Lead-Lag Live

Jesse Felder on Insider Trading Insights, Market Dynamics Comparison, and Algorithmic Investing Challenges

• Michael A. Gayed, CFA

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What if insider trading activity could reveal hidden market trends? Join us as we sit down with Jesse Felder, the brilliant mind behind The Felder Report, to uncover his remarkable transition from Bear Stearns to co-founding a hedge fund and pioneering financial blogging. Jesse shares his invaluable expertise in market analysis, emphasizing the underappreciated significance of insider trading and comparing today's market dynamics with the dot-com bubble era. He also addresses the ever-evolving challenges of creating engaging content in a landscape dominated by passive investing and algorithmic trading.

Next, we dive into the economic implications of insider activity with Professor Najat Sehun from the University of Michigan Business School. Leveraging her groundbreaking data, we discuss historically low net insider buying, signaling a bearish outlook from insiders. We explore sector-specific trends, the potential impact of election uncertainties, and unique insider buying activities in the small-cap space. Notably, we highlight turnaround situations like Beyond Inc., where executives like Marcus Limonis play a pivotal role in influencing these purchases.

Lastly, we tackle pressing issues like the potential misalignment between the forward PE ratio of the S&P 500 and current economic data, supported by indicators such as the Bloomberg Economic Surprise Index. We delve into macro indicators like the dollar, interest rates, and oil prices, and their effects on earnings projections. Our conversation underscores the importance of market breadth, with key signals like the Hindenburg Omen and Titanic Syndrome forewarning potential downturns. Emphasizing a conservative investment approach, we suggest diversification into energy, materials, real estate, and commodities. Wrap up the episode with heartfelt thanks to our live audience and a reminder to stay connected for future insights.

The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions.

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Speaker 1:

my name is michael guy at publisher of the lead lag report, joining me for 40 minutes roughly. Mr jess felder, just um. I know a little bit about you, but some people don't obviously so introduce yourself. Who are you? What's your background? Have you done your career? What are you doing?

Speaker 2:

currently. Yeah, I've been writing my uh research report, the Felder Report, for the past 10 years almost 10 years now. But I started my career at Bear Stearns back in the mid-90s. I left to co-found a hedge fund where I was head trader and co-portfolio manager and quit, coincidentally at the very top of the dot-com bubble in March of 2000. And moved out of LA to Oregon and since then I basically just managed my own money, started writing about markets back in about 2005. So almost 20 years now. Hard to believe it's been that long.

Speaker 1:

And yeah, like I said, started the research product about 10 years ago long and, yeah, like I said, started the research product about 10 years ago. I'd argue you were a bit of a pioneer because there were people that were writing about investing online and doing blogs, but they were not anywhere near as pervasive as they are now. The number of sub stacks and newsletters and things like that Take us through the journey of staying interesting.

Speaker 2:

It's hard to keep content out there as frequently as you have yeah, I think you know, I I'm just, I think what drives me is just curiosity. I'm always looking for new indicators, um, and things that, uh, you know are maybe, especially, I think, in this day and age. A quote that keeps coming to mind is that I'm going to bungle it, but Warren Buffett said that. You know, when so many people are trained to believe that thinking is a waste of time, it gives a terrific advantage to those of us who really value thinking about markets. And what he's talking about specifically is the idea of the efficient market hypothesis leading to the decision to just go passive with your investments. And I think you know, since he said that, whatever it was 25, 30 years ago, it's gotten even more poignant since then.

Speaker 2:

With, obviously, the you know more than half the assets, you know capital assets being committed to passive, there is a huge opportunity for those of us to kind of look at, you know, look for opportunities in the market to, you know, to use macro or, you know, individual security analysis to look for opportunities.

Speaker 2:

So one of the ways I've done that since the start of my career analysis to look for opportunities. So one of the ways I've done that since the start of my career, and I know you mentioned at the top, is to look at insider activity. To me, this is still an area that's dramatically underappreciated by most investors, I think. Well, you know, investors sell for a variety of reasons and buying is not always indicative of, you know, good opportunities. That's absolutely true. But in aggregate, insider activity is very meaningful and at times, even on an individual securities basis, it can be very, very powerful for information. So, you know, that's one thing that I've studied for 30 years and utilized, I think, effectively. And you know, and since then I've been kind of looking for other types of things in the markets that I think are underappreciated, that can add value to a more active process.

