The Compound and Friends - Banks Can't Forecast Interest Rates Either (with Josh and Michael)

Episode Date: October 9, 2019

Welcome to the latest edition of What Are Your Thoughts - Michael Batnick and Downtown Josh Brown break down the biggest topics of the moment. On this episode: * Get your story straight - are there too many IPOs coming out this year or not enough? 2019 is on pace to see the most capital raised by initial public offerings in a year since 2000, and possibly even break the record. The number of companies coming public is on pace to match or exceed prior records as well. So this is....good news? * Twitter's new app update has a "trailer" feature, previewing the next people who are about to show up on your timeline. Was this a solution in search of a problem? Does anyone actually need this? * The bond market has delivered big gains for investors this year. One year ago, the CEO of JPMorgan was concerned that 10-year treasury yields could soar to 5%. Today they're half that level and have gone in the exact opposite direction. And now he's talking about preparing the bank for zero percent interest rates. If Jamie Dimon doesn't know where yields are headed, why would any investor or financial advisor think their forecast would be better? * There are four NFL teams with 0-4 records, the Bengals, Redskins, Dolphins and Jets. Season over? Any point to keep watching? * Josh has a mea culpa. Amazon Prime does have some shows worth watching. In particular, 'The Boys' was a great first season. Michael recommends 'Catastrophe' next. Let us know below what else Josh should be watching on there. * So it looks as though we're getting another rate cut this month. Does this qualify as a "rate cut cycle"? Will a rate cut even help at this point? Are insurance cuts worth doing with unemployment at all time lows and the stock market at all time highs? * What is to become of your local sporting goods store? Will any survive besides Dick's? 1-click play or subscribe on your favorite podcast app   Subscribe to the mini podcast on iTunes or Spotify    Enable our Alexa skill here - "Alexa, play the Compound show!"   Talk to us about your portfolio or financial plan here:  http://ritholtzwealth.com/   Obviously nothing on this channel should be considered as personalized financial advice just for you or a solicitation to buy or sell any securities. Please see this 3,000 word terms & conditions disclaimer: https://thereformedbroker.com/terms-and-conditions/ Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

Ladies and gentlemen, welcome to What Are Your Thoughts? I'm here with Michael Batnick as always. We are live from the compound and today we're going to play our favorite game. What Are Your Thoughts involves Michael asking me questions. I have no idea what they'll be. I will be asking him questions and he doesn't know what I'm going to ask. Stick around, let's see what's going on. Okay, Michael, I'm going first.

I want to ask you about the fabled IPO window in the aftermath of the WeWork debacle, or maybe that's not over yet. It's still an incredible year for IPOs. I just want to read you a couple of stats to set the table. We may break the all-time record in dollars raised, $97 billion, which was set in the year 2000. $97 billion, which was set in the year 2000. The median age of tech companies going public in 1999 and 2000 was four years old. Right now it's 12. And the average listing day return for these IPOs is the highest since 2000.

2019 could also have the most new listings in five years. My question to you is, a lot of the people who complained about the market because there were no IPOs and companies couldn't go public are now complaining that there are too many deals, too many companies are getting exits, and too many new businesses are listing, and maybe they're not high quality or whatever the case may be. Are these basically the people that would find fault with the IPO market literally no matter what what's going on it? Like is that kind of noise worth tuning out if you're an investor or should we be concerned? That it's the best year since 99 are these fictional people that you speak of because I'm not seeing that no I see it all I see it all the time and most of what exactly is happening. Maybe I'm missing it

I think it's people that are looking at we work and then they're saying the other 50 IPOs this year are just as bad. But that's not true. Well, we know it's empirically not true. So should we be concerned that we're back at 1999 or 2000 levels for some of these metrics? Is it good? Is it bad? Or is it just more noise? I don't know. I think obviously the reason why this is so in our face is that the high profile names,

WeWork, Uber, Slack are struggling out of the gate. WeWork's not even getting out of the gate. There were two biotech IPOs this week. So anyway. Nobody's talking about them. So my point is JP Morgan had a post and we'll show it here where they showed that a lot of the actual pure tech IPOs are doing really, really well. So it's the ones that nobody talks about that are actually doing okay.

And the index, the Renaissance IPO index, still outperforming the S&P 500 year to date. I think that index is up 30% plus this year, which is a huge outperformance of the overall market. So you're saying there are a lot of deals that are happening. They're not as big as, let's say, Uber. Well, the 99 comparisons are interesting. Somebody tweeted that these companies all have tons of revenue, whereas 99 was just laying the foundation and clicks and excitement and hope and stuff like that. But Josh Wolf said that's the point. These companies have so much revenue and they still can't turn a profit.

