Summary Q&A with Phil Davis:
Q. What is your overview on US markets?
A. A lot of things US investors have been not been paying attention to are getting harder to ignore, most notably the breakdown of trade negotiations with China, rising interest rates and rising oil prices, which are beginning to impact consumer spending and even the housing market.
Q. The US 10-year Treasury yield jumped to 3.2% last week, its highest level since 2011. It is said that the recent strong economic data pushed the rate higher while the stock market declined as it put downward pressure on stocks. Will stocks be under pressure for a while?
A. I think so. Any investor has to look for the safest place to get a reasonable rate of return and, for many years, the returns on bonds have been terrible and stocks have been great but, as rates push up over 3%, bonds begin to look attractive -- especially against a market that is no longer sure to go higher. The more the market corrects, the safer bonds look in comparison -- that will keep the pressure on stocks for quite a while.
Q. How do you assess the overall technology sector today? In addition to data privacy issues and the threat of tighter regulations, a report regarding China spy chips came out recently. What is your prospect for the technology sector?
A. I think the public is becoming more aware of privacy issues and will begin demanding more regulation of technology companies. Being careless with your personal data has been cheap for these companies in the past, but a move to make them responsible to safeguard your data will become a cost of doing business for them in the future. There will always be hackers and spying in technology and on the web, and the public will simply become more aware of the brands that protect them, and this will lead to consolidation that major players like Apple, Samsung and Intel can take advantage of -- if they are smart enough to become the leaders in protecting their users from harm. The overall tech sector has become overpriced and is overdue for a correction. We have been shorting the Nasdaq and some of the FAANG stocks recently in anticipation of this.
Q. The third-quarter earnings season will kick off. Investors will keep eye on [earnings] as they expect another double digit growth quarter. What is your focus? Any particular sectors/areas/points that you monitor closely?
A. We think the 3rd and even the 4th quarter will continue to provide easy comparisons to last year due to stock buybacks and, of course, lower tax rates. What we'll really be watching is sales - are the companies actually generating more revenues or are they just benefiting from lower taxes? After this year, companies will once again have to actually improve their bottom lines to beat the prior year, and you can say goodbye to double-digit growth. There are far too many companies with very high multiples that can't sustain the growth -- we will be looking for shorting opportunities into 2019 among those high-fliers.
Q. What is your outlook for 2018-2019 US equity market? Where are the attractive areas to invest? What is your recommended portfolio?
A. We believe it's a bit downhill from here with a correction that's in progress and a slight recovery into the end of the year. Next year, as I noted, companies will have a much harder time living up to expectations, and we expect a very choppy market in 2019 but it's just the sort of market we love to invest in as it favors companies with strong fundamentals, which is what we prefer to buy. We will look for stocks with strong, steady revenue growth and a healthy bottom line -- preferably ones that pay dividends and did not waste money buying back too much of their own stock at these market highs.