The Compound and Friends - Live from the Compound (from Long Island)

Episode Date: March 18, 2020

Michael Batnick and Downtown Josh Brown discuss all of the recent market volatility from the COVID-19 situation, including some takes on stock buybacks, what 13Fs might look like, the 10 stocks that have raised their dividends for 50 years straight, the overall damage so far and why we need to be bullish on treatments, and save the enthusiasm for vaccines for a later time. We love all of our viewers and subscribers and are thinking of you as we have this discussion. Stay strong, we WILL return. Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

All right. So welcome to Live Not From The Compound. We're actually not there. Michael Batnick and I, downtown Josh Brown, are sheltering where we are out in the suburbs of Long Island. And probably like a lot of you guys watching this, just waiting to hear what the next shoe to drop is and what the next order is from the government and trying to be good citizens, not making a lot of contact with people. But we wanted to come back on The Compound and talk to you all about some of the things that we're reading and hearing and seeing in the markets. Welcome to The Compound Show podcast. Each week, we let you in on some of the best conversations we're having about markets,

investing, and life. Just a quick reminder, the hosts of this show are employees of Ritholtz Wealth Management. All opinions expressed are solely their own opinions and do not reflect the opinion of Ritholtz Wealth. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast. Okay, here we go. Michael, the first thing I wanted to get into was I'm dying to see what the 13Fs look like for Q1. For those that aren't aware, 13F is a filing that every large hedge fund, bank, asset management firm has to do with the government 45 days after the quarter ends to report what stocks they bought and sold. So what do you think we're going to see there? What are your thoughts about who's doing what and who will end up looking really smart for either their sales or their buys?

Hey, well, everything is getting sold here. I mean, I think we're approaching like 0% of stocks above their 200-day moving average. So selling has been indiscriminate across the board. Obviously, some areas are getting hit harder than others. Areas like airlines and travel stocks and cruise ships and casinos and hotels are absolutely falling knives at this point. 70% down, 60%, 70%? Yeah. I'm looking at United Airlines. Like there's no business. United Airlines in a 75% drawdown.

That's before today. Royal Caribbean, another one. God knows how much that's down. Marriott, I think it's down 30% today. So just pain all over the place. And then, of course, we haven't even mentioned the oil stocks. Mass limited partnerships, remember those? So there's pain all over the place.

And then there are opportunities. We're not exactly equity analysts, but a company like McDonald's, that's down 40%. Obviously, in the eye of the storm, people aren't going out. They're not going to McDonald's. Same thing with Disney. They shut down the parks. Things are going to be slowing down rapidly, but is 40% enough? We'll find out, but I would think that there's probably some opportunities coming up there.

Our friends at Bespoke Invest did a really good table showing dividend aristocrats, companies that have raised their dividend for 50 consecutive years. And there's 10 of them, names like 3M, Emerson Electric, Coca-Cola, Johnson & Johnson, and those sort of names. And what they did was they broke it down by dividend payout ratio. In other words, how safe is the dividend? How maybe susceptible is it to being cut? And then they also showed where the dividend falls in terms of the range. So for instance, a company like 3M, over the last 20 years, it's basically as high as it's ever been. The dividend payout is now 4.3% compared to, say, the 10-year treasury, which is 1.1%, maybe obviously not an apples-to-apples comparison,

but they did a good job there. So there are companies, there are businesses that are going to be fine, and there are certainly opportunities for people that are thinking about it this way. A company that has raised its dividend every year for 50 years was raising its dividend through the great financial crisis, through the bear market 2000, 2002, which included 9-11. So it makes sense that there aren't a lot of them because that's almost impossible to be able to do. And then you think about the stalwarts of this bull market, Amazon, Apple, Facebook, Google.

I mean they're selling off but Amazon is down 17 percent. Apple is down 25 percent. Microsoft is down – what is Microsoft down? I don't have it right here. But anyway, the point is that the big giant names, yeah, they're getting hit, but they're not getting slaughtered to the extent that the other ones are.

