Announcer: Wall Street Unplugged looks beyond the regular headlines heard on mainstream financial media to bring you unscripted interviews and breaking commentary direct from Wall Street right to you on mainstream.

Frank Curzio: How’s it going out there? It’s October 9th. I’m Frank Curzio, host of the Wall Street Unplugged podcast where I break down the headlines and tell you what’s really moving these markets. We live in a pretty crazy world where the opinion of a complete nobody can result in an entire country banning the NBA. Come on guys, you know I was going to go there. Two topics, China and NBA basketball, that’s what I love to talk about, you knew I was going to come out with this intro. Strong opinions about it. You knew I was going to go there. Since it is a top story on… You can look at every site. I mean financial site, you look at every major sports site, talk about the NBA in China and if you live on another planet, which is perfectly fine since the story’s everywhere now. Let me break down what’s going on.

The general manager of the Houston Rockets, the general manager of the Houston Rockets, so the general manager is only really an important position or maybe notable position in baseball, other than that it’s like a director at a company. You never know who the directors are in a company, you have to look them up. The general manager of the Houston Rockets, his name is Daryl Morey, sent out a tweet last week with an image saying, “Fight for freedom, stand for Hong Kong.” The tweet is about the pro-democracy protest taking place in China, which is now turning a little violent based on what we see in the stories and stuff like that, in several reports, but has been crazy enough to where they’ve closed railways, shopping centers, super market stores, banks, I mean they’re closing almost everything and it’s getting a little crazy down there.

Now Daryl Morey, and I’m not saying this in a bad way, I’m really not, but he’s a complete nobody in terms of being an influential figure in America. Most people in the NBA, outside of the Houston Rockets, don’t even know who this guy is. Again I’m not putting him down, I’m really not, but this is not Lebron James tweeting, it’s not Zion Williamson. If you’re not familiar with Zion Williamson he’s the next Lebron James, very, very… Playing his first year. Kevin Durant, Magic Johnson, Michael Jordan, you don’t have more to these huge influential people making this statement. These are all influential figures in the NBA. This is coming from a complete no name person.

After this tweet China officials got really pissed off at the NBA. One network said, “Chinese Rockets fans are first Chinese. We love Chinese red more than Rockets red and Houston Rockets really fouled. If you foul you have to pay the price.” I’m quoting, and by the way, you look at Yao Ming who was a huge part of the NBAs aggressive marketing push, pushing his brand to China. He actually played for the Houston Rockets, talk about the same team here. The Houston Rockets are kind of considered like the Yankees or the Cowboys in America, one of the country’s most loved teams. Since 2017 it even gets a little crazier where Yao Ming is a chairman of the Chinese Basketball Association.

A few things here, which I want to cover. First, how can a tweet from an absolute nobody… I mean Daryl Morey has only 1,700 people on Twitter following him. Yes I did check. It was probably 500 less before he sent out this tweet. How can one tweet from basically a no name person influence one of the biggest countries in the world, which is China, and a multi-billion dollar sports brand in the NBA? Because this is one person’s opinion. It’s not Lebron, Jordan, Magic tweeting this to the tens of millions of followers on Twitter. I mean how sensitive have we become? What is going on? How did this turn so bad so quickly? You can say, “Well there’s a lot between the China and US and Trump and trade negotiations, so this is just something that’s going to get amplified even more.” Whatever but it’s a tweet from a no name. What do you think about that? How crazy it is. How’s everyone so sensitive these days?

With that said listen, I think China has every right to be pissed off but not to ban the NBA. I mean a fun peaceful sport so many people enjoy watching. Yes we have free speech in America, which gives every idiot a platform to say whatever the hell they want and I guess you could say, “Frank you know what? You’re one of those idiots and you’re doing that right now.” You’d be correct. But how about this? How about we try to avoid getting in everyone else’s business? I mean there’s so much shit wrong with America right now, so how about we fix our own problems first before trying to tell every other country around the world how to fix theirs. How great America, we should do this, you should do that. It’s different cultures, and this tweet, I truly believe this, was not meant to criticize China as a whole. I can see why China is pissed off, but I mean anyone of us could have did it. Being in Hong Kong and seeing people come together, no matter what it is, it’s kind of inspiring sometimes. It wasn’t like, “Oh man screw… Hong Kong…”

So its derogatory where they were attacking China. It was just like hey, but I get it, I get it why it’s a big deal to China, why they’re pissed off but to the point that you’re taking it out on the whole entire NBA? Now this wouldn’t really be a big deal if there are not a lot people watching basketball in China but there a couple of people watching it, to the tune of 800 million people in China watch the NBA, 800 million. Guys there’s 327 million people living in America, 800 million people watch basketball in China. That’s how big it is there, it’s huge. The NBA has a license deal with Tencent that runs, depending on who you’re reading, anywhere from $500 to a few billion dollars. Also has a 30 year partnership with one of the biggest networks, CCTV, who broadcasts NBA games in China. But all together this partnership between NBA China it’s a multi-billion dollar relationship when you take… You account for everything. Media rights, streaming, merchandise sales, all this. It’s a massive partnership that benefits everybody.

