Waiting on tech earnings, don't overplay market seasonality

0:09Very happy to have Jay Hatfield on Investing Experts. Jay is CEO and Chief Investment Officer of Infrastructure Capital Advisors. Jay, welcome to the show. Welcome to Seeking Alpha. Great to have you.

0:27Jay Hatfield:Serena, it's great to be on. Talk to us. We're nearing the end of July, a summer full of to be continued, let's say, on a number of different levels and factors. Tariffs August 1st, maybe some more to find out there. What are you focused on? You just released your July market commentary. I saw it on Seeking Alpha. Talk to us about how you're looking at the markets these days. We've been correctly bullish all year, including when we went down to 5 ,000. You probably noticed a lot of sell-side strategists lowered all their targets. We had a differentiated view that tariffs, obviously it's not good news flow when we're not in earnings season, like in April, but are actually in the long run positive for the economy, positive for economic growth.

1:25Jay Hatfield:Not popular, by the way, but positive for economic growth. Taxes are never popular. And so we've been correct. That wasn't really why we were bullish, but we didn't think tariffs really interrupted our bullish case. So we have a 6 ,600 target. That's 22 times next year's earnings, so 26 earnings. The reason that's important is that we don't do six-month targets, but if we did, it would be 3 ,300, which is right where we are. Because at the end of this year, being at 6 ,600 is a pretty fully valued market. So I think what's going on now, we have a normal great seasonality in July, but we've run up 1 ,300 S &P points in two months, which is among the strongest rallies ever.

2:09Jay Hatfield:Now we're waiting for tech earnings. So that'll really determine the near-term direction of the market. And then, as you mentioned, we're going to get into August. It's going to be more tariff news, less earnings news. So we might pull back a little bit, but you can try to play that if you want, raise some cash and buy back some shares in August, September. But we think that the risk to our target is the upside because normally in tech rallies, like in the late 90s, you get massive overvaluation. And our valuations of the MAG, what we call MAG-8, that includes Broadcom, show that the companies are all undervalued except for Tesla.

2:53Jay Hatfield:It's not undervalued by any measure. But we're way far away from all these large companies being overvalued. Having said that, expectations are high. So we said earlier today, things are dicey, which means it could go either way. They're not negative, but we're sort of neutral in the market. And that's kind of the way it's trading. A lot of discussion on this podcast on exactly the points you just mentioned, tech valuation and whether this market rally. Well, let me just ask you before I reiterate all the points that we've already made. What are your thoughts on what duration this market rally may have and how the tech earnings play into that?

3:34Jay Hatfield:Well, the expectations are pretty high for tech earnings. So we'll see how they play out. Playing earnings is always problematic because it's pretty full information out there. Stock prices have run up. So we'll wait and see. I mean, like I said, we're less optimistic about Tesla. Apple, we think, is a pretty expensive stock. The other stocks we do like and think are reasonably valued. So overall, we continue to be constructed on tech stocks and would not necessarily overplay this August, September normal pullback. We are likely to get a Fed rate cut in September. So that'll be the unusual positive catalyst that normally doesn't occur when we're out of the burning season.

4:25Jay Hatfield:But that could be a positive. We don't know for certain they're going to do that, but that's our forecast. So we wouldn't overplay the seasonality, the weak seasonality of August, September. We have Tesla earnings coming out July 23rd. If all systems go, this episode will be released on July 23rd. You mentioned that you're not bullish on Tesla. You also mentioned the Magnificent 8, Broadcom deserving a place there. A, does Tesla deserve a place in the Magnificent 7? Does it not matter whether it's under that moniker or not because of how much it drives market sentiment in many ways? And what are your thoughts if you could maybe lay out your thesis briefly on that stock?

5:11A much talked about stock to be sure.

5:13Jay Hatfield:Well, I would say it's in the large cap seven, but not the magnificent seven. But the classification doesn't matter much. It's still close to a trillion dollar stock. But we just simply, we're pretty conservative investors. So we look at the PEG ratio, which is the PE to the growth ratio. Tesla trades at about 150 times next year's earnings. Arguably, those earnings are declining, not increasing, because their core business is under a lot of pressure. And we're not true believers in the profitability of driverless and robotaxi. But having said that, what's great about untested, unprofitable businesses is you can make anything up about it if you want.

6:02Jay Hatfield:There's no real data that comes out about it. So we wouldn't short the stock, but it's extremely risky. and we're quite pessimistic on both the core business. We don't think all electrics are the short-term solution to energy transition or even conservation for that matter. And so we're not believers in the core business. It's been damaged by political activity as well. And we don't think that RoboTax is going to be that profitable. So we more or less hate the stock, But God bless anybody who wants to own it. They've done well with it. And it's a very volatile stock. So probably good for trading, good for writing options.

