Portfolio positioning for an uncertain market with next gen investors

0:09Welcome back to Seeking Alpha's Investing Experts podcast. I'm Rob Isbitts and you may know my work at Seeking Alpha under the profile Sun Garden Investment Publishing. I also lead the investing group, Sun Garden Investors Club, where we focus on teaching risk management, technical analysis, and using options to protect and enhance returns. Club revolves around three key strategies, bond ladders, option collars, and ROAR, my proprietary grading system for stocks and ETFs. But really, this is about hearing from these three sharp next generation panelists. We did our first session for investing experts earlier this year.

0:51And we're thrilled that Rina and the crew at Seeking Alpha invited us back again. And I suspect she'll put a link to that first episode in the show notes, along with this one. So check that out. Welcome back, Julia Ostian, Jack Bowman, and Kenny Ofontes. And let's get right into it. The subject, folks, is autumn. And as I said in an article that should be out on Seeking Alpha by the time this airs, September is where bull markets go to die. And if that doesn't do it, October is also standing by ready to finish the job. So there's a lot of chatter about that. It doesn't mean it will happen, that the autumn will be ugly for the stock market in particular, just that it could happen, especially in a market that's elevated, at least at the top of the S &P it is.

1:40If there's one thing that you want people in today's session to remember, it would be blank. Julia, fill in the blank for you.

1:49Julia Ostian:First of all, I'm really excited and grateful to be here. It's nice to talk to you guys again. And funny enough, this year has already felt like autumn for me, at least, even before we got here. And since the spring, it's been one thing after another. If you recall, tariffs in April, oil price uncertainty was run in June, mixed jobs and manufacturing reports throughout this whole period, and the constant back and forth on rate cuts. and it's honestly been a lot. So heading into a season that's already infamous for volatility in a year like this feels especially uneasy. So, you know, this whole setup reminds me of that picture of a board balancing on top of a ball, on top of another board, on top of another ball.

2:35Julia Ostian:So I just ask myself, what could possibly go wrong? And yet somehow here we are at an all-time high. So I am really excited to share my strategy. What do I do with my portfolio in these uncertain times and learn something new along the way from you guys. So thanks for having me again. Great. All right. Welcome back. It is great to have you here as part of this trio of sharp, young, upwardly mobile and already very accomplished analysts that write at Seeking Alpha. So Jack, Julia was talking about that trick with the ball and the board and all that. You've actually performed that trick in public on the board walk out in California, right?

3:19So, no, I'm just kidding. Why don't you give us a little intro in terms of what's high on your list of focus topics as we enter September?

3:29Jack Bowman:Yeah, thanks, Rob. I've been getting better at it. Santa Monica crowds are a little rough. um no but i the month the the last few months have been very interesting uh and a lot of that has to do with things i'm looking at outside of the equities markets i've been watching oil prices continue to fall as the u.s goes full drill baby drill mode uh opec continues overproduction we are seeing a sell-off in global 30-year bonds it's not just the u.s although our 30-year treasury is now nearly 5 % in its yield. But we're seeing Western bonds sell off at the same time. The yield curve is steepening across Western economies, not just ours.

4:12Jack Bowman:And equities are somehow still okay. And this is what I've been watching is, as the risk-free rate, you can lock in almost 5%, 4.92, whatever it is today, for 30 years, backed by the US government. So why are you buying stocks? But people are, right? And of course, I've been very happy to be invested in international stocks and gold this year. They've been very good to me, especially coming from the last couple of years where they haven't been. So we're seeing some rotation within markets, but we're still seeing a lot of this exuberance in the equities market, which is maybe not baffling to me with all the AI profits and money raining down from anyone who wants to buy a GPU.

4:56Jack Bowman:but how long does that last for i don't know but i am happy to be here though all right great and you definitely brought up a few things that i will come back to uh when it comes to things like yield curve steepening uh maybe the uh efficacy of bond ladders in this environment personal experience on that and uh also the the macro in terms of the international Kenny, what's on your mind, my friend?

