Ted oakley is a founder of oxbow advisors and he is back to talk about the stock market and the crypto markets at large risk assets are not doing well, have not been doing well. Can they continue to underperform? That is a theme of our discussion today with ted oakley. Welcome back to the show thanks david ted five months ago, i spoke with you. Well we’ve spoken after that as well, but i remember a conversation.
Five months ago you had said to me that a 50 correction wouldn’t surprise me. That was a rather appreciation call, because we’ve had a major market sell-off a bear market. If you want to call that, since that conversation, the s p is down about 20 year-to-date. It’S not down 50, like you had anticipated or said, is likely, but uh 20 is a significant number. Nonetheless, the nasdaq’s down more cryptos uh will be touching on that uh have been.
You know if you want to consider them a levered play on the tech stocks. They’Ve been down even more so overall, this year has not been great for the stock markets april, for example, has been the worst month for the nasdaq on record since 2008.
So, what’s next is my question: p compression has happened. Are we now fairly valued in your perspective, or do you think there’s more pain ahead? You know david.
I don’t think we’re fairly valued, no uh. You know we were two standard deviations extreme above normal valuations, and so you had to come back just to get in that zone again, you would have to come back, you know 40 plus to get there and what usually happens on these markets is that you get Sort of a combination of things, but the nasdaq always leads in in the in this s, p, is number two and the dow is number three that’s sort of how they go down by the time you get all of those down and in that deep territory. Uh you’re probably getting closer to the end, but i i don’t. I don’t think you’re there in that spot right here, because if we think the numbers will be worse than people expect like well, you know and they bought all the stock back. The last two years to try to hold everything up, but i don’t think that’ll work right here.
You had mentioned that valuations were the number one concern for you for a while uh we’re going to circle back to that, because it sounds like there’s still a concern for you, despite where prices have fallen now, people have said that the correction we’ve seen since november Has been mainly the fed’s fault in the sense that the federal reserve has shifted their stance from an easy monetary policy to that of a more hawkish uh, more defensive, more contractionary, monetary policy uh. Do you agree with that consensus view that the sell-off was the fed’s fault? Well, it’s partial right because what happens is the fed always runs it in the ground so to speak and the only way that they know how to control inflation usually is to throw you into a recession which you know kills demand. I think one of the things they’re missing right here is probably wondering if the supply side for for this inflation piece is more to blame than the demand side. I think there’s something to that.
If that’s the case, they’re doing the wrong thing for sure, because they can’t you know they’re not affecting supply side. This is a demand side push they’re doing, but back on your question, no, i don’t. I think i think i think the fed had yeah. That obviously has something to do with it, because when that starts, everybody starts to shift everything, but the other side of it was. You were extremes on any measure.
You want to use price to book price to sales, profit margins, public companies were 13.5. There was not one thing we use that wasn’t at an all time, i’m talking about all-time high um, and so we felt like it just we didn’t know what the what we popped the bubble. We just know it can’t stay there, because that’s no! That’S not normal people have been calling it.
The everything bubble, uh qe from the fed, has stimulated uh, not just the economy, but asset prices everywhere stocks cryptos, whatever you want to name it even gold has gone up. Some would speculate that gold was up because of the fed. Others might disagree with that view. Whatever your viewpoint is, it’s you can’t argue with the fact that, like you said, valuation metrics were stretched beyond their historic means. Now let me ask you this: when these things happen, do you have let’s say a target p or target price to book and then beyond that target red flags start to start to blink in your mind, and you start to get more defensive.
Do you have let’s say some sort of guideline that you follow? Well, not necessarily. We we look at what we do. Look at our individual companies, we don’t own index fund or exchange-rated funds, we own individual stocks, individual bonds and individual real estate. So what happens?
Is we look at what you know we have about a 200 stock group? We look at that. We, we will scan that and see where we are, but you know normally just from a market standpoint. You know you. You come back to 15 and a half 16 times earnings, but usually it overshoots that and you go to um a more a deeper valuation on it.
