't done a really thorough fair value evaluation of them. However, I think the transition to them absorbing TD, which isn't getting talked about, is a big deal. And I know this from the inside. I've had my brokerages that I've been with. I used to be with an outfit that I just had a platform that I used was called Broker's Express, which owned Options Express. And I don't even know if TD Ameritrade bought them or Schwab bought them but that's all going to end up in the same place now.
So you have all these brokerages over the last decade that are basically either owned by Schwab now. I think Fidelity bought a couple. They're not very aggressive there. And I think Interactive Brokers did one. I think Pershing, which is New York Bank Mellon ( BK ), I believe the parent company has eaten a few. So you've seen a lot of little brokerages get consolidated or E-Trade who bought them Morgan Stanley. And then Bank of America bought somebody. All the big banks have bought these brokers all over the place. And the one truth here is that scale matters, Schwab will have it. But integrations can be difficult.
And I will say that the culture at Schwab and the culture at TD Ameritrade among the people is very different.
So I don't know who the winners will be from this merger. Will it be Schwab in the long run? Sure, because they pick up all those assets. But if I'm an investor looking for a brokerage to invest in, I probably look for the companies that benefit from advisors leaving Schwab because I think that that is inevitable.
So when you look at the brokerage industry, I don't think that the cursory view -- I don't think that the top down haven't been inside view is going to be the most helpful thing for investors. So I don't know if Schwab can go lower or not. But I don't think the upside is as great as what people who are bullish think.
RS: So as we wind down, and we're looking ahead to next week, anything that you would share with investors specifically for this week, or that you would point to investors to be thinking about right now?
KS: Well, we haven't talked about energy yet. And I will say that I think this was a pretty good trade going on right now. Little pullback we had was a refresher, I think. But I think there's a handful, a very small handful of fossil fuel stocks that are good investments. And I think that all of them have a common thread is that they have a tie in to the energy transition.
So with Occidental ( OXY ) it's carbon dioxide, and carbon capture. With Kinder Morgan ( KMI ), same thing, carbon dioxide, transportation. They're the biggest transporter of carbon dioxide, and gas pipes unlike oil pipes. Gas pipes can be converted into hydrogen. So that is something that I think is coming. I mean, it's about a decade away. But when you talk about pipelines, everything's about a decade away. So I think that Kinder Morgan is real nice.
I don't think a lot of the frackers are exciting. But the companies that are almost exclusively in the Permian, and this is why that big Permian deal with the former Encana, now Ovintiv ( OVV ) just got done. And why Exxon ( XOM ) is talking about -- or rumored to be talking about making a bid for Pioneer ( PXD ), companies that are exclusively or almost exclusively in the Permian are in good shape.
Infrastructure, best rock, right? That's something that if you don't know that phrase, if you don't know what rock is, you want the best rock, you want the best drilling places. You can look in the Permian for that.
So Occidental and Permian Resources ( PR ) are the two that I'm in. I think carbon capture and renewable natural gas, and sustainable jet fuel or aviation fuel are big deals.
And then the other thing with energy is you've just got to own clean energy. And I think the two ETFs that I'm going to use for investing are ( QCLN ), which is the First Trust Clean Energy. It's got a very long name. And then you've got ( PBW ), which is more -- that's not market cap weighted, that's level. And it's very skewed towards small and mid caps, globally.
So with PBW, and QClean, and I'm going to write an article about using these together. And I've mentioned them before, you've got to figure out a way to scale into those, because the biggest industrial transition in history, bigger than all the other ones. And it seems like each one gets bigger. But I don't know if it'll be the case after this. I guess maybe space travel.
But the industrial revolution that we have now in technology and energy, fourth industrial revolution impacts energy. The shift to clean energy that's going on over the next 20 to 30 years is so big, it impacts so many things, you've got to be involved with it at the energy level.
The world is changing. And industries that benefit from cheaper energy or AI are going to do the best, because they can lower the cost the most. And if they're stacking up recurring revenues, like managing energy, or software, or any other type of service where there's just a contract, and we're just going to keep paying you money for the service, like a subscription investment letter, that is going to do well in the future.
Subscription revenue businesses always do well if they can get critical mass. So you have to find the ones that are getting critical mass and invest in them. I think that's pretty amazing. I mentioned space travel, I'll just put this in there to close off.
I think that the space industry has the potential of being the next giant thing, after the energy transition, or being partially simultaneous. There is a basket of satellite stocks and other space technology stocks that we've been investing in just a little bit. Some of them are down 70%, 80% 90%. Some of them were SPACs so they have that built in hate, and other ones are just small caps that are easily attacked.
Some of those stocks aren't going to be 10 baggers. Some of those stocks aren't going to be 20 baggers, some of those stocks are going to go up 50 or 100 fold.
For further details see:
Bank Earnings, Charles Schwab Takeover And Clean Energy With Kirk Spano