Speaker 1:

I think actually this is an interesting thing that we can maybe debate, which is does thinking even matter in a world where increasingly it's algorithmically driven, increasingly it's just auto flows on the 401k side going to passive vehicles? It seems like somebody can have a thesis, ultimately have all the reasoning right, but the overwhelming bids that are there which have nothing to do with thinking means the thinking doesn't result in the output.

Speaker 2:

Yeah, I mean, there's definitely times where you know you feel like, is this, you know, am I doing this for naught? Is this all my efforts, you know, wasted Because markets just kind of are driven? I mean, especially, you know, recent years we've seen, you know, gamma squeezes in the options market, the tail wagging the dog, so to speak, in terms of just options activity and speculation driving prices. That's really nothing new in markets, though it's manifesting in a different way. But I mean, I saw that back in the late 90s we were running three different hedge fund portfolios. One of them was a short only fund in 1999.

Speaker 2:

That was no fun and you could see how, you know, speculation drove absolute madness in the markets for a prolonged period of time before, you know, rational analysis actually paid off. And you know, very similar to that period, I think you know, there was a terrific opportunity in value stocks in 2000. So many stocks were trading at such extreme valuations on the low side that there was a real opportunity to take advantage of that and that drove outperformance of small caps and value stocks for a number of years afterwards. I think we're sort of in a similar situation. I don't don't think the uh, the values are nearly as attractive as they are today, but it absolutely, uh, is reminiscent of that earlier period where you feel like you have an edge, you have a compelling um you know thesis regarding something and the market's just not rewarding it. Um, you know absolutely that that's one of the challenges to being active in this environment.

Speaker 1:

Yeah, and certainly if you're looking outside of tech and then some select industrials, that's been sort of the frustration I'd argue for the last 13 years really start around 2011. Okay, let's touch on the insider transaction side of things. First of all, just keep it bare bones for those who are not familiar about insider transactions Insider buys, insider sells how does it work? How does the announcement side work?

Speaker 2:

And then what tends to be more of a powerful signal yeah Well, when I talk about insider activity, I'm basically talking about what are the top executives and directors that these public companies are doing with their own money. So if you are technically considered an insider, you are one of the top managers in top management at one of these companies. You're a 10% shareholder, you're a director. You have to disclose all of your trading activity in a relatively short period of time, something like 24, 48 hours or something. So you see, you know the buys and sells come across and they're in real time. It's not like you know hedge fund reporting where you know we're getting the data delayed by a couple of months or something. You see insider activity within a day or two of it happening. I pay almost no attention to 10% owners, so large institutional shareholders. It doesn't really matter to me unless it's somebody with an incredible track record. But mostly what I'm concerned with and even directors aren't necessarily as important to me what is the CEO, cfo, doing with their money? And, for example, over the last few years we've seen persistent insider buying at a stock like Energy Transfer, which is basically just an energy infrastructure company, pipeline company, and that stock, you know, had massive insider buying and still has, until very recently with you know 10, 15% dividend yield and the stock's up you know 50 or 100% and Wall Street has just absolutely ignored it. But there are opportunities like that where you see you know a really cheap stock and for me as a value investor, I want to see it validated by the insider buying. So on an individual level, that's kind of the thing that I'm looking for.

Speaker 2:

On the flip side of that, we've seen insiders selling at NVIDIA since the start of June. That's just off the charts. I mean it's bigger than anything we've really seen before. Jensen Huang, specifically, has been, you know, selling about 240,000 shares every other day, and what makes these sales different than any sales he's made in the past is, in the past it's been related to exercising options and then paying, you know, selling off an amount of stock in order to pay taxes and things.

Speaker 2:

He's been just selling a non-option related you know not exercising options to sell stock. He's been basically selling out in the open market. You know, like I said, about 240,000 shares every other day, which is, you know, a fair amount of selling. It's the most we've ever really seen him do. So I think, when you see those types of extremes in insider activity on an individual basis, it can be very telling about what insiders believe. Is you know the stock price relative to fair value or, more likely, how things are trending? Is the company more likely to kind of surprise to the upside or on the downside in the months or quarters to come? And I think that's even more powerful when you look at insider activity in aggregate. Powerful when you look at insider activity in aggregate.