5:24Kenio Fontes:Hi, guys. Thanks for having me here again. Excited to discuss this thing with all of you. My take is this second quarter was really strong in terms of earnings growth. And we saw that with companies like NVIDIA, Microsoft. But the flip side is that this also pushed the valuations a little higher. Year-to-date, the tech sector is up about 14 % in total return. Almost none of that came from dividends. A lot of it come from earnings growth. But another big chunk is multiple expansion. So just to give some very quick examples, NVIDIA went from around 20 times forward earnings to 30 times, Microsoft 25 to 30 times recently.

6:11Kenio Fontes:That's a big stretch for me. And we even have some better examples like Palantir, Oracle, Netflix. So I think right now it makes sense to do two things mainly. First, be a little bit more cautious with these consensus stocks like Microsoft, even if it is a very, very great company. And second, look for opportunities where the market is a little bit more skeptical, where we can go against the narrative. Names like Google, Uber, or Amazon, I will get into those later. Just to mention one more thing, Jack talked about the free risk rate. Here in Brazil, we have 15 % on treasury yields. So I'm used to wait to know a little bit about macroeconomic cycle and all this matters a lot.

7:01Kenio Fontes:Just a caveat, I even own NVIDIA myself. I'm bullish on the business. But for me, I'd rather wait for potential pullbacks to add more. Yeah, yeah. I don't think we'll get away with not discussing NVIDIA. To me, the biggest thing that I see this autumn, it's not fundamental and it's been building for a while. It's the potential reckoning, I would call it, for retail investors because of how they've been taught about investing since the global financial crisis. And I'm not talking about folks who write for Seeking Alpha and even a lot of the Seeking Alpha audience because it's a very high end audience in terms of investment intellect.

7:39but it's also a very small portion of the overall audience. The problem is people have been taught, not just since the financial crisis, I mean, especially since the pandemic, all they know is they don't really understand the stock market, a lot of them, especially the newer investors. They just know what it does for them. And so they put money in the S &P 500 index fund. They watch it go up and up. And when it falls, even by 30 % or more, they get right back up and you know nothing bad ever happens and so they they also miss a lot of things are going on underneath the biggest stocks because they don't move the index and it's created this buy the dips thing which has kind of become like the law of the land and i think it's about to be a bigger problem not be look markets can fall so what i've lived uh 30 plus years professional investor and market declines are some of my best periods.

8:42So the market falling shouldn't really matter. That's what risk management is all about. But I think that there's so many people who've been trained almost like saying the car can only go forward. It can never go back. Well, what if you have to back up sometime? Or what if you have to parallel park? And I just don't know they're prepared for it. So I think that the rest of the year, people should prioritize understanding what indexing actually is, what drives it. And my latest research is starting to roll out on that. So anyhow, Julia, you talked about institutional investors. And based on what I just said, you want to chip in on that or anything else?

9:26Julia Ostian:Sure. Thanks, Rob. I actually think about Like what you just shared about the S &P 500, it ties directly into what I've been rethinking this year about positioning, you know, my positioning. And like you said, a lot of people are still just buying dips in the S &P without really thinking what drives, you know, those spikes. and for me I've been looking at where I actually want my money to sit if volatility hits you know if the correction hits where I will be comfortable with my money being and as I already said this autumn feels especially uneasy with all of the policy changes and geopolitical environment and all of the risks so I have to say I've been working for the past six months or so on making sure I am comfortable with my positioning, with my portfolio and for a case of an actual bear market.

10:26Julia Ostian:And currently I have to say I actually am. And if we will have time, I'll be happy to share with some of my insights and where do I locate some of my holdings. But about the institutional investors, I actually have read a great article of JEX showing that institutional investors are getting more careful and they are increasing hedges and cutting ETF exposure, while what is very interesting, they are not holding cash. So this duality, you know, it's basically something that I know this I do as well. I am being careful, but still I am trying my cash to be positioning somewhere. So maybe, Jack, you could share a bit on that.

