00:00How are you thinking then about preparing for Jackson Hole in a really volatile week for
00:03Treasuries that has had varying effects, shall we say, on equities?
00:07I'm going to keep expectations low. I know there has been a tremendous amount of people
00:14kind of wanting more answers, probably expecting more answers. We'll see if we get them. It'd be
00:20upside surprise if we do. But I think as a fundamental investor and as I work with all
00:25of our PMs, the thing that we try to stay focused on with all the craziness going on is what
00:32you can
00:33control. And I think, you know, looking at companies from a bottom-up perspective, really
00:37understanding what companies have the balance sheet and the flexibility to kind of get through
00:44any environment, that's really where we're focused. And that's what we have control of.
00:48What do you do with the macro lens of high yields then, of yields that fell after the announcement
00:53that the Treasury made and then rebounded back to where they were?
00:57I know. I mean, it's hard to ignore the bond market and these moves as an equity investor.
01:02And I think the way that I really think about it is, what is it doing to borrowing costs? And,
01:07you know, if you look coming into the year, it was under 5% for corporates. Now it's above 5
01:14.5%.
01:15You could say, okay, well, not that big of a move. Or, you know, the ultimate 5.5, 5.6
01:21is not
01:21that high of a yield historically. But it's the quickness of the move, the sharpness of the move
01:28that can make a difference. And with all the capex spending we have going on, it's making it more
01:34expensive for companies. So how durable is this cycle?
01:38Well, I know you're cautious short-term. Is that what's behind the caution?
01:41I think what's behind the caution is, you know, look, not just the Fed, not just the war in Iran,
01:48not just capex spending. It's kind of like all these things combined. It leads to an environment
01:55where any shoe can drop and cause a 10%, 15% correction. Now, look, you know, we saw some
02:01correction in July. I wouldn't mind a little bit more because I think it would put us in a better
02:06place to really remain stable for the rest of the year. And we've had healthy returns. I think we
02:12can, you know, still have healthy returns.
02:15Was that July correction then just a huge buying opportunity?
02:17I think to a certain extent it was, but you had to be selective. I mean, there is rotation going
02:23on
02:23in the market and underneath. And it gives you a chance when you're, you know, looking at companies
02:28on a day-to-day basis and trying to think about what industries and companies you want to get
02:31involved with, you look for those downturns to really, you know, start buying.
02:36So what are the companies and industries you're expecting to lead?
02:39Yeah. Well, I'll focus on the industries and I'll let our PMs focus on the stocks.
02:43Sure. Fair enough.
02:43But I do think, you know, healthcare has been an industry I've talked about for a long time.
02:49It rightfully has underperformed, so disappointing me, but you're starting to see the rotation and
02:55people, you know, believing that there's some room in healthcare to benefit probably from AI
03:01and some of the innovation. Industrials as well. I would, you know, industrials have had a big move
03:07on the large cap side.
03:08I actually wanted to bring this up because I was just looking at the industrials S&P sector.
03:12It's the most expensive sector right now in the equity, I guess.
03:16It is. And I think, you know, I like it a little bit better down cap where you have less
03:22or lower
03:24expectations, probably more earnings growth acceleration coming and they're lagging a little
03:31bit. They also have more flexibility than some of the larger companies and aren't as globally exposed.
03:36Are industrials doing well because it's like related to an AI build out or is it just optimism
03:43about the U.S. economy? What is behind that? Why they've been performing so well?
03:47Yeah, I think it sits, the sector sits at an interesting intersection between the AI infrastructure
03:53build, but also the ongoing reshoring or resupply, you know, the supply chain, you know, redistribution.
04:02And that's been a huge benefit and, you know, something that people still aren't paying a ton
04:07of attention to.
04:08While we're talking about sectors, what's your read on the retail sector right now? You had some
04:12stores that did well. Walmart was a really big disappointment for this market.
04:16Yeah. You know, I, you know, we talk about the K-shape economy a lot. I live in Milwaukee,
04:23as you know, Danny, so I feel like I kind of live in a world where, you know, it's not
04:28all,
04:29you just, you're with people all the time that are suffering from inflation and that lower end
04:34consumer really is challenged. But the high end consumer continues to spend. And so I think even
04:40within the retail channel, there are opportunities, but you probably want to focus on where,
04:46consumers still have capital to spend.
04:49But even that is so tough because a lot of the luxury results we've seen have been weighed down
04:52by China not performing as well. And I just feel like in this market, we're not in the environment
04:58of everything is rising anymore. It just feels like there's a lot of landmines that you have to
05:03navigate. What have conversations been like with clients given that? What is the sentiment read that
05:09you're getting in this period?
05:11I think most of our clients are long-term investors, which is a good thing. So they are
05:16thinking long-term, but they're curious about the rotation. They certainly are nervous. There are a
05:22lot of known unknowns out there in the marketplace, and they want to know what could be the next risk
05:28point. And unfortunately, I would say the biggest risk is something nobody's probably talking about
05:34right now and probably something I couldn't come up with because if I could, it would be priced in
05:39the market.
05:39It's a great point. And I wonder if that also just underscores all of the concerns around AI
05:47and why this time is different or this time isn't different. Do you think us just like really
05:52focusing in on these concerns also just kind of alleviate some of the risk that what's building
05:57is something of a bubble?
05:58I hope so because when everybody's so focused on one thing, it's usually not that thing you
06:03should be paying attention to. It's usually something else. I do have some concerns about
06:10this space. It rhymes with things I've seen in the history where you have different funding
06:15mechanisms for all this infrastructure build, for all of this stuff, really huge acceleration and
06:24growth. You worry about something breaking. And I don't know what that is. That could be more
06:29systemic than just hitting a few stocks.
06:32Are you avoiding specific things because of that?
06:34No, we're not necessarily avoiding things because of it. But again, as a fundamental investor,
06:39we're looking at things more carefully. Like where do you see the spread with earnings rising and free
06:45cash flow decelerating? Is that going to happen outside of the hyperscalers and any other place?
06:50And kind of watching for trends like that, I think overall AI is going to benefit many more industries
06:58and sectors longer term. And for the companies, that's great. And a lot of those companies won't
07:04have to spend a lot to get that benefit. So overall, I'm positive.
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