Speaker 1:

Does that tend to be more of a directional tell or more of a relative underperformance tell? Right, I mean the idea that you see a whole bunch of selling. Do you tend to see that stock lower 12 months from there or just be relatively weaker?

Speaker 2:

Yeah, najat Sehun is really kind of the person that I've seen. He's a professor at Business School University of Michigan. He's done the best research you know on insider activity, as he was pointing out that we recently saw the least amount of companies engaged in net insider buying in the history of his data. So this is essentially the most bearish reading that he's ever seen as long as he's been tracking insider activity. And I measure it kind of in a different respect. He measures the percentage of companies with net insider buying.

Speaker 2:

I just take the total sell to buy ratio, because this is actually what he talks about in his book. When you take all the selling divided by all the buying across all public companies, you can get a ratio and that 12-month moving average if that ratio is really what matters Sehun's demonstrated that it's a good 12 to 24-month leading indicator of the economy, of corporate earnings and, of course, of stock prices. So that sell-to-buy ratio this year went above 25 times, so 25 times more sales than buys in terms of dollar amounts this year. The only other two times in the history of my data that I've seen this and this data comes from insidearbitragecom, another great website to track this stuff was in late 2021. We saw that ratio jump over 25 and it went up over 20 in that 2015 timeframe before the flash crash in summer of 2015 and then selling rise, many multiples of buying, like we've had, like we've seen this year. It's a pretty good indicator that insiders are bearish on the economy, on earnings and, obviously, stock prices over the next year or two year or two.

Speaker 1:

Any chance that that might be driven by election concerns around taxation, whoever's in power. Is there anything that's maybe extenuating, that maybe makes it not as powerful?

Speaker 2:

of an indicator, given it's an election year. Yeah, I don't Really. What has been most interesting to me is not so much the selling I think we did see probably a greater amount of selling in 2021 in terms of dollar amount but it is the buying. Like Sehun points out, the amount of insider buying today is literally the lowest we've seen in 10 years and so when you adjust, that's just the dollar amount and obviously 10 years ago stock prices were much lower. Just that's just the dollar amount and obviously 10 years ago stock prices were much lower. So when you do the dollar amount of dollar buying relative to market cap, it's like the lowest in the data.

Speaker 2:

So insiders have zero interest in buying shares. Now that could be related to, you know, election type of type of stuff, you know, I don't think you know it would be more likely that they were selling now. I think if they were, you know, worried about maybe capital gains taxes going up, you know, in the years to come or something like that, we're not seeing that. It's just a lack of a dramatic lack of buying among insiders right now and that tells me that they just don't see that the value in the shares, especially related to what they believe are their prospects over the next 12 months.

Speaker 1:

Are there, on a relative basis, certain sectors where the buying is not as weak? I mean, tech is a different issue, right, but in the energy space, are you seeing, at least relative to history, more buying there?

Speaker 2:

Yeah, I haven't really seen a ton of insider buying in energy lately. There's really not been much buying to speak of anywhere, but I will say I haven't really seen any insider selling at all in that space. And so when we do see selling, another good example of selling is Carvana. Insiders have been really good timers of the stock. I was buying Carvana, you know, under $5 a share. You know, a couple of years ago, when you know the Garcia, you know father and son team had been buying from you know $20, $30, $50, $40, $50 a share, all the way down to single digits $30, $50, $40, $50 a share, all the way down to single digits. Those purchases were obviously really well-timed and they were buying in size and it wasn't just the Garcias, it was other top executives at the company, including CFO and whatnot.

Speaker 2:

Now that all of that has switched now completely to where we see, you know the last couple of months insiders selling at Carvana has taken off again and so there are stocks too that you can look at and see. You know that the insiders are just really good timers of the stock. You know Carvana has gone from $5 to $140 a share, so you know it makes sense for them to take some profits. But I've also seen some selling at you know CarMax and AutoNation and you know things like that too. Obviously, that is a kind of a confirmation of what we're hearing from the major auto OEMs. You know we're saying that.

Speaker 1:

You know consumer demand for automobiles is just not great right now and doesn't look like it's going to improve anytime soon. How about segmenting by market cap? Any interesting insights as far as insider transactions for large caps, mid caps, small caps, small caps being the most interesting one, I think possibly here.