6:47Jay Hatfield:So God bless the bulls. It's what makes horse races, as they say. Talk to us about, if you would, other tech stocks that you're focused on or that you're primarily focused on as earnings season starts to unfold further. Right. So these are two big holdings in ICAP, which is our large cap dividend fund. Most of the dividend related to these companies comes from writing short term covered calls. But we like Amazon a lot. It's very reasonably priced. We have a$300 target on Amazon, so very cheap compared to our target. We do see it growing in the 20 % range, not just because of AWS, but because, and we're talking profits here, not revenue.

7:29Jay Hatfield:The profitability from the retail business is improving dramatically because now they have professional management, Andy Jassy. He's cutting costs, shortening delivery times, doing more advertising, which is in a way cost offset, cutting back on other bets. And so we think they're going to deliver that 20 % earnings growth. and it's also lower risk because kind of half of it's Walmart and half of it's AWS or cloud-type company. So we're bullish about that company and also Broadcom. Broadcom, to be fair, has run a lot. So we have a 320 target versus roughly 280. I guess it was 280 yesterday, maybe down a lot today.

8:13Jay Hatfield:But it's getting closer to fully value. But for a while, people weren't fully appreciating that their chips are really required for the backbone of the internet. So their communication and storage type chips, application specific, huge backlog there. So we in particular like those companies and we also like Meta as well. It's a smaller holding in iCap. They're benefiting from AI both on the engagement side and the advertising side. So an early benefiter from AI. I know that you have your own series of ETFs, and I'm interested in hearing about how you're thinking about them and how they're reacting.

8:57But I'm also curious about your sense in general around ETFs, maybe specifically as it pertains to tech, if you'd prefer. But in general, every day we're seeing more and more ETFs. How would you share with investors your thoughts on ETFs, maybe even why you decided to focus on ETFs and specific ones you'd like to mention.

9:21Jay Hatfield:So we launched one of the first active ETFs. And that's really what we're in favor of is active management, kind of two elements to that. So we have three fixed income funds and three equity income funds. First of all, that's a critical distinction. Because a lot of times, investors will buy like a call writing fund like Jeppe and think they're getting fixed income, they're getting income, but they're getting equity type risk. It's roughly equivalent to the S &P. So we have three funds that have equity risk and three that are fixed income. With fixed income, you absolutely need active management because you're managing call risk, interest rate risk, default risk.

10:00Jay Hatfield:None of those are operating with equities. So you could argue that it's perfectly acceptable to buy just the S &P 500 in a low cost way like through Vanguard. You do get a lot of Tesla, which could be good or bad. But what you also get is with equities, it has some benefits because as the market cap goes up, the funds buy more. So it's in effect a momentum investor, which can work really well, does not work in fixed income. So with our funds, though, our equity funds, ICAP, SCAP, NAMZA, and large cap, small cap and pipeline fund, we do more active approaches that you do on your own, but take a lot of work and you have to manage the taxes.

10:44Jay Hatfield:So mostly we run right rather covered calls. We run low leverage and we cycle leverage depending on how attractive the market is. And we do have some fixed income mixed in, which improves the dividend yield. So it's really the active portions applied to the stock picking. We're always trying to beat the market stock picking, but sometimes that works, sometimes it doesn't. We've seen that from hedge funds. They think GameStop is terrible and goes up millions of percent. So stocks are difficult to predict. There are ones that are higher quality, but sometimes the lower quality ones run. But writing call options, running modest leverage or low leverage with some market overlay on that, and incorporating a little bit of fixing and mostly preferred stocks, which we think is a great asset class.

11:38And anything to say about tech-specific ETFs, given that we just focused a lot on the tech sector? Anything to say there?

11:46Jay Hatfield:Well, we do think that tech's a great sector to be in. This is a market that's similar to the 90s, if anybody remembers that, which was a ridiculously good time to make money. So we're bullish on tech and likely to launch a tech fund that does do individual call writing. So we're positive on tech. And I think it is a great sector to write short term calls on as well, because of course, you have very high volatilities. A sector, or I should say a section of ETF investing that we focused on. And again, I don't know if you have any thoughts to share about this, but Bitcoin ETFs, usually people come on here and say, just trust the brand names in that part of the world.

12:33Any thoughts to share there?

12:35Jay Hatfield:We're not big long term fans of Bitcoin. But we recognize with the current president in power that it's probably a very good bet because he's promoting Bitcoin. And so we do own a little bit of in our hedge fund, we would not own it. Since it has no cash flow, it has no earnings multiple. So it's important. Like Tesla is 150, but Bitcoin zero because it has no earnings. But just to answer your question directly, in our hedge fund, which we are long right now, we own iBit. And the reason for that is it's the most liquid. And so it has the best calls. So I think it's a good strategy to write covered calls on Bitcoin because it is pretty volatile.