It’Ll go to 12 and a half 13 times or something on the s p. By the time you get to that you’re going to have a lot of other companies that are going to be really cheap. So you have to look. You have to sort of look just take a look at the big picture and then look at your single companies, which is well, which is what we do. Okay, um we’re going to come back to your single company uh portfolio in just a bit because you do have a few strategies uh for your for your different funds.
Um. Let’S talk about what’s next, so we’ve got more fed hikes on the way uh we’ve got the war in ukraine. That’S ongoing! What are the biggest? I guess headwinds for the markets now that you you you as an investor, need to hurdle over before you’re, more confident in deploying more capital, because you told me offline, you’re, still very much in cash.
Well, we haven’t seen you know. I know a lot of people are saying you know i, if you look from a press standpoint, everybody’s talking about was this. The bottom is, you know it’s like today. This day is a very, very normal day on a bear market and people keep buying these openings, and these openings will be strong and by the time you get to the end of the day, you know you’re down again, and so it goes on and on and On till until people say can’t do this anymore, i’m gon na sell them all, and then you know you know when you’re getting a big washout, because you have a few days where you can’t believe the numbers on the downside it all at one time. I just think we just don’t.
We don’t see the signs, we don’t see the margin margins falling, but i’ve checked with the number of firms and they’re, not they’re, not in trouble right now on margin calls or anything like that and so um. We look at a lot of different things, but the one thing is that we find it’s interesting. Those we find that uh people are not they’re talk about it, but they’re not really worried about it, because they’re not really doing anything about it. Well, just valuations aside, uh evaluations, aside ted, what is wrong with our economy or a financial system that would warrant, i guess another 20 downside to reach 50 downside target uh from november’s highest, because, if you think about it last time we had a major uh major Uh correction in 2020, yes, covet happened. The world got shut down, understandable the the bear market before that 2008, the lehman crisis, major housing, uh refinancing crisis, understandable.
What? What what’s? What’S the understandable situation? Today i mean where we were just coming out of a recovery. Yes, there’s a warrant going on in eastern ukraine, but what else yeah?
Well, i think what happens in these with the fed and you can go back and look at every time. They’Ve raised rates going all the way back. What happens is they’re raising rates and something breaks on you? You don’t we don’t really always know what it is, but they break something, and then the leverage in the system today and i’m not certain people realize how much leverage is out there. But if you look at the amount of leverage among if you just take notional contracts, so many things that you can look at that are leveraged up and so all of a sudden that leverage gets really expensive to carry and that’s one side of it, but usually That ends up breaking something.
You know it could be a foreign country. It could be some giant fund here in the u.s. It could be a company there’s a lot of things happen, but it normally shows up that way, and you can’t you can’t see it. The only thing you know is that if you’re getting you know lower lows and lower highs every time you work through a few days in the market, then – and i tell people this, but i’ve been around a long time and if, if everything you bought the last Six weeks, or so or eight weeks, it is down you need to quit buying, because it’s telling you something you know it’s only a weight on it, and so that’s where that’s where this has been.
Maybe people are just dollar cost averaging buying on the dip, as they would call it. Yeah yeah! Well, the dip buyers. I have a graph of this, but the dip buyers are one of the worst dip buying years uh in the last 30 years, and so i i think it’s a lot like really the 2001 time where you came off a real big period: 95 to 2 000. Everybody was drunk on the profits.
Uh everything was easy, nothing hard and then all of a sudden they had to endure this down up down up down up but mostly down, and we feel like that’s where we are now. I’M just curious off topic. Have you talked to anybody friends, family associates about the private side, the public markets are down, but what about private funding? Vcs private equity? Is that drying up as well?
Here’S what we’re seeing and we’re in fairly decent touch with vcs big real estate, closings things like that one of the things we’re finding is uh. It’S slowing things down. For this reason, i’ll give you some real recent examples of of that which is we’re seeing some big real estate deals that got choked down. They were expecting. You know, these are two 300 million dollar deals and they were getting choked down because they were looking.