11:15So before you do, Jack, Julia, well said. And you're saying that they are drawing down their equity exposure, but they're not putting it in cash. Does that mean they're allocating the bonds or is it more of a long, short, alternative type thing?

11:30Julia Ostian:So that's exactly what I'm curious about. Yeah.

11:33Jack Bowman:So this was watching futures exposures is how I kind of watch institutional investors of seeing how future levels change. And thankfully, the Commission on Futures Trading aggregates by the kind of institution so we can see how hedge funds are positioning against intermediaries or dealers, market makers. And one of the things we're seeing is the increased allocation to hedges to just direct puts on things like the NASDAQ. But we're also seeing heavier allocations to commodities, except for oil. Oil is still in this downtrend, but the rest of the kind of smart money players are keeping their allocations to the U.S.

12:14Jack Bowman:high, but also their hedges high. And instead of diversifying necessarily, although they will tell you in surveys that you should get out of U.S. exposure and you should own international and all these things, what they're doing is they're still buying U.S. stocks. They're still, just like the rest of us, addicted to MAG7 AI profits, right? You know, I mean, the S &P is 8 % NVIDIA, right? You can't escape it. But they're keeping their allocations to commodities high now, too, especially as a price in future inflation. I think that's part of the bond woes is in 20, 30 years, what's our inflation going to be like?

12:51Jack Bowman:Are market returns able to keep up? I mean, we're in the 75th percentile of valuations right now this year. So 70 % of the time, historically, valuations have been lower than today. Only 70? Right. And this is indicative of being not at the top of the bubble, but somewhere in the middle, right? we talk about the S &P being over 35 % tech stocks. Well, in 1880 something, it was 60 % railroad stocks. So it can get worse, right? You're not saying that because you think I was there. Okay. Well, look, you talk about the concentration at the top, wrote something recently on an ETF, ticker is T-O-P-T.

13:36And it's not a buy or a sell. It's a different way, I think, to look at the S &P 500, not just top 20, but the top 20 are like almost half the index now. And if you look at the top 50, even more. And when you start to look at it that way, the companies at the top, even when you look at the top 20, I'm pulling it up right now. But even if you just look at the top 20, NVIDIA, Microsoft, Apple, the big three there, 44, almost 45 % of the top 20. So this is not a market of stocks. It's a market of a handful of companies. That's not a bad thing as long as it continues. The issue we have is that people think they own something that they don't.

14:29They, well, 500 stocks, I'm so diversified, okay? You're not. Maybe if you own the equal weight S &P tickers RRSP, not so much. And we've had such a long period of time where the big have gotten bigger at the expense of everybody else, just like the economy, right? Just like the wealth spectrum. It's all kind of going that way. And I don't know, maybe it breaks, maybe it doesn't. Anybody have any thoughts on that kind of peering into the future?

14:55Jack Bowman:Yeah. I think the other thing to think about too, is that it's not just asset prices and stocks too. The housing has become much more expensive alongside this, even as mortgage rates have gone up, right? And we were kind of sold that like, Like, well, as rates go up and the risk-free rate increases, I mean, 15 % on sovereign bonds in Brazil is insane to me. But, you know, I mean, as you have options, right? If Akenio is smiling, he's up to say, just another day, just another day.

15:24Julia Ostian:I have to say just another day because in Turkey, in August, it was close to 32%. percent so yeah that's a separate segment on what to do with the global bond market because you know i'm a big fan i've written a lot about this laddering treasuries and again different part of life uh but to me just like jack said treasury rates i mean they haven't been you talk about 70 i think treasury rates for the last 20 years uh probably in the 90th percentile 95th percentile They just don't get that much higher than this. So unless you think that inflation is going to run through the roof, that's why I laddered zero coupon treasures.