13:14Jay Hatfield:If you lose a little bit, there's probably going to be an opportunity to buy it back. I would pick the ETF that has the most liquidity in the option market. And something that you touched on in your July outlook was the bond market. How would you expand on your thoughts on the bond market? One thing that's slightly esoteric but critical is I briefly mentioned that we're positive on tariffs. But there's a reason. And nobody talks about this. It's critical to distinguish between political talking points and actual economic analysis. we're pretty moderate and also we belong to the greed is good party.

13:52Jay Hatfield:So we try to be pretty objective. So if you really look at the budget situation, the budget deficits, even by the CBO, which doesn't include tariffs, projects$1.7 trillion, which sounds high. We're projecting $1.4 trillion, which is only 4.5 % of GDP, which is critical because usually GDP grows about 5%. So it means we have a sustainable amount of debt roughly equal to GDP. It's not much higher as reported by some budget hawks and just political talking heads. So the budget situation is better than expected. But what's more important is that the Fed is ultra tight. They've shrank the money supply 9 % year over year, which hasn't happened since the Great Depression.

14:41Jay Hatfield:So it's dangerous. It's being offset by tech spending, but the housing sector is weakening dramatically. I'm in California. It's even weakening here in the Bay Area, despite the tech boom. So that means that the Fed's going to have to cut rates. And if you're worried about rates because of the budget deficit, I would say don't be, because it's just not that critical. It's pretty static in this 4 % to 6 % range, has been since Bill Clinton was president. What drives interest rates is the Federal Reserve. It's not the current Fed funds rate, but it's a terminal rate. It's way too high right now.

15:16Jay Hatfield:The market's projecting about 340 on the terminal rate. It should be closer to 3. The president's advocating for 1, which would cause double-digit inflation. But the equilibrium rate's around 3. That implies the 10-year should be 3.25 to 4. So we're bullish on rates. We have been all year. It's looked like a bad call at times. It's looking like a better call now. And we think in September we'll get the rate cut. that we need, and then the foreshadowing of probably at least one more this year. So we think it's appropriate to be bullish on rates. Focus, though, on monetary policy, not just in the U.S., but globally, and focus less, even though we're bullish on the budget deficit.

15:57Jay Hatfield:That's not our rationale. Focus less on the budget deficit. The bond market is global. It's okay to ignore the rest of the world when it comes to stocks. We have all the leading stocks, the MAG-8, what we call the MAG-8. But bonds are fungible. So a British gilt is the same as the U.S. Treasury. So don't ignore the global market either. The rest of the world's cutting rates. The Fed will eventually cut rates, hopefully by September, and long rates will come down. Few follow-up questions, if I may. Let's start with in terms of the international versus U.S. exposure. How are you thinking about these days?

16:38Is there a certain allotment when you when you're thinking about and strategizing portfolio-wise vis-a-vis international and U.S.?

16:47Jay Hatfield:Clearly, it was an unusual time where it was way better to be in Europe. But keep in mind that they have a competent central bank. And so they did have cut their rates to arguably the neutral rate. So it was appropriate to be long Europe. Also, Europe was just super cheap. But we think that trade's mostly over and it pays to be in the US market once the Fed resumes rate cuts. And there's just a very simple reason. The bonds are fungible, but nobody has the MAG8. Nobody has the emerging companies like the Palantir's, even if it's overvalued, but Palantir's and all the other emerging AI companies.

17:30Jay Hatfield:And we have the most free economy with the lowest tax rates, highest savings rates, private saving rates, at least. So we're bullish on the U.S. That's been the right call over the last 20 years. And we think it'll be the right call over the next 20 years. And then given your exposure to real estate with the PFFR, the REIT ETF, what's your take on real estate these days vis-a-vis interest rates and also just in general, given the state of the economy and the state of the consumer? Well, we correctly thought that people had overstated the death of offices. And what the issue was there is that investors weren't distinguished between buildings and REITs.

18:13Jay Hatfield:So REITs are publicly traded companies with very low leverage. The investment banks a long time ago said, well, you can't take this public if it's highly levered because it's just going to go bankrupt and downturns. So really low leverage, typically very high quality assets. They're constantly recycling and building new ones or buying new ones and selling off the old ones. So they're not just like walking around in downtown Chicago and picking the worst office building there. So office has done way better than people thought, at least the REITs, not every building, obviously. Been a lot of bankruptcies on buildings.

