Where to invest
we have a great hour ahead for you. we have three professionals who will give you―and we’ll tell you what is impacting what and how and where they’re investing. we’re joined with jessica kaie from cohen, klingenstein and marks and charles crane and gary shilling has been a bear for a while and i believe remains so today. thank you for being here. jesscarks let’s start with you. make the argument. gary’s a bear, you’re a bull. why?
>> we’re bullish on technology, but the market as a whole, we have a lot of cyclical companies in our portfolio.
>> you have bull across the whole thing or is this bull on select areas?
>> we’re a growth stock manager, so we only own growth stocks, but we’re bull esh on that sector because we think that the economy is going to continue recovering, interest rates are low, there’s zero enflakes and we think that all of those factors should lead to an uptick in capital spending.
>> is it harder to find―is it harder to differentiate between growth and value anymore? do you find it harder stocks or finding stocks to buy?
>> no, i think that it is clear which companies are growth versus which companies are value. growth companies have a slightly higher p.e. and their growth rates are faster. technology companies, obviously, over the last couple of years, they did not spend as much, so the growth rates were negative in a lot of cases, but over the next couple of years we think that technology spending will pick up. there hasn’t been any spending for the last few years, and we believe that it will accelerate.
>> we’ll get back to technology more in the show. cautious bull. what does that mean?
>> cautious bull can be an optimistic bear. you can slice the salomi only so many different ways.
>> i’ve got to preface all of the comments by saying that predicting the market is a bit like predicting the weather. precision is much more a matter of luck than any degree of skill. so with that out of the way, remember that there is only two things that drive stock prices. one is the underlying earnings of the issuing company and two is the multiple of those earnings that investors are willing. earnings are growing at a good clip. they’re decelerating a bit. but i think that we’ll see double-digit earnings growth through the balance of the year. on the second measure, multiples are elevated. there is no question about it.
>> too elevated?
>> not too elevated. but i don’t think that it is reasonable to expect much in the way of multiple market expansion. if interest rates rise, market multiples will come down. that’s not to say that individual stocks within that market might not see multiple expansion in their own --
>> companies that may benefit from i.r.a.’s?
>> yeah, or the companies that are caution those rates to go up. those companies that are sensitive to the economy and who are seeing their businesses do quite well right now.
>> gary, we talked a lot with you in the past about things like inflation, concern about the consumer, are those still your primary reasons for being a little more negative on stocks?
>> yes, this economy has been driven by tremendous monetary and fiscal stimulants. tax rebaits, big military spending, low mortgage rates which cash out refinancing. but those things are really fading, and with all of the excess capacity, we don’t see a big pickup in capital spending. back in 2000 at the new tech peek, everybody said that this will wear out. and they’ll have to come back.
>> eventually they do have to come back.
>> like caie said, it is all run or all debt. they’re saying that they don’t have no pricing power, why should they build new inventories. they have too much capacity.
>> it goes back to charlie’s point about earnings.
>> let’s talk about earnings. the market took off like a scolded dog. if that continues, and i that was one off. if that continues, it means that you won’t have the productivity growth which has been the primary provider of profits. that’s the key, and if people will hire everybody in sight, they won’t have that profitability anymore. why should the markets celebrate that? that and higher interest rates for two days, i would think that the market would be in the tank.
>> a tech investor, that’s a big part of your strategy, finding companies that will get the benefit of capital spend egg. capital spending will come back spending. capital spending will come back for some teches can.
>> it has started to come back. it is slower than we expected. but the market picked up in anticipation of in capital spending, but we think that it will come back.
>> when? who will be doing the spending?
>> i think that it started. but it started more slowly than we expected. but i think that it has started and there has been a number of years of zero spending, especially in technology. and so companies have to at some point upgrade their servers, their computers, their software. they have to in order to get more --
>> they got a big break from the government, because of change of depreciation rates with capital spending, if that alone and no one think that’s will be permanent. if that is not enough to get capital spending picked up, what will be? if people are not spending now, why would they when it costs them more on a tax basis to do so?
>> i think that at some point you have to upgrade if your systems are too slow. and i think that, you know, we have seen companies reporting better numbers, certainly better profits and that was mostly related to cost cutting.
>> we’ve done a lot of work on this. what we found drives capital spending is not profits, it is not cash flow. it is not interest rates. it is capacity utilization. when you have capacity coming out of your ear balls, businesses say, hey, look, why should i build more? i don’t need it. why should i take the risks? i may not get the profits, i may not get the―these price haves been there. again, the fact that this hasn’t come back so far. yes, capital spending isn’t going to collapse. is it going to come back strong enough to drive the economy?
>> gary raises a good point. capacity utilization is low by historical standards. i question the validity of the spess physicality of let’s -- i question validity of what capacity is. however, there is a lot of excess, whatever the specific number is. that said, there is going to be some growth in capital spending. i don’t think that it explodes. it may explode in certain parts of the whole capital structure, however, and technology is probably one area where explode is a hot word, but it probably will increase.
>> i agree with you, charlie. i mean, you―the numbers are ridiculous. you don’t care what they measure as long as the errors are consistent through time. whatever they measure today, it’s the same what they measured six months ago. i don’t think that there is any reason to believe --
>> let’s continue our discussion about can’t yalt spending and technology -- about capital spending and technology. we’ll be back after this.
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