16:09I've written and spoken a lot about this. And it's kind of like my second Social Security here in the States. And I'm encouraging other people not to do it because no direct advice, but to look into it. Because, again, people have been coached for so long here on, you know, buy the S &P 500, buy the NASDAQ, which looks too much like the S &P 500, by the way. A lot of overlap. And, you know, just call it a day and time will bail you out. It doesn't happen.

16:39Kenio Fontes:Here in Brazil, it's the other way around. we are called like the country for fixed income so people are told to invest only in fixed income they just want bonds just want treasury and so on like the CPI link is kind of I think it's CPI plus 7 or 8 % the treasury it's not CPI, it's another metric but similar is that because they want to make sure the government is well financed? financial advice right yeah definitely not uh i actually kenny i wanted to go back on on a couple things you were talking about some of the companies that i would describe as great business been a great stock maybe going to be a tough stock going forward so please expand on that uh as you like and i would be shocked if julia who does a lot more stock work like kenny does, then Jack and I do, do a little more ETF tilted, you know, if you wouldn't also chime in.

17:44But let's go back to this idea because, you know, buying great businesses and holding them, I like the first part. The second part, it only works out in bull markets. In bear markets, it gets treated like everything else.

17:59Kenio Fontes:Yeah, yeah. I'm not sure if I totally agree because we have some different things. We have Microsoft and Amazon, both big and great companies, but I look at them differently. Microsoft is almost a consensus in the market, so the valuation gets more stretched than Amazon. Both companies reported strong earnings, but after their results, Microsoft stock went a lot while Amazon stock actually fell. Why was that? Microsoft Azure grew almost 40 % while AWS grew only 17%. That's not good in fact it could be seen as a reason to worry but that what it really shows is that now the market is already priced Microsoft as a consensus growth story assuming it will continue growing at high rates maybe forever, at least for the next decade.

18:56Kenio Fontes:And that actually compresses the potential IRR. And for Amazon, it's the other way around. The IRR is now a little bit bigger because the story is still compelling, but the valuation is slower. So I look at that differently. Well, that's now well put. And I mean, as we sit here today, first trading day of September, they both look more likely lower than higher to me in the intermediate term. But what do you want from a chartist who's also primarily a risk manager? I like the worst case first and I go in reverse. Julia, what do you think? This seems like a topic that's right in your bailiwick, as they say.

19:42Julia Ostian:Definitely. You know me very well. About your phrase that big, great companies work good in a bull market, but in the bear market that they get treated like everything else i have actually a couple of thoughts on that so let's get back to the to my strategy right how do i prepare for the correction or the bear market so i'm almost out of ai at this point almost completely and not only before the autumn season but for the past half year or so and the reason is that those stocks as we discussed previously and everybody know they are the ones that get hit the hardest if everything falls because they're really expensive right now and the only ai related stock that i still hold is volunteer but it's more of a conviction story for me than anything else and to be fair i have held it for almost the past five years at this point but in general if we are talking about the industries you know the hot industries that people do want to hold but are kind of afraid to hold if everything crashes and the semiconductor industry is always the big one to watch for me and i've actually written a whole article on the sector not long ago and i still hold nvidia and amd and it's not you know it's not that these big companies they're like i'm i'm looking at them you know with the forward outlook.

21:15Julia Ostian:For example, I wouldn't be holding Apple right now. The whole story with the manufacturing and the problems and the risks, it's not for me, at least not before the uncertainty hits. So the trend pretty much is visible for me, at least. I'm still holding the companies that are hot, that people are talking about them, that there is a sentiment that I believe they will be like big and they will be growing in the future but at the same time i'm sure that those companies they will come out of any correction uncertainty or volatility even stronger than they were before like that they will not go bankrupt they will not crash these companies they will be okay doesn't matter even if the bubble yeah everyone is very afraid of the bubble even if the bubble will pop i'll be okay holding them for like two three five years until the price will be even higher than it is today.