So- Well, they all have a lot of cash and they all, in my opinion, Amazon and Apple are consumer staples. Wait, what is? You're not through Amazon and Apple. And to some extent, Google, you're not, well, Google is a little tricky,

because advertising budgets may be severely hit. So let's put that one aside. So the Google Cloud is essential. It's the reason everyone's able to be Skyping and using zoom, like you need the Amazon Web Services, you need Microsoft and Google Cloud. And I think those are like, those are almost like utilities right now. But I think like, the Amazon sellers will be very, very wrong. If any company is proving how important it is to our modern society right now, it's the supermarket chains, and it's Amazon. And probably you can throw in Walgreens and CVS. And these stocks should be, I'm not saying they should be making 52 week highs every day, but they should be higher, not lower. Because the longer we're in this position, I understand shelter-in-place stops walk-in traffic, but these are the companies that

have what we need and they're open. Well, you have companies like Kroger hitting multi-year highs. I think Walmart is at an all-time high today. So yeah, these- Should be. Walmart is doing one month worth of sales in like three hours. Dude, it's the inventory turn of the century. And I saw Amazon is going to hire 100,000 people because they need more warehouse, they need more delivery, they need more logistics help. The demand for Amazon right now – I'm amazed the site hasn't crashed. And we're on there every hour looking for things that we can't find locally and not that we can find them either. But it's just the point that there is a demand crash in many aspects of the economy.

There is no demand crash for Amazon.com. It's just – it's not real. Hang on one second. Oh, there he is. So cute. I got a screaming baby. All right. He just woke up from his nap.

Okay. Yeah. Okay. So let's talk – sorry. My baby was screaming. I had to get him out of the crib. Wait. I want to hear what Logan thinks about consumer staple stocks.

Do we buy Clorox? Logan, do we buy Clorox 30 times earnings? By the way, do all bald men look alike or what? All right. So then, of course, then there's people like us that are talking to clients about their portfolios. We're fortunate. Our portfolios are going to recover. Stocks and bonds will come back.

The real economy is going to be in a world of hurt. And I saw a tweet just before we started doing this from Aaron Blake. He said, good Lord, in the past two days, 31,000 Minnesotans have applied for unemployment insurance. Minnesota is roughly 160th of the US population. If other states have the same rate, it would be 1.8 million. This is going to be... Dude, I went into Mateo's last night in Belmore. My wife hasn't eaten decent food in three days.

I'm like, let me get the burnt broccoli, rigatoni vodka. Let's just have one decent meal tonight because we're just living on shit out of packages. So I go in there and the guy's like just he's got delivery orders on the bar, the dining room, the lights are off. It's the worst shit I've ever seen. And that's, you know, one tiny example of what's happening in cities and suburbs all over the country.

So I don't I don't know if there's a precedent for this. Yeah. Like, and I don't know if there's a precedent for this. I don't know. Not to be hysterical, but I feel like we're exhibiting, we're in the midst of a financial crisis, maybe a panic with the rate at which stocks are falling, which by the way, this chart has been all over the place, the fastest bear market ever, and it's only gotten worse. But it almost feels like the calm before the storm because we haven't even seen the health panic yet, which is beyond frightening, potentially overwhelming the hospital infrastructure system, the healthcare

infrastructure that we have in place. And obviously, we're all going to be affected. We're all going to know people either directly or people, friends and, friends and family. So obviously that's where, you know, that's where our heads are at right now. Yeah. One of the biggest challenges, and fortunately I think we're going to rise to the occasion. One of the biggest challenges is going to be to retrain all these people who have been laid off because we're going to have to retrofit college dormitories that are empty as temporary shelters for people. We're going to have to literally like build medical infrastructure. And it's not because everyone's going to die. It's just because you're going to need to have places to treat people. And so calling up like the Army Corps of Engineers, I know our governor, Andrew Cuomo has been talking about that.

Like, yes, a lot of this stuff is unthinkable, but we have the manpower. We have the expertise. The big question is how long it takes for stuff like that to mobilize. And I, you know, I don't know. My guess is as good as anyone else's. I don't think anyone really knows. we do have the ability to retrain certain people to do things that two weeks ago they were doing something else. And like, that's going to take time, but it's almost like a world war two mobilization or somebody was saying, we need a medical new deal. Like we need these big government works projects that we can put people to work on right away. Not for busy work. Like let's not just build shopping malls, but like for actual things that we now need. And so it's going to be, it's going to be a very interesting time to live through. And I think we'll never forget the things that we end up seeing as the country reorients itself toward fighting this enemy. And you know, that that's really like a brand I'm 43 years old and I haven't

