joined by Rhys Williams, chief strategist at Spout rock asset management.
We have december A. P. P. I.
Number coming out about an hour ago at this point rising 9.7%.
Year over year despite out of that slower month over month number what
2/10 of a percent versus the expectation around 4/10 of a percent.
Um And then concerns over how the Fed is going to respond
to interest rates all kind of top of mind for investors.
What are you kind of paying attention to most right now?
Well,
I think the testimony by jerome Powell this
this week really laid out that that that's
going to be pretty aggressive on inflation and
that's clearly the number one worry in Congress.
It's the number one worry in the markets right now.
And um so I don't think actually that
that the same inflation statistics that we're seeing
right now are going to be are going to be here 12 months from now.
I do think they're gonna be pretty aggressive and I do think both the C. P. I.
And the PP.
I will slow in the second half of the year,
slowed down their rate of growth and and so therefore the same
inflation fears that we have right now will be will be alleviated
from the consumer side.
We all hope that at the very least so many
companies are depending on that to be the case.
Speaking of kind of company's earnings obviously coming into focus.
Um this week, Delta just reporting
not too long ago, a beat on Q. Four earnings with Ceo Ed bastian
saying that Delta expects a strong spring and summer travel season.
We have heard that from a lot of analysts, um you know, in this space,
what do these earning signal about the strength of leisure and the travel sector?
Um, you know, going into kind of this more spring and summer season?
Well, I I think that this is going to be a huge boom in, in the spring and summer,
assuming Macron is the the end of of of of of Covid,
because I do think there's a lot of pent up demand
and clearly every time people feel a little bit better,
they're the,
that they're traveling and there and there and then and
then they haven't been to europe in a few years.
Um, I do think there will be a big boom on the airlines specifically though,
I think business travel has to come back in a meaningful way for those companies to,
you know, recover to where they were prior to covid.
So I think there are better places to invest than in the airline industry.
Speaking of maybe potentially a better place to invest.
We've talked to a lot of analysts,
um, you know, over the last couple of weeks and financials,
financials have really been a place, they say maybe an opportunity,
we know that banks are set to report earnings
tomorrow and you know, while rising interest rates, certainly good for financial,
that's why many analysts are pointing to it as a potential opportunity.
You've got a company like Bank of America, for example, lowering overdraft fees.
Citigroup kind of closing its consumer banking business in Mexico.
Should investors kind of be expecting lower growth
when we get those reports out tomorrow?
Well, banks have run a lot up into these earnings.
So I do think there is some risk that they sell off on,
on the earnings um that they've obviously been great
performers here in the last month or two.
Um That being said, if the Fed is really going to raise rates four times,
you want to have some banks in your portfolio
because they are going to get some positive,
probably some positive managers margin.
Um, but but we do think this is not the absolute best time to load up on banks,
we'd be buying into weakness
and in terms of buying into weakness here,
tech obviously at the beginning of this year kind of saw a bit of a sell off,
but it looks like we had a bit of a
buy the dip mentality over the last couple of sessions.
Um, You know, with tech rebounding, even still,
we've got the NASDAQ down about 2/10 or 22% 2.8%
in the last four weeks in the software industry, down by 5.8%.
While semiconductors are down 2.1%,
what do you see as the biggest risk risk to the tech sector,
is it interest rates or potentially, you know, something else?
Well, you know what I do think that,
that they are perceived as being very interest rate sensitive,
I'm not sure that's very fair because I think a lot of tech companies can pass on
any sort of rising inflation that they're facing.
Um Certainly the big fan companies have a tremendous ability um to
manage their earnings higher uh even in the teeth of higher inflation.
So I don't,
I don't quite understand the markets infatuation with
this idea that when interest rates go up,
tech has to come down.
Um and I would divide it into a couple of different kinds of attacks.
I mean, I think sort of the big steady Eddie
Bank stocks which are almost consumer staples in
the 21st century um are are pretty protected.
Um I think some of the more speculative growth tech,
which has been just hammered in the last,
You know, a couple of months,
I think that's an area that might be of interest to put your big toe in.
I don't think you should back up the truck by any means.
But you know, these are stocks that were trading, I mean one stock, for example,
the stock like Hubspot was an $800 stock in November and it's now a $500 stock.
Um and I think that's a stock we own um just disclosure, but you know,
that's the kind of name where you,
where you're growing 30 35% you have a very profitable margin
structure and and and because it's a quote unquote speculative tech,
it's been caught up in this, this huge selloff
in terms of potential areas of growth still in the tech sector. Let's parse this out.
What what what area do you see kind of
potentially having the most growth
in tech in general?
Well, the most growth is clearly some of these sas software companies.
Um that's the most growth,
but that's also pretty still pretty high valuations
despite the fact that they've come back down.
Um So I think and and in the sort of sort of garp morgue RP investment theme,
the big fang stocks, uh you're not going to get to hurt their,
um and they're going to keep growing and and and they're well, you know,
just great companies that, that have very diverse business models.
So I think some sort of combination and the last one would be semiconductors.
You mentioned that earlier
semiconductors are in in a sweet spot right now because
that's the one area that's been have had tremendous shortage.
So you're going to see a very strong 2022 for all of those companies that are,
that are tied to the semiconductor chain,
do you think though that growth is pricing because when you
talk about kind of the fang stocks and even software,
I kind of feel like with evaluations where they're at now, that's a bit pricing.
I could see maybe the argument that semis aren't as priced in
semis are, are are for sure cheaper.
Um, they're viewed as more cyclical companies, um,
as opposed to some of the growth growth software,
which may have 10 years of revenue growth into the future.
But I think that's probably the opportunity while you want to have some of each,
you want to have some fangs,
you want to have some semis and you want to have a little bit of growth tech.
Um, but, but once again, I wouldn't go,
you know, overboard in growth tech because they are expensive.
I'm not, I'm not going to exaggerate that tech
before.
I have to let you go here and we kind of touched on some of this,
but I want to see if there's any other areas opportunity you see out there,
which industries do you think, um, are undervalued still right now?
Well,
I also think that one area of the market which did
well last year but did really poorly for the last 10,
uh, is energy.
Um, and I do think that's an area also of, uh,
that investors should have some exposure to, uh,
there's been a big lack of investment in oil and gas precisely
because it's been such a brutal area to make money and,
and everybody's very infatuated and rarely, so with E.
B. S and the growth prospects there.
Um, so the fact that oil is going to be with us for the next 20 years,
or at least maybe 30 to 40 years would suggest
that these can be decent stocks over the next,
you know, year or two just because of the tremendous lack of investment.
So I think energy is an area that investors ought to have some exposure to,
And most investors, both institutional and retail, really don't.
And to that point, energy is outperforming. I think of what over 12%
in the last four weeks. I really appreciate your insight.
Rhys Williams, chief strategist at spouting rock asset management.