They thought their financings would be maybe three and a half now they’re, coming in at four and three quarter: four and seven eights. These are big institutional deals and uh and the then the buyers are are backing off a little bit to say. Well, maybe we have to reprice this thing somewhat, then. The other side we’re finding, is a lot of the vcs that pushed out a lot of these companies that had a lot of funding but no profits and couldn’t see any profits, they’re getting murdered. And so when that happens, it slows you down from having to do a lot more.
But that’s that’s what we see in the marketplace. Yeah, it seems. Capital is just drying up everywhere. Then, let’s just take uh the arc etf, for example, kathy wood’s arc fund down 65 over the course of the last 12 months, uh people, one one point of view – is that things are oversold. Now, it’s not it’s not fair to say that uh all the companies within that i’m just using that fund as a proxy, but it’s not fair that all the companies within the nasdaq are fundamentally poor companies there’s long-term potential, and so, if you take that perspective, now Might actually be a good buying opportunity?
What do you think? Well, i i i would not buy arc here. I think there’s another full down leg on a lot of those companies coming in here. I think people are trying to bottom fish at things like that and it’s nothing against arc, i’m just saying with the companies they own. I cannot see that other than maybe a one or two bounce being something you want to own right here and the reason being is because they own a lot of companies that don’t make any money.
Now that doesn’t mean they may not be great technological companies in the course of 10 years, they’re just overpriced, that’s really what you get down to and like if, if you’re buying something – and you can’t get any return, i’m talking about dollar return on it. Cash flow back to you with either earnings or cash flow, then you’re, making a bad investment. Are you talking about uh? Are you talking about the large blue chip tech companies ted we’re talking about this right? If you look at tell a lot of things i own, like teledoc and and then tesla and things like that, you know those companies were built up so far that you know they had to break back.
They had something had to happen and, and even now, they’re overvalued uh relative, what they make you know, and we had. We came into this market uh in some ways, worse than 2000, because you had so many companies that were priced as if they were making a lot of money when in fact they were making no money. And when that happens, when things correct those kinds of companies really take it on the chin, that’s what happened in the in the dot-com bubble. I remember i recall learning about that companies making no money being priced at exorbitant valuations. They were using valuation metrics like price to click click number of times.
You click on the website because they weren’t generating cash. They had to events some fancy, uh metrics, that i guess justify their valuations and all came crashing down. It’S not so you’re, saying you’re, seeing similar things happening now, keep in mind that we have come a long way since 20 years ago. We do have now big tech companies that are making a lot of money, and you know so i it’s not entirely. It’S not back, then, maybe most the tech sector wasn’t doing anything, but now we have, i guess, a good side and a bad side right.
You just got to pick well uh. I think, though, if you look sort of underneath the cover, though there’s a lot of companies that are they’re out there, that they’re, either fintech or tech or something and they’ve been funded. They’Ve been funded well for the next two or three years, but they’re having to live off the funding because they’re not making any money as a company – and i think that’s that’s. The problem you get into here is: unlike 2000, all those companies were sort of lumped together, there’s sort of the same thing internet. They just use that word, that’s what they were most of them uh.
Now it’s scattered, there’s all kinds of companies. These unicorns out here that um, you know there was a lot of money around and somebody had an idea and said: hey: let’s do this and they get out there and but they’re, not making money. I mean that’s what we see um but uh you in investing. You you typically always come back to the meme. You come back to the norm and i think that’s what we’re in the process of doing right now.
I want to get your thoughts on cryptos, but before that, so let’s close out the conversation in your equity market outlook uh, so we’re down about 20 here to date you think, there’s more downside! What do you have a target in mind? Do you have something that makes sense? We don’t have a target. We usually have an idea, though, when we see the signs, you know that are out there and those signs typically come in the form of we will look at a few things that are technical, we’re, not huge technicians, but we do use some things because they can Give you an idea of how people are positioning like book, call that sort of thing, uh, futures markets and that you can tell how they’re positioning and so when they all get positioned one way.
Uh. Then then you then you come back and so i think uh for us it’s hard to have a number. But any number wouldn’t surprise me. You know it should go on down another 10 points or 20 points or or even 30 points for that matter. But i i don’t look for it.