seen anything like that in my lifetime. So it's a brand new thing for most people watching this, I would say. Yeah, this is new for everyone. So I want to get into buybacks. So I was saying that I think they have been exposed as being the most pro-cyclical way that companies return capital to shareholders. Like this is the time that you would say, if a company has a $3 billion or $10 billion buyback authorization, this is when you would say, okay, this is what you had it for, right? Your stock is now down 40, 50%. But then at the very moment that you would expect to see buybacks, companies are now more concerned with preserving cash for the emergency. So buybacks are extremely pro-cyclical. They don't actually work the way a lot of people think they should work, which is companies buying their stocks when they're cheap, because now they're extremely cheap and companies just can't do it. I think they cut dividends with

more hesitation than they halt buyback activities. What do you think about that? Yeah, buybacks get halted immediately as they should. I mean there are companies that are furloughing workers and outright laying them off. So should they be doing buybacks? Of course not. What do you think about Cuban's response? He said that any companies that are potentially getting bailed out or government assistance should be banned from doing buybacks forever. Yeah.

Well, I don't know about forever, but should not be doing them concurrently with a government bailout. No, no, no. He was saying forever. Forever? Yeah. The thing with that is they'll overturn it in five years when we're in a bull market.

But I understand what he's saying. By the way, I don't think the fact that buybacks are being suspended changes anything that we've been saying over the last five years. Things changed. Things changed. No, I totally agree. And when you institute a buyback program, you're not saying there might be an emergency where the economy shuts down for 60 days and that's when we buy back stock.

I think they're just saying like if our stock gets too cheap relative to its peers and we think it's the best use of cash but the best use of cash now is not shrinking your float the best use of cash now is helping your employees um because your employees are going to need help i don't care what industry you're in people are going to need help from their employer if they want to continue to work there or even if they're going to be late so what's going to happen? In other words, obviously, pick restaurants. Open Table did this great thing where they're sharing data showing traffic all across the country in different cities. And New York City was down 60% year over year. I'm sure it's going to get worse. So they're not going to be able to pay their rent immediately, right? Bills don't stop even though incomes are going to stop all across the country. So people, businesses are not going to be able to pay their landlord, but their

landlords can't evict because there's nobody coming in behind it. And then the banks can't take their property back because there's nobody coming in behind it. So it has to start at the top. The federal government, which it sounds like they're going to, needs to do massive, massive stimulus. But how do we get through this? What happens when the money runs out? Are we going to cut... Are student loan payments going to be put on halt? Is the federal government going to step in and start paying utilities? Okay, water and electricity, send the bills to us. Like what's going to happen? I think if they want to prevent societal collapse in certain parts of the country, they are absolutely going to have to suspend the collection of bills.

Evictions? No, no evictions. How can you evict somebody they're going to just say they're going to say to landlords um look we'll we'll we'll circle back around and deal with this later but you cannot throw people out on the street right now it's it actually adds to the health crisis um de blasio was on msnbc last night and de blasio the mayor of new york city and uh he was saying the closing of the restaurants and bars and places where people congregate

was only the second hardest decision he had to make. The hardest decision was telling a million school children that they're going to be home and everything that that means for their parents. So like very hard decisions have already been made. Like, I don't think we're in the first inning, right? I think like the gears are turning

and people are doing things that they never imagined that a million years they would have to do. So we're already in that. That's not like what's still to come. So now I think, bless you, Logan.

So now I think things bless you, Logan. So now I think things start moving really quickly and that's like – that's why I think the market is reacting the way it is today after a big update yesterday. Yeah, so schools – everyone has such strong opinions and understandably so. But everybody's opinion is seen through their own eyes, right? How is their situation affected? So you have billionaires saying one thing. You have regular people saying something else. You have low-income earners saying something else. To say we all need to come together is an understatement.

But easier said than done. Did you – so you didn't see – I don't think you saw Bill Ackman's tweetstorm. I don't. So Bill Ackmanman's tweetstorm. I don't know. So Bill Ackman is a hedge fund manager at Pershing Square and I think he means well. He went on this like Twitter tirade this morning about – like saying, dear Mr. President, and he's basically saying, shut down everything except essential services for 30 days. Tell America, all of America, this is spring break. Enjoy a month at home with your family. Enjoy no one. Well, no one is paying any bills for anything. No one is collecting any bills for anything.