Speaker 2:

That's a great question. I don't quantify it in that regard. But the opportunities that I have found are generally in that small caps space where I do find some interesting insider buying. For example, it's been interesting to see insider buying at Beyond Inc, which is the former Bed Bath Beyond space. We've seen some interesting insider buying there. That's kind of a turnaround situation. It was overstockcom bought the rights to the name Bed Bath Beyond and the website and things and they've done that with a couple other things. They brought in Marcus Limonis as the executive chairman and he's been buying a fair amount of stock along with a couple of other top executives. So there are some turnaround situations in kind of that smaller cap space where there have been some interesting insider buys. But generally, yeah, I think if there is any kind of bullishness, it's in that smaller cap realm.

Speaker 1:

Let's tie this into earnings, which I was joking before us going live. They still matter, Although, oddly enough, maybe not as much as they used to. I was just doing a piece on Seeking Alpha, looking at a fund that awaits by earnings and it's underperformed the S&P 500 since inception, despite it having large caps as a big portion of it. But where are we as far as the earning cycle in terms of expectations and how do you think through earnings when it comes to a momentum driven environment like this?

Speaker 2:

Yeah, you know it's. I think it's very interesting to look at. Yeah, you know, I think it's very interesting to look at where we are in terms of. You know, the forward PE ratio on the S&P 500 is around 21, 22. And when you look at the economic data, one of my favorite charts that I've been looking at right now is, you know, from Bloomberg Sober, look on Twitter, who publishes the Daily Shot has tweeted it a couple of times too. It basically compares that forward PE ratio on the S&P 500 to the Bloomberg Economic Surprise Index and right now that Bloomberg Economic Surprise Index is literally at its lowest levels, or was very recently lowest levels in years, and it has a very tight relationship with the Ford PE ratio, the S&P 500, suggesting that the Ford PE ratio should be kind of at the bottom end of its range right now, considering where the economic data is trending. Obviously it's not. It's at the high end of its range. So there's a huge gap there and I think that highlights this potential area of problems for the stock market going forward.

Speaker 2:

So right now earnings estimates are very, very bullish, expecting kind of, I think, double-digit earnings growth next year, kind of towards the end, into the end of this year and into next year. Now, if insiders are right, there's going to be major disappointment on that front. And when I look at that insider sell-to-buy ratio and I overlay it over S&P 500 earnings and insiders, I mean there's a very high correlation there too. When the sell-to-buy ratio goes up, earnings growth goes down. And so if you kind of invert that chart when the sell to buy ratio is very low and insiders are very bullish, that's a very good sign that earnings growth is going to surprise on the upside over the next 12 to 24 months.

Speaker 2:

And so we're in this period, I think right now, where you have also macro indicators. Another leading earnings indicator that I use is basically just and this comes from Stan Druckenmiller a composite of the dollar, interest rates and oil prices, and that has a really good lead on earnings too. It suggests that in order to get a real boom in earnings over a 12 to 24-month period going forward, we probably need a big decline in the dollar, big decline in interest rates, big decline in oil prices. They've all kind of started to roll over a little bit, but not anywhere near to the degree that would sustain that type of an earnings rebound or earnings growth that markets are now pricing in, so I think there's a real possibility for disappointment on the earnings front over the next few quarters.

Speaker 1:

All that to me sounds like, just in general, your big picture view is you're either bearish or cautious about the direction of things, that we may have gotten too far ahead of earnings. It's funny that you, if that's the case, which is what it sounds like, obviously, because the other side of this, which is what you are now constantly hearing, is we're finally on the edge of this small cap rotation. Small caps are going to drive the momentum phase next. I'm skeptical that. I think small caps would likely be down less. They still outperform. They're due to outperform. It's just a directional issue. What would other than what you mentioned right, sort of a big drop in rates and other dynamics that would turn the earnings picture around? Is there any arguments we made that the fundamentals don't matter and that it's mechanically, algorithmically driven market, in which case money will go from NVIDIA into small caps you need a small portion of NVIDIA's market cap to draw small caps and that maybe the day of reckoning for when the market cares about fundamentals is just later down the line?

Speaker 2:

Yeah, I think that question, I think it's a really good point and I know that Mike Green has talked about a lot and he's done some interesting research on the passive side of things and I think he's pointed out I don't know if he has recently, but I know in the past he's discussed that there's just so much money in 401ks that it just automatically goes in from paychecks every two weeks or every month or something and it's invested into these passive funds. So you really need to kind of put a halt to that. You really need to see a recession that results in rising unemployment and less money going into passive indexes. I think and I think Mike has argued that we're very close to recession right now if we're not already in one. If you look at the unemployment argued that we're very close to recession right now if we're not already in one. If you look at the unemployment rate, we're very close to triggering the SOM rule.

