S&P 500 and Nasdaq power to record closing highs as some of the biggest American companies posted stronger-than-expected quarterly profits. But are these record levels justified? And can corporate earnings continue to grow? Kim Parlee talkes to Phil Davis, founder of philstockworld.com and PSW Investments.
- Welcome to Money Talk. Coca-Cola, United Technologies, and Twitter are just some of the big cap companies that reported earnings beats this quarter and led the S&P 500 and the NASDAQ to record high levels. But with the economy and its late cycle, will the market ascent ease up? Or even fall apart?
Joining me is option strategist Phil Davis, founder Phil's Stock World.com and PSW Investments. He joins us from Fort Lauderdale.
Phil, how are you?
- I'm great. How are you doing?
- I'm doing well. Thanks. Great to have you on. Let's just start-- we'll get into the plays because I know people are like, get on with it, get on with it. Get to the plays. But I promise we'll get there.
Give me a little context here. Because if I think back, you know, December, November, that time, I mean, the markets were coming down hard. And then, you know, fast forward to, I think, just a couple days ago and you see the banners on the screen saying, S&P new all time high. So what do you make of where we are right now?
- Well, in the Fall we were shorting the market because we felt that we had gone too far, too fast. And-- but also the depth of the drop in December got-- we started buying again when we got towards the end of the year because we were very excited about being able to buy at those lower prices.
I think on the whole most of the damage is done by what I call self-inflicted wounds. In other words, you know, stupid trade wars that you don't need to be having; the Brexit moron, you know, idiocy over there. Things like that are just that they're not really anything wrong with the global economy. There's something wrong with the global leadership.
And once we get past that stuff, or once it normalizes a little bit, we're on a pretty strong footing economically overall. In fact, I'm very impressed with the way we did rebound so fast.
- Tell me about some-- I mean, if you take a look at some of the stocks making up the indices, I mean what do you see? I mean, are they-- is it a healthy rebound? Are there lots of stocks participating?
- Well, you know what? I was very nervous going into this quarter. And I thought that we were going to have some earnings problems and such. But last week, one week ago today, in fact, in our morning report, we analyzed the NASDAQ, and we looked at the top 10 components of the NASDAQ. And we looked at each company one by one to decide whether or not it was actually worth what it was when the NASDAQ was hitting 8,000.
And as it turns out, you can make a justification case for the NASDAQ. The top 10 stocks in NASDAQ are 40% of the composite index. They're almost 50% of the NASDAQ 100. And if those 10 stocks can justify their position now-- and the earnings coming in tonight; you can see they're even doing better-- then the entire NASDAQ is probably justified at about this level, crazy as it seems.
- What about the fact of what I said when I was at opening up to you? You know, we're in the late end of an economic cycle. I mean, do you believe that? I mean, where are we from an earnings perspective? How can we get more upside from here?
- I think the real upside is coming from automation. I think we're sort of in the beginning of-- you know, there are the normal cycles that you were talking about. And you're right about that. We are heading into-- you know, we've really exhausted the sort of-- this part of the normal cycle. But there's this super cycle building of automation and AI. And it's really happening.
It's all very science fiction, and we've heard about it for many years, and they never really caught on, but they're making leaps and bounds progress with automation now to the point where I think every year you are going to see these incremental moves up and up and up in corporate profits. It's not good for people because they're going to replace all these people with machines. But it's fantastic for corporations and their bottom line.
KIM PARLEE: But what is that--
- Especially large ones.
- Yeah. And I guess the one point is, you know, does that dislocation of people ever start to hit the bottom line? If people don't have enough money to buy? Or do you expect another cycle begin in terms of those people getting re-employed again or redeployed somewhere else, I guess?
- I think we're going to be-- I think we're heading into a decade of turmoil where you will see-- well, first of all, you're going to see these large companies that are able to automate are going to start destroying their competition. So you're going to see bigger and bigger corporations taking over. You're going to see more and more people thrown out of jobs that have to find something else to do.
But there will be other work. There'll be other-- you know, there'll be other ways to deploy income that's being made. But it's going to be very disruptive. There are going to be some very ugly cycles. There's going to be blowback on it. There'll be people screaming for legislation. All sorts of weird stuff is going to be happening. It's going to be interesting, to say the least.
- Yeah. Interesting to go into and also with this election coming up, too, whether that's all going to kind of sync up for that. Let me ask you, though to stick with the market, we've seen the markets come back to all time highs. At the same time, we've seen just a whole bunch of IPOs come out-- Lyft, Zoom, PagerDuty, Pinterest. Uber is set to come out. Does that tell you anything about the cycle?
- Well, I-- well in the traditional investment banking sense, these guys are the-- money-- look, the money's out there. People are willing to handle this cash to Lyft and so on and so forth, regardless of whether or not anybody makes money. And then if you look at Amazon or somebody like that, they play out the scenario where we'll give someone a chance because over time they might make your money back, even if they don't look like they're making money.
I think they're striking while the iron is hot. I think they're worried. Because in 2008, we saw the liquidity like that dried right up. So while the money's out there, while the market is ripe for these IPOs, while these unicorns can still get bidders, even though they're not making any money, now's the time to strike and get out there. And that's what they doing.
- All right. Last question for you before we get onto some of the calls and that type of thing. But I'm curious-- are you-- I'm hearing two things from you, I guess. It's like you've got this automation supercycle, on one hand, which I think sounds bullish-- for the right companies, anyway. And then you've got this disruptive, you know, lots of things could happen, trade tensions, all that kind of stuff. So which one trumps in terms of your thoughts of sell in May and go away? Do you stay in the market?
- You know, and, again, you're saying you're of two minds, it's true because I'm a hedge fund manager so I have two mindsets. I'm always looking at both sides. But as much as I'd like-- as much as I would love to sell in May and take the summer off, because we've made unbelievable money already this year. I mean, we've made enough money already this year for this year and next year.
But on the whole, I think there's that fear of missing out. People don't pay me to go take a vacation in May when I've made enough money. There's that fear of missing out on more upside in the market. And I think that does trump-- don't say, "trump"-- I think that triumphs over the fear of the market going down. I think we are in pretty decent position in the market. And I think that probably it's best to stick with it and keep going.
- All right. Let me-- let me squeeze in one last thing before we go to break. You mentioned Trump. What about Trump and in Iran? You know, with everything that's happened this week, I mean, oil moving up to new highs. That's helped the TSX, actually, which I think a lot people were quite surprised at. But you know, what is your take, I should say, in terms of the latest moves with Iran. I mean, is it really-- is Iran's oil production really all that material to the market overall?
- I think not as much as people think. It's a knee jerk thing. It's not so much Iran's production, because they produce about 1.8 billion-- 1.8 million barrels a day, which is roughly what the OPEC has taken off the market. So it can be replaced like that, by OPEC just ramping their own production up.
But-- and also not everybody is going to comply. Very much doubt that China is going to comply with the US demand with Iran. They are still going to buy their oil. Iran's also going to sneak oil onto the market. So it's not going to have that big of an effect.
The big deal though is when you hear Iran talk about the Strait of Hormuz, and closing the Strait of Hormuz, or blowing up the channel, or mining the channel. One-third of the world's oil goes through the Strait of Hormuz. If that becomes a war zone, that will be disruptive. And that's where the real story is going to be if there is one.