No one is going anywhere. No more travel, no more transit. Let's rip the bandaid off, stop it all for one month. And we will be in so much of a better position in terms of containing the virus. So I was saying, I don't, I'm not saying he's wrong, because I'm not an expert in epidemiology. But I was just thinking, like, that's such a thing that a billionaire would say, because I don't know where he is, I'm guessing like Connecticut or Westchester. You just picture him like surrounded by pallets of toilet paper in Poland Spring with no bill coming to him that he can't pay, probably around the clock security in front of wherever his domicile is. That is

exactly what I would be thinking if I had a billion dollars. Most people can't do that. Tell that to the person in a 700 square foot apartment with two kids and no savings. Right. Well, that's my point. And then like who gets up out of bed and shows up at the electric company to keep to keep the fucking lights on? Who goes to the water, the water utility? Like who's doing that? And then so it's just doctors and nurses out on the streets during the day?

Every other person on earth is at home? What happens if people are running out of food? And honestly, this is sort of a low worry on the totem pole, but what about kids that are in seventh grade and they're learning trigonometry, whatever, and then the curriculum... Well, fuck that. No, I know, but the curriculum for the next year feeds on

what was taught previously. How does that all get reset? Well, you know what, Michael curriculum for the next year feeds on what was taught previously. How does that all get reset? You know what, Michael? Everyone will have an asterisk next to their name that was in primary or secondary education right now. My daughter is in eighth grade. She's getting assignments sent to her. She's doing them. Teachers are trying to figure out how to use Zoom, which, by the way, is another name that's closer to its high than its low. I own the stock full disclosure, but Zoom, there was an article in

New York Times last night, how everyone is trying to convert everything they do to a screen version, including college kids throwing parties, but doing so through their computer screen. So I think that's interesting. But yeah, I heard a horror story about a woman whose daughter was on semester at sea. And they took off in mid-January. And in February, there were reports of call in Asia telling them, no, you're not disembarking. They got to Johannesburg, South Africa, and the crew said, we quit. Everyone get off the boat. This semester at sea is over. So she's been in South Africa for a week trying to get a flight back to, you know, trying to fly her way back to New York. So, like, yes, everyone in a college situation like that, everyone in a high school situation like that, there's going to be an asterisk.

Everyone gets that what happened is unprecedented. And I don't think academically this is going to affect the rest of their life. I can't imagine it. Like are we going to pretend this didn't happen? So I'm less worried about that. I am optimistic that it does seem like finally it took longer than it should have. But it does seem like people are starting to take this seriously. People are starting to hunker down and not leave.

And obviously everybody just hopes that this passes through the system as quickly as possible. So I want to end this. We'll be back. I want to end this on an optimistic note. The stuff that I'm trying to read about, not because I assume there's going to be a best case scenario. I have never read more about drug development, vaccine development. like drug development, vaccine development. I'm like, and the New York Times had a piece last night, there are 50 potential drugs that react with the protein in the cell that is being fed on by this virus. And they're trying all of them at once. Like, I don't think that I don't think that I know any better than the government about when a vaccine will come. But I think the treatments are improving daily, because I think doctors all over the world are learning from each other

in a way that was not possible during the Spanish flu, for example, 100 years ago. There are doctors zooming from all of these cities all over the world and saying, this is what we're doing. This is what we're doing. This is the efficacy of this. So I do think we will be pleasantly surprised on the treatment side, even if we're waiting a long time for the vaccine. And I have to think that way because I have a family, I have a business, I have friends and loved ones that I care about. That's the only way I can think. I can't think about soup kitchens. I don't think that that helps anybody. And it's definitely not going to help me. So that's what I wanted to close on. Do you or Logan have any thoughts that you want to close with before we sign off?

No, I mean, I'm optimistic that the market will recover, that we will get through this. But at the same time, I'm very, very concerned and frightened for what we have to endure in order to get to the other side. So just hope everybody stays safe and we will be back shortly. Yep. We'll see you guys soon. Feel free to leave us any feedback, any messages of love and support. Greatly appreciated. We love you. We support you. We're thinking about all the people that are unsure about their incomes, their jobs, or any of the preparations they need to make with their families, depending on where they are. We're thinking about you guys. We love you. We appreciate you. And we will be back.

Thanks for listening. Check us out at thecompoundnews.com for daily investing and market insights. You can watch all of our videos at youtube.com slash thecompoundrwm. Talk to you next week.