Speaker 2:

And then there's just a number of other things. Just look at corporate reports, all these consumer-facing companies. You know, when McDonald's is seeing same-store sales decline even though they're raising prices, I mean that traffic is. That means traffic is down. You know, pretty significantly at McDonald's. It means people are struggling and I know there's this, this idea out there that you know, yes, there's a K-shaped economy, but so long as the upper arm of the K is strong and that's, you know, the wealthy consumers that have, you know that own assets and own real estate that the economy will do fine. But I would argue that it's not so much that that's always the case. Right the upper arm of the K, they're always going to do fine, no matter what it's. It's really the the trend in that lower leg. Right, I mean the direction of that trend, because we saw when, when, that, when the lower K, the folks in the lower K, given a bunch of cash during the pandemic, right, we had this massive boom. And I think now that they're struggling really points to that.

Speaker 2:

Yeah, the risk of recession is elevated right now, I know I mean nominal GDP is still very strong, but there's a chance that inflation, you know, could trend higher through the end of the year while nominal growth continues to trend lower, resulting in you could see some real negative growth numbers. And if you combine that with some rising unemployment, which, as we normally see once the unemployment rate starts rising for a period of time, as it has recently. It typically trends higher. It doesn't, you know, doesn't rise and then just plateau at a level. It usually trends in that direction. As you know, bill Dudley pointed, it becomes a self-reinforcing thing, you know, to the downside. So I think that if we are close to recession, you could start to see some of that passive money. You know that monthly or bi-weekly money um really start to slow down as as the job market cools and and that would be, uh, your sign, that, uh, that, uh, that uh price insensitive buying um is is no longer able to prop markets up in the way that it has.

Speaker 1:

I'm sharing on the screen a post you reposted showing JOLTS data. And JOLTS are obviously inversely correlated to the unemployment rate, so it does look like that's a pretty firmly entrenched trend.

Speaker 2:

Yeah, one of the most cyclical sectors I think you can pay attention to is housing. Yeah, one of the most cyclical sectors I think you can pay attention to is housing and I think, within a lot of the recent data that we've seen, hiring and housing is dropping off a cliff. We're seeing very low interest among buyers and purchasing.

Speaker 2:

If you do see a slowdown in construction, which would only be reasonable given the trend in no-transcript it has to be like the asset allocation play, then would be to bet on duration to some extent yeah, you know I I think in a normal cycle absolutely, um, I'm I've not been able to get bullish on bonds, uh, this cycle, for the simple fact that the deficit is already so large right, I think it's the largest you know deficit, post-war deficit that we've seen during an economic expansion ever in terms of fiscal deficit to GDP. You go into recession and that's going to blow out the deficit even wider and you know, obviously the Fed could come in again and that's probably part of their job is to make sure the smooth functioning of the treasury market. But if, like I say, if we've seen the low for the inflation prints this year and I think you know kind of the year-over-year, you know comps suggest that that's very possible, that you know comps get more difficult through the to the end of the year and there are signs with you know costs, you know shipping costs and things going higher. There's a case to be made that energy prices could move higher gas and oil, that you know we get some pickup in inflation again. It's going to be difficult for the Fed to be as proactive in terms of intervening in the treasury market, lowering interest rates, all these things that they have in the past, if inflation proves a little more persistent than markets may currently expect. So I think it's telling that you know Warren Buffett has famously bought at this point in the cycle.

Speaker 2:

You know bought when he's loading up on cash. He's famously bought used to zero coupon bonds as a way to kind of make that bet on duration. He's doing the exact opposite this time by becoming the biggest buyer of treasury bills on the planet. So I think you know Buffett doesn't want to own any duration. I think Stan Druckenmiller's talked about the same and Stan has said that his career was made on trading the bond market. It wasn't shorting stocks during declines, it was betting on bonds in a majorly leveraged way when recession was coming. He's saying kind of the same thing that it's really tough to bet on duration when you have these other risks out there in terms of the amount of debt issuance and supply demand issues. So I think yeah, normally I would say yeah, it's time to bet on duration this cycle. I don't know if it's going to work as well as it has in the past.