I don’t know what it’s going to be. Let me just ask you this that five five months ago, you said that a 50 correction wouldn’t surprise you so we’re about 20 of that 50. Well, not that doesn’t doesn’t make sense, but we’re 20 down. So, according to your thesis from five months ago, there’s still thirty percent more downside is, do you? Are you still sticking to that?
Well, what i said then was that was your potential to do that potentially yeah you could um. Now you could go down 35 points uh or 40 and the fed, which i think they will do, will come right back in and say, oh wait, a minute! No we’re we’re not going to be that aggressive, because we can’t have this happening because you know it’s all about the market for the fed. So there’s a point in there. I don’t know where it is, but i guess it’s more than 30 or 35 percent, where the fed would come back in and and really say, hey we’re not going to be as hard as we thought.
We were and uh we’ll have to see. But that would be my guess: yeah cryptos have been selling off uh they’ve been selling off hard. I think sell-offs are an understatement. People have said that the crypto market, as a fintech sector, if you want to call it that, has been more or less just mirroring the nasdaq, except on a higher level beta uh basis, so uh, basically a lever play on tech stocks. Uh.
Do you agree with that view that institutional, uh investors and funds are kind of playing the crypto space like uh like a more levered nasdaq, or do you think that they’re entirely different investment philosophies? If you want to call it that? Well, i think, what’s happened to people and institutions. Is it’s very hard for them to maintain an independent view if all the meetings they go to and all the cocktail parties they go to and everything and everybody on crypto yeah and they would be saying like we were saying – is that hey we won’t own it? We think it’s a sham and we’re not going to do that right now.
Then you get people look at you like where you’re you’re you’re, really off your lala land or something, and so they don’t have the capacity to do that, because it’s just hard for them to go against the grain to say we’re not going. So i think a lot of them have been they’ve drugged them into this. You know, they’ve been dragged in to doing it when they didn’t really stop and think about everything that was going on everything that was. Can you clarify what has been going on that you think have well basically yeah yeah. Here’S what’s happening like you’ve had you’ve had this um really, you did all all of these coins now we’re up to about.
I don’t know ten thousand, whatever we’re up to um. You’Ve got all these coins that are out there, for example, that obviously ninety percent of the coins are meaningless. They don’t mean anything other than the fact that somebody’s going to pay you more for it than than you than you bought it for that’s it. That’S the only upside you have, and so, when you have that many angles, it’s not like having gold and silver there’s, two things: okay, but if you look at the crypto side, there’s all these going and you can go down the lane and get to the number 2, 000 and they’re still at like 7 500 million dollar market cap, and so we look at that and we realize how much money people have in these things, and so when that whole thing just keeps on wasting away, we think it’ll have an impact on the Stock market that those two things go together and they’ll they’ll eventually come over there and say: well, i need more money. So i’ll just sell my stocks, but i i think that’s what, when i say the things that happen is you get?
You got the fad going. It’S just a it was a it’s the same thing and it was like again a lot of young people that grew up playing on a computer and they like that. That’S fine! I don’t have my my kids do the same thing, but the problem is, it didn’t. Have any economic value i keep coming back to that show me the economic value if you can show it to me i’ll, go with it, but there’s none out there right now.
All right, i’m not here to debate you, maybe i’ll, get somebody to uh join you on a panel one of these days and we’ll have a conversation about the economic value or maybe there’s no value. There are a lot of people who do agree with you. Ted, of course, the people who work in the crypto space think that there is some sort of value, so be an interesting conversation to have at some point. I just want to ask you just because you’re a valuations guy, just looking at cryptos, i mean uh. Let’S go with the let’s just run, with the assumption that they don’t generate any sort of economic value.
There’S no intrinsic value involved. You wouldn’t look at the space and say well: something’s dropped 95. Now it’s a good! Now is a good time to get in just valuation wise. You wouldn’t say that not on most of the cryptos coins themselves.