22:09Jack Bowman:One of the things I wanted to bring up about this, because as much as we're talking about the bubble and which stocks to own, which stocks to not, we've seen an interesting divergence. So in the dot-com bubble, the hardware sellers were hit the hardest, right? Cisco is our big key example of this, of they peaked in, you know, 1998 or 1999, and they haven't been there since, right? And one of the differences that Cisco was selling this kind of commodified hardware that anyone else with a garage could just start making and producing and selling. And NVIDIA's work is much more complex than that. And no one can just pick up what NVIDIA does.

22:47Jack Bowman:But I think we've misconstrued some of this invulnerability in earnings like NVIDIA with the tech sector more broadly. And Kenny touched on this in an article he wrote that I thought was brilliant was like software is having a much different time than hardware and the tech sector is seeing this divergence and so i think stock selection may be really key in in the next bear market whenever that comes because of some of these narratives of like nvidia might still be able to be really profitable uh in a in a recession because a lot of their income doesn't come from gaming anymore it comes from data centers but the software companies who are getting replaced by AI, that may kick into overdrive in a recession where we need to lay off workers and cut costs and do all these things.

23:34Jack Bowman:So I wonder if anyone had any opinions on that. As you guys like to say, probably more than I do, if you double click on that for a second, and we go to the idea of software companies behaving differently, as I understand it, that's because their business is threatened by AI, right? You have AI, you don't need the software. I mean, how big a deal do any of you think that could be? Because the idea that, again, the idea of investing in great companies, okay, some of those great companies become passe. Their businesses do, you know? I mean, if technology has done anything, I think even more than the last 10 years, is it's taken companies that had assumed wide moats and it's knocked the moats down or knocked them out.

24:29Julia Ostian:I don't know. I have to say that, in my opinion, AI enhances software. It powers software. And, you know, it's like with the workers, people are afraid. People are like, oh, no, AI will take my job. and listen if you will learn how to use and how to power your job with the ai you will come out only stronger and only better after this so the same is with any software and with any company right now you know people also investors in my opinion it's funny they say like i want a pure ai play like i live in israel and we're full on high tech right now every startup is ai startup I can promise you that I have many friends that are working in high tech companies, and all of them right now are looking for engineers with AI background to open an AI division inside of this company.

25:19Julia Ostian:So when you are looking for AI, you can be looking for any kind of company. It can be actually an online retailer or it can be a cyber security. It can be anything basically you can think of. Yeah, Amazon is a tech company, even if they consider it to be a retail company, right? Every company is now a tech company, right? There's even some discussion that at some point, S &P, who's kind of the keeper of the sector sorts and stuff, will change the definition of what goes into the technology. Exactly. You know, right now, every financial company tries to be a fintech company, right? So this is basically the future of tech in like five to 10 years.

26:05Julia Ostian:Every tech company that is now tech company will be AI tech company. It's just, you know, it's just the growth of the industry, I guess. It's just the progression that we're facing.

26:15Kenio Fontes:I have a slightly different view on this. What really matters is how companies will implement this. So Microsoft and Amazon will be able to implement AI and remain unchallenged or even stronger. But I'm not so sure about the mid-sized software companies like Salesforce. It's a maybe for me. It could be stronger, but I'm not so sure. It's very different. You have to analyze each case individually. Like Spotify definitely will be stronger with AI because of its brands, its networks effect, millions and millions of clients and all of that. But I think it's very, very challenging to say that Salesforce won't be disrupted in the next two decades.

27:03Julia Ostian:But that's actually a great point. And I have to add on this that it will actually come off to like the balance sheet of the company. If they have enough of money to produce this AI, to build those models, to actually train them, they they will be the first one right in the industry and those who want who don't have the money they will be the last and this is actually also comes down to the point of the big companies right because they have the most money they have a lot of resources to produce this kind of tech and so yeah it just confirms the fact that the big ones might be the the most powerful ones from now on.