Speaker 1:

Another thing you had reposted from Sentiment Trader, which looks at the percentage of NASDAQ 100 stocks that are more than 10% off their eyes, rather below their eyes. Let's talk about breadth, because the breadth point is something I've been hammering myself for over a year, this kind of between. When I talk about, I equate breadth with small caps, because there's many more small cap names than large cap names, just by definition. I know people have different ways of thinking about breadth, but to me it's very much really a small cap, relative weakness. It hasn't really mattered all that much. The divergence, I think you can argue it lasted for longer than anybody. Certainly I thought it would. But does breadth still matter at all?

Speaker 2:

I believe. So I mean, I believe it's one of the most important tells you could want in terms of understanding the strength, the persistence of the underlying trend in the market. So right, a healthy market is driven by the, you know, greater percentage of components within the index. A not so healthy trend is driven by, you know, fewer and fewer stocks driving the performance. And so one of the things that I look at to kind of understand this is and I've written about for years now is I look at the Hindenburg-Ohman and the Titanic syndrome, which are two, I think, important signals of underlying trend strength. You know, an individual signal doesn't matter to me. I mean, a lot of people like to talk about it. Wow, hindenburg-ohman was triggered yesterday. One signal doesn't matter. But when you look at them over like I said, I look at insider activity over 12-month look-back period I think 12 months we saw 50 Titanic syndromes triggered across the NYSE and the NASDAQ. The only other times we've seen 50 was in November of 2021, right before the 22 bear market was in January of 2018. And 2018 was a really difficult year for the stock market and at the top in 2000. These are the last 30 years, the only times we've seen 50 Titanic syndromes and I should probably explain what this is.

Speaker 2:

A Titanic syndrome, just like a Hindenburg omen, is triggered when you have a stock market within a new high, something like you know within a couple percent or within you know the last 10 days or something, stock markets hit a new high and the number of new lows is significantly elevated, like over. In case of the Hindenburg Omen, I think it's two and a half percent of all issues traded. So you shouldn't be seeing a number of new lows, new 52-week lows, you know growing at a time and especially, you know, crossing a threshold, that type of a threshold when the stock market's making new highs, it's basically a sign of growing disparity, growing divergence under the surface of the market. So when you have a large number of stocks making new lows, it's a sign that you're seeing these kinds of divergences that aren't indicative of a healthy trend. So the fact that we've seen 50 Hindenburg omens over the last 12 months and that's a very rare level sorry, excuse me, titanic syndromes it's a very level of breadth, rare level of breadth divergence, I think is another important warning signal that the uptrend in the stock market is just not healthy right now and typically how we see this resolved is by a reversal to the downside.

Speaker 2:

Now it could be anything from like. What we saw in 2018 was basically just a period of kind of sideways action. Although the fourth quarter of 2018 was roughly 20% decline, it could be a 22 bear market right. That was another precedent. And it could be something like we saw with the dot-com bust after 2000. Top market went in kind of a three-year tailspin. From that point I do think it can be resolved in a number of ways.

Speaker 1:

But right now it's telling you that the upside is potentially not sustainable. How do you execute all that? I mean, I myself make it very public that even when I'm at peak bearish I say don't short. That's just me, because I've done back tests. I know it doesn't work all the time, but if you have a mindset like yours and I'd say also like mine, where you're justifiably concerned, even though it hasn't played out just yet, how do you play it?

Speaker 2:

I think what I like to say is I think everybody has their own version of what aggressive looks like and what conservative looks like, and I think with these types of signals, I think it's important to understand. From my opinion, it makes sense to lean conservatively, as, whatever that looks like for you, I agree with you. For most people, short selling is not a good idea. I've always said it's the double black diamond of investing. It's very difficult and even if you do it well, you're one of the best in the business, you're going to lose money most of the time. So short selling is probably not wise for most people, nor is getting out of the market entirely, but I do think probably for most people. Looking at, what does true diversification mean in this type of environment? Right, 500, for example, it's about as concentrated, if not more concentrated, than it's ever been in these stocks that are probably most vulnerable to, you know, bear market type of type of activity. So if you feel like you're, you're, you know, diversified by just owning the S&P 500, or you know something along those lines, you may want to think about, well, maybe still owning equities but diversifying more into other areas of the market, right, I mean, for me it's fascinating that you know energy and materials, the flip side of the technology.