Now i think uh and i haven’t done enough work on this. I have to tell you just a personal point of view, but i think the decentralized finance side that includes blockchain and that sort of thing will eventually uh have a real space in finance, because i think, if you look in the same way for us, if we’re Wiring money overseas back and forth doing different things, there’s a tremendous hassles in doing things right now, uh in the banking system. So i think that that has a place. I don’t consider that to be a coin, but i do consider it to be a function of something that’s going to really be they’ll cut they’ll come into play. Eventually.
I think you don’t consider bitcoin as a store of value like gold. Digital gold people have called it that yeah, i don’t uh. I think the reason why is because when you get you know, i guess bitcoin, i don’t know what the what the downturn’s been since november, but it’s high um. I don’t, i think, when you, when you have things that get volatility like that, both ways up and down it’s very hard for me to see that as a as a as a store of value again for bitcoin to me, it’s for people that uh, if they Could just give me to say: okay bitcoin’s going to pay me a dividend or bitcoin is going to make me some money some way or another, but you know you can you can take bitcoin and you can put it in a in a in a d5 bank Yeah and then you can, they can pay you a yield. I mean bitcoin itself doesn’t pay you a yield, it’s just the custodians can pay.
You a yield like a bank, it’s just the yields higher than than your traditional financial institution. Did you know david? I have to ask you this yeah and ask somebody this not necessarily, but if i, if those companies – and you look at those basically those companies, those coin companies at the brokerage firms, if they’re paying you 12 on your money, you know something’s wrong. Okay, this this! This reminds me of when you had stanford and madoff and all that sort of thing, and you looked at it.
You said that that that there’s something missing there, okay – and i may not have all this correct, but if you can pay me 12 or 14 on my deposits in there something’s going on okay, there’s something different about all of that: that’s not a normality there or Something so uh. Well i’m not going to be the person that digs into it any of that. It’S like terra today, all that you know that all of that what can’t happen can’t happen can’t happen. Well then, it happens because so many people out there don’t know they don’t know where they have it or what it is, and so that that to me is the problem. Maybe it’s just a brave new world but you’re saying it’s a little bit fishy for you.
It’S not so much fishy to me is. If you go back through thousands of years, okay, there’s average returns, you get, i mean it’s not uh, there’s never been anything invented. That would give you some sort of abnormal return like that for long periods of time. Uh that didn’t that either didn’t go away or come back to the norm or something because it’s not something that is normal, that’s true, all right! Well to close out the conversation, maybe tell us a few uh sectors or stocks that you do like that.
You do think can weather the storm. Well, you know we have three strategies and and uh you know one of the things that’s different is we have a growth strategy, all stock, it’s about 53, liquid right now um, but in that we have, we still have growth names in there that we’ve had for A long time you know we own we own microsoft and apple, but on down the lane, though we own things like o’reilly, automotive and and some defensive kind of names as well, but um, but we’re not really buying too many things here. Yet we just think that’s not the spot and we have a middle strategy called a high income strategy. Uh it’s fairly liquid too. Really, i’m saying you know 40 plus, but here’s some things in there – that work: okay, real estate, investment trust which will hedge you to a degree against inflation and those have all come off a little bit.
But you know you can still get six percent to seven percent on a lot of those. We can still get eight and a half to nine and a half on some of our gas pipelines. All of those look good and then we have um a group of too big to fail. Bank preferreds win that strategy. We own two that have sold out in price, naturally with weights going up, but they’re up to six and a half six and three quarters uh on those on just the dividends on those which we like a lot and then we’ve just uh.
You know we just recently bought the one and two year treasury because yeah, that is also in the conservative side, because we think we think that is a as an interesting place right there, because while they may raise the short-term rates really high, we think there’ll be A spot anywhere that breaks down, but there’s things to own um. You know gold is up a little bit since january one week. But if somebody came in, we know new money we’ll own a little bit of gold for them too, but there’s some spots, but nothing more than 50 for us, probably in anything all right, great ted. I appreciate your viewpoints and uh and your insights thanks for your picks today and uh, we’ll speak again soon. Hopefully the markets will uh uh be equally volatile.
We’Ll have a lot to talk about in the coming in the coming in the coming months. Uh interesting cycle, we’re in so thank you again, you better thanks and thank you for watching kidko news.