So I thought that was kind of interesting. So he's saying that some of the deals are too big because if they have so much revenue, why don't they earn money? Yeah. So that's a different problem altogether. I thought that was an interesting point. So part of that is that they don't want to. They prefer to reinvest.

And I thought that's what we all wanted to happen. Didn't we want companies to invest in their own businesses? I don't know. I guess there are people that will never be happy. All right. So we're doing rate cuts, right? We're in a rate cutting cycle now. Yes. Is it better to do, do we know that it's a cycle? How many cuts makes it a cycle? How far are we? We wanted to, so there's two. No, there's three now and probably this month for all right. Cycle. I think. Um, so is it better to do a rate cut and not need it than to need a rate cut and not

be able to do it because you already did it? Yeah. Is a preemptive rate cut the right way to go? And I guess obviously we'll only know in hindsight, but just like theoretically, what are your thoughts? I read this guy, Brian Westbury, who's a strategist at First Trust, I think. And the point that he's making is that you would only do a rate cut for one of two reasons. The first is there's not enough liquidity. Like, I don't think anyone's saying that's the case. The second is you're trying to get people that aren't borrowing to borrow. And corporate leverage is at an all-time record high. So which of those issues does a rate cut solve? Neither. So we're doing these now for sentiment, for stock market sentiment. Like to me, it's as clear as a bell. There are no issues

with liquidity in the financial markets. But what do you mean stock market sentiment? We're 3% off all-time highs. Correct. But we had a disastrous correction in the fall that scared everyone. Disastrous? Well, we're down 20%. It scared everyone. That's what the Fed reversed course. That was in the winter. Big deal. Right. But the Fed, the crash started at the end of September last year, a year ago.

It was 20% in six weeks. Is that not a crash? But the Fed didn't start doing anything until 2019. The Fed gave a speech and basically told the market they were backing off of the current course they were on. And then this year they came through with rate cuts. That's what literally happened. So my point is the Fed is now managing stock market sentiment more than it's managing its mandate, which is full employment. We're at three and a half percent unemployment. We're cutting rates. I don't understand it either. I'm not. And wage growth is still two point something percent.

And unemployment, 3.5? Correct. So the Fed's mandate is stable prices. I think we would argue. Stock market prices? No. Stable prices in the real economy and full employment. We have both.

So the Fed is now cutting. The only thing you can say they're doing this for is they either see threats from overseas. Well, that's legitimate, potentially. Not part of the Fed's mandate, but sure. I'm not sure that requires insurance cuts. And by the way, the problem overseas is that they're cutting too much. They're cutting into negative rates. So we're going to join them? We envy Europe's economy? I really don't understand it. It doesn't make any sense to me, other than if you say the Fed's trying to keep the stock market from going down, which maybe that's the case. I want to talk

about the bond market. On August 8th, 2018, Jamie Dimon gave an interview and said he thinks the 10-year Treasury yield could hit 5%. And that freaked people out. And obviously, a lot of people thought twice about their maturities. Maybe they even got out of some bonds. Well, actually, didn't the stock market sell off because CPI was running hot and then yields were going up and crashing the economy? Actually, he didn't say it in a vacuum. There was a panic that rates were going to rise faster than people expected. Wait, hold on. Getting back to the IPO stuff, it is interesting that these companies are getting massacred with the rates at,

you know, still pinned to the floor basically. Oh, yeah. Right. How much appetite would there be for these companies

at 6% interest rates? Anyway, so Diamond says 10-year yield could hit 5%. Since then, virtually every category of bonds has done incredibly well. This year,

the long bond, the treasury, 20 years plus, is neck and neck with the S&P 500 up about 20%. I think investment grade corporate is up mid-teens. Zero coupon bond, 33%. Unbelievable. So you did really well in bonds after that moment. And I'm not saying like Diamond put the top in, but like that was endemic of what people were saying. On September 10th, Jamie Diamond comes out and says, JP Morgan is preparing for the risk of zero rates. So Diamond's come full circle. Here's my question to you. If the man who runs arguably the largest, most successful bank on the planet, the most politically connected, the most

economically entrenched bank. They're involved in every different type of finance imaginable. Can be that wrong about where rates, quote unquote, could go, will go? Why does anyone else think that they have a prayer at, I don't want to say timing the bond market, but guessing at where rates might be a year from now or six months from now. I don't think anybody makes decisions with bonds like the average investor with the idea that they can time the market. I don't think that's what they're doing. I think they're just reacting because they're either afraid or stuff like that. When they see a drawdown in their bond portfolio, they do react. Maybe. I don't know.

Do you think financial advisors think they have a handle on where rates are going more so than individual investors? Yes. Because I don't think individual investors necessarily understand the connection between rates and the path

and the price and all that sort of stuff. I think advisors think they do. Maybe. My opinion is that one of the most dangerous types of advisors an investor can be sitting

across the desk from is someone who's telling them to buy or sell bonds based on a rate view. I disagree. You think that's not terrible? An advisor that tries to replace bonds with something that aren't bonds that he says have bond-like volatility. Oh, this is a bond substitute. So what? Utility stocks? MLPs. MLP, right. Okay, next. I was in Modell's last week.