18:52Jay Hatfield:So we're bullish on the asset class. We own it in some of our other funds, too. S-CAP and I-CAP. We own REITs, just the equities, not the preferreds. And those won't work until rates start dropping to working today. So they're going to be a great place to be, we believe, when we do actually get Fed rate cuts. And what's your sense on the U.S. dollar these days? And if you'd care to add any other currencies to that, happy to hear. We do. You know, the U.S. dollar has been appropriately weak because we do need to cut rates. Economy's been weakening. I mean, it's important, though, to keep in mind the dollar became way overvalued when it became obvious that Trump was going to be president.

19:33Jay Hatfield:So everybody said, well, it's off 10 percent. It went from 108 to 98. But they ignore the fact that over the last 20 years, it's basically been right around 100 or just below that. So kind of a normal exchange rate historically. But I would say that on balance, I wouldn't be concerned about US exceptionalism. is just that if we're cutting rates, that tends to weaken our currency relative to other currencies. Since we were laggard in cutting, that should put some pressure on the dollar. But it's fine. And like I said, it's more normalized now than it is terribly down, as a lot of people are reporting on.

20:10Jay Hatfield:And again, that's a little bit political because everybody wants to say, oh, well, President Trump ruined the U.S. and we're never going to be competitive again. And look what happened to the dollar. But everybody ignores the dollar rallied extremely hard when inappropriately, in our opinion, when it was, you know, in betting markets, at least obviously was going to get the presidency. So we're more neutral on the dollar, but don't think it's a big issue. Although it is a big positive for earnings because the dollar depreciated 6 % year over year. So it's a tailwind for big international companies.

20:44Jay Hatfield:And we've already seen that where we've had strong earnings. And anything to share about the gold and metals markets? The gold market has really turned into a momentum market, so we'd be cautious about gold. In other words, normally it trades with interest rates and exchange rates. Actually, exchange rates finally started helping gold, but it was high even when the dollar was super strong. So it seems a bit disconnected from fundamentals. Seems like most of the demand is coming from Asia, which is very hard, at least for us, to predict. So we're neutral on gold, obviously been working really well.

21:17Jay Hatfield:And the rest of the metal complex, a lot of those metals are being moved around by tariff discussions. So we're not in any of those commodities right now. And anything else to expand on in terms of what you discussed on your market commentary or in general that you feel like would really behoove investors to be aware of or to have in their minds? Well, I think the most important thing is that inflation doesn't happen spontaneously. It's caused by 90, most of it, almost all the time by excessive monetary growth, money supply growth, which is what happened during the pandemic. It grew 60, nominal GDP 38, and inflation 22.

21:59Jay Hatfield:So Milton Friedman's quantity theory worked perfectly. Most people ignore that. Absolutely critical, shrinking now. That's why we're bullish on rates. And I just mentioned, since you brought up commodities, we're neutral on oil. We stayed neutral even when there was a war in the Middle East because there was no production interruption. But oil is the other factor in inflation. It's not that critical now. In fact, it's detracting from inflation. But during the 70s, it went up an unimaginable 1 ,200%, which is really unimaginable. It's not 12, it's not 120, it's 1 ,200. So more than 10 times. So it's equivalent of oil going to$800 a barrel.

22:38Jay Hatfield:So that's what caused a lot of the inflation during the 70s. And that's what caused stagflation. And so we're not going to get stagflation if oil prices are down year over year. It's just not possible, basically. But we are neutral on oil. We still do like MLPs and pipelines in our AMZA fund because they're very leveraged in natural gas. And we have the cheapest natural gas in the world. We're exporting it. And it's also required for electricity generation, which is obviously expanding due to AI. So it's a big beneficiary of AI and exports. It's very environmentally friendly. Definitely will help the environment dramatically if it expands, which it will, and displaces coal.

23:25And that oil conversation, much of that is dependent on the fact that the amount of oil that we're importing is completely changed. Would you say that? Would you agree with that?

23:37Jay Hatfield:Absolutely. So we're, we're slight next net exporters of energy, though there is one big change relative to two or three years ago. So two or three years ago, we had energy companies really more four or five, there were growth companies. So if oil prices were running up, they would gun up their production, invest more than even their free cash flow, issue equity. Well, that had a tendency to destabilize the oil market. So they would then overproduce and that would irritate OPEC. They would actually increase production. That's what happened during the pandemic and crash the price to penalize our producers.

24:19Jay Hatfield:Now our producers are, and this also happened with MLPs, they're much more value oriented and they buy back shares just like the pipelines and MLPs do and then retain a lot of free cash flow, increase dividends, pay special dividends. And so when prices drop a little bit, they're going to produce less. There's been rigs being pulled out. So that tends to stabilize oil prices. So since those companies made the transition, you'll notice the volatility of oil prices went way down. And that's why we've been good predictors. We usually have ranges. So right now we're 70 to 90. And I'm sorry, no, that we've lowered it from 60 or 70 to midpoint, 60 to 80.