Speaker 2:

Overweight is a dramatic, you know, underweight, historically rare underweight in energy and materials. Rare underweight in energy and materials. And these are the areas which, if you believe, as I do, that we are in the early years of a commodity super cycle, you probably want to diversify into those areas that are so significantly underweight. Also makes a ton of sense to own other asset classes besides equities. Right, as I mentioned, you know Buffett owns a massive amount of treasury bills. The yield is great, gives them a lot of optionality if there are more opportunities that come up in the stock market through a decline. But I think for most people they're dramatically under-invested in real assets. So you know, real assets would classically be real estate, precious metals and commodities, and not to mention tips and those types of things. So I think generally, precious metals and commodities make the most sense in that area and investors are just dramatically underinvested in those things.

Speaker 1:

Investors are just dramatically underinvested in those things and we can talk about why there might be a kind of a secular shift in that direction in the years to come, if you'd like. Yeah, let's expand on that, because I'm of the same mindset. I mean, for me it's partially related to the idea that I think China probably economically has either bottomed or is close to bottoming and that would be enough at the margin to just get some commodity excitement going again. Can you expand on your view there?

Speaker 2:

Well, I mean from a cyclical perspective. I published a chart, or posted a chart on Twitter last week. It came from Simon White from Bloomberg, who pointed out that most people believe that commodities go down in a recession. Right, this is why people are selling commodities right now. The truth is, commodities decline in the lead up to recession and then go sideways at the start of recession and actually rise through the recessionary period. So by the time you've come to the conclusion, oh wow, we're in recession, you've already missed the bottom in commodities. And so I think, from a cyclical perspective, if you do believe we are very close to recession, it's probably a great time to buy commodities.

Speaker 2:

But from a secular standpoint, I think one of the most important things to pay attention to is just the capital cycle. Where is money flowing? Because when the majority of money flows to one area, returns necessarily go down in the years to come in that area. Vice versa, so when areas of the markets that are starved for capital over a period of time generally see the most wonderful returns going forward. Because, you know, let's just look at the commodity cycle, for example, right in the energy space, when the Fed lowered interest rates to zero after the green financial crisis, energy companies borrowed a ton of money, went on this huge fracking boom, invested in massive supplies. Oil prices crashed Since that time really since the 2014 oil crash these companies have been starved of capital for about a decade now, and so that the investing into energy infrastructure and production and all these kinds of things has been very low, and that sets the stage for wonderful returns going forward.

Speaker 2:

You could say the opposite about tech stocks. So, after the dot-com bust, for years, tech stocks were kind of starved of capital, and the returns that we've seen over the prior 10 years, the last 10 years, were the result of those companies being starved for capital and returns in the space going up in a dramatic way. But right now, right, we're seeing the opposite. All the money is going into data centers and NVIDIA chips and all these things. There's a massive amount of capital going into space that will necessarily depress returns for years to come, and so I do think we're in the middle of a secular shift where investors are going to be transitioning from wanting to own technology stocks to wanting to own commodities, and that will drive a super cycle over the next five to 10 years. Let's talk about the Felder Report.

Speaker 1:

as we wrap up here, talk about your research. What have people got access?

Speaker 2:

Yeah, that's a nice plug. On my website, mike, I appreciate it. It's thefelderreportcom. I put out a weekly email. It's just all it does is feature the five kind of articles or charts or things that I found during the week that I that I found most interesting. A lot of times it's that commodities chart type of a thing or an article about. Lately I've been focused on AI and hype versus reality in AI, but yeah, that's just free to sign up for. Right there on the website I also put out some premium products. I read a weekly market comment that kind of is a lot more detailed, with kind of the stuff that I'm coming across and curious about and a weekly chart book and trade ideas that are typically driven by that insider activity.

Speaker 1:

Everybody. Please make sure you check out the Felder Report and appreciate those that watch this live. This will be an edited podcast under Lead Lag Live on all your favorite platforms. Make sure you follow Jess on X and various social media platforms and hopefully I'll see you next time for another episode of Lead Lag Live. Thank you, jess, appreciate it. Hey, that was fun man. Thanks for having me.

Speaker 2:

Cheers everybody, Thank you.

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Michael A. Gayed, CFA

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