Modell's is a sporting goods retailer in the Northeast. Is this a humblebred? Did you do something athletic? There's 152 locations. Yeah, I play basketball. So what were you in there for? Sore for a week. Icy hot?

Sore for a week. And there was nobody there. Yeah. It's a big giant store. Did you go to the one in Freeport? Yeah. Yeah. What is that, like 5,000 square feet?

It's a big store. The good news is their rent is zero. I don't understand. How is this company still in business? There are days, like leading up to the start of Little League season, where there are 50 dads in there with their sons or daughters. All right. Getting softball equipment, baseball equipment. But I agree.

Most of the time, I go into a Modell's. But I agree. Most of the time I go into a Modell's, even in Manhattan. There's nobody there. There's really nobody there. Because also I understand Little League, but like a lot of the stuff you can just get on Amazon. I hope Modell's survives. It's part of my childhood. And I know other people live near Dick's or some of these other stores. There aren't going to be many of these left though. There aren't going to be many of these left, though. I want to give a mea culpa, if I just have a second. I savaged Amazon Prime Video in a What Are Your Thoughts a couple months ago.

I watched The Boys at your recommendation. That's like one of the best TV seasons I've ever seen. I finished it. So good. It's like I can't wait. I hope, are they making more? I mean, yeah, It's like I can't wait I hope Are they making more? I mean yeah I'm sure they are Because the ending was amazing

No it's also good You probably had very I was going to say What do I watch next on Prime? But I had no expectations Going into that Because Barry recommended it And you know

Hit or miss And it looks like superhero shit It looks sort of silly But fantastic I was wrong There is something to watch on Prime What else is good? There was something

Oh it was Fleabag on Amazon Prime I wasn't into it really I just saw her host Saturday Night Live People love that She seems funny Watch on Prime. What else is good? There was something else. Oh, it was Fleabag on Amazon Prime. I wasn't into it really. I just saw her host Saturday Night Live. People love that. She seems funny. Oh, Catastrophe was awesome. What is that? The Delaney show.

Rob Delaney and Sharon Hogan. I'll watch it. It's like 25-minute episodes, six seasons. The whole season is like four hours. I'm sorry. The whole series is like four hours. I got a lot of flights coming up. I'll start downloading that stuff.

It's funny. All right. What do you got? Okay. Sorry. I'm sort of of flights coming up. I'll start downloading that stuff. It's funny. All right. What do you got? Okay. Sorry. I'm sort of short on topics here. So did you see Twitter? Like the new Twitter on your phone has like a trailer kind of?

No. Where when you open your phone and you're on Twitter, at the top, it shows like three avatars. Of shows? No, no, no. Three people that you follow. And it's like these are the people who are about to appear in your timeline? No, no, no. Three people that you follow and it's like these are the people who are about to appear

in your timeline. I didn't see that. It's a nice little feature. It's like a trailer. You like it? Kind of like it. Like you're about to see an awful shit post

from Josh Brown? It just says like these people are coming up. Okay, they're like next in the feed. That was an upgrade. Alright. Here's my last thing.

There are four NFL teams with 0-4 records. Jets, Dolphins, Cardinals, Cincinnati. No. Cardinals got their first win this weekend. Jets, Dolphins, Cincinnati,

Redskins haven't won. Miami's going to play the Redskins this weekend. Someone's going to win something. Are any of these teams salvageable? Any Cinderella stories here? Salvageable?

These organizations are garbage. They're all garbage, right? Redskins, Dolphins. I mean, Falcons are not a garbage organization. Who was the fourth? Cincinnati. Bengals. I mean, Bengals have good players.

They're terrible. I mean, I don't know. And then Pittsburgh is one and three. There are some really bad records in good teams, too. Well, they're not a good team. There's very few. It's hard to envision a full playoff. What do you do if you're a Jets fan now?

Do you just watch Red Zone or do you just stop watching football? But more than half the league is terrible. Yeah. Are we trending in that direction? Are there just going to be winless teams? Is the parity thing falling apart and we're starting to get super teams or it's not quite? There's no super teams. That's but proves my point that because there's so many lousy teams, it's much easier in any given year to turn it around than it is in the NBA. All right. Well, listen, if you're watching this and you're a Skins fan or Dolphins fan or Jets fan, very sorry.

That's all we got for today. I want to invite you all to subscribe if you haven't already. Feel free to go ahead and give us a like. We love that. We love your comments too. Tell us what your thoughts are on any of these topics. We will be back very soon.