Of course the NBA, Adam Silver who’s commissioner lead, he was in China a few weeks ago. He was in China a few weeks ago watching the World Cup Basketball games in Beijing. They’re trying to remedy the situation, which makes sense. They apologize, deleted the tweet from the Houston Rocket executive, NBA released how many statements? At least 20 so far trying to ease tensions and James Harden, who’s the superstar, one of the best players in the NBA, plays for Houston Rockets, issued an apology himself saying how much he loves China. Adam Silver came out personally he said, “Listen, I love China,” but he also said, “Look, I support free speech,” which he should, he lives in America. But that further pissed of China. I mean China was like what? I mean China’s getting mad for something that we did but yet they’re kind of doing the same thing to us. They got so pissed that CCTV announced, and this is on Tuesday, they would suspend the broadcasting of all NBA preseason games.

Now I have a question. What did China expect Adam Silver to say? That nobody in the NBA could tweet anymore? They could not exercise their right to free speech. Is that really what you wanted? I mean let’s put this in perspective. China being pissed at the US for one person’s opinion, and again this person’s not influential, it’s not Donald Trump, it’s not someone that’s out there with millions and millions of people that people are going to talk about, some guy that nobody even heard of. But China being pissed at the US for one person’s opinion talking about freedom, one of the virtues our country was founded on, it’s like the US being pissed at China after the general manager of the National Ping Pong Team tweeted how much he loves AOC and believes the US should be a socialist nation. Then after reading that tweet our government instructs our media networks to ban ping pong from being watched everywhere in America. Really, that’s the extreme?

I mean maybe not apples to apples comparison but pretty close. Where I think we would just look at him and be like oh. That person in China’s an idiot, he doesn’t understand our political system, who would ban China from everything ping pong related, it’s crazy. How sensitive are we? This is the world we live in now. Is this is truly what we believe we should shut down all social media platforms, this way nobody’s feelings would ever be hurt because everybody has feelings now, everybody has feelings. I’m offended you said that. I’m so offended. Everybody gets offended by everything now. So sad.

But the situation gets even better because you know who started chiming in? Oh wonderful politicians from both sides of the aisle voicing their opinions. Two of them include Senator from New York, minority leader Chuck Schumer and Senator Marco Rubio from Florida. These guys are accusing the NBA, who’s trying to remedy the situation with one of its biggest partners, of putting money over human rights. That’s what politicians are saying. They believe that the NBA, by apologizing for the comments made about Hong Kong and democracy, which they should have did, they’re now supporting communism. Are you kidding me? I mean you have to love our politicians. These assholes are going to do anything to get attention with an election year coming up.

First, Mr. Chuck Schumer, New York is a disaster. Families making $200,000 a year can’t make ends meet. Home prices unaffordable, traffic a complete joke, airports are the worst, not just in the nation but on the planet. Homelessness at an all-time record, the NYPD are now seen as the enemy, they get water thrown on their heads by civilians with cell phones hoping to catch one of these police officers knocking the crap out of one of these idiots out on tape. Why? So they can send the tape to TMZ and become famous and then sue the police department for millions of dollars. Big Chuck do me a favor, why don’t you focus on fixing New York first instead of complaining about a problem that doesn’t concern you at all. I mean come on, our politicians are getting involved in this? Give me a break.

Marco Rubio, dude I lived in Florida for 10 years now. I know why the South Fort of Civil War Defense [inaudible 00:10:48] because most people here hate to work, they hate to work. They’ll do anything not to work. Seriously, I have a pool in my back yard which turned greenish after I hired some kid to clean it. Actually didn’t hire him. The person who used to do it was great for seven, eight years. They sold the business and the guy has his kid cleaning it who does a terrible job, he’s five minutes a week or whatever, but now the pool’s terrible. I called three different places to clean my pool. You know how many called me back? I’m trying to give you business. You know how many called me back? Zero, zero, not one of these people called me back and I left three messages. It’s not an isolated example. I’ve cited dozens if not hundreds of examples over the past 10 years I’ve been doing this podcast in Florida of how people hate to work here.

If you’re from Florida and you’re hearing this and you hate me, you know what I’m talking about because the people who work hard make a great living here. The people who are grinders make a fantastic living here, it’s a great area, it’s got great tax structure, the weather’s absolutely fantastic. But man the culture is crazy. Also the schools are horrible in Florida. The culture here is horrible where it’s okay for kids to be stupid and underachievers, it’s perfectly okay. I mean I saw this example with my kids when my kids, great students both AB students, but over the past month or two they fail maybe a test or two, whatever it’s normal. The teacher said, “Hey you know what, you can take them over.” What? You can take the test over? What planet do you live on? What does that actually teach our kids? Not only that you’re taking up even more time they could be learning a new topic because you’re allowing them to take the test over in school.

I told the teachers, “Listen, I don’t want my kids taking their tests over. They have to live with their mistakes. Make up the difference, get strong grades on future tests in those classes.” You can take every test over? I mean what is that showing… What lesson does that provide kids? That’s right here you’re looking at sixth grade and third grade levels here. When I look at Florida it’s ranked one of the worst states when it comes to spending on education. They spend around $9,700 per student from kindergarten through high school, well below the $13,000, around $13,000 national average. A new report out saying Florida’s one of the most dangerous states to live in. Think about that for a minute. More dangerous than Michigan, Detroit? Behind Maryland, home to Baltimore, and New York, California? Holy cow? Rape and murder statistics are rising in Florida. Most school shootings take place in Florida. Hey Marco, do me a favor buddy, please focus on your own state before criticizing another country or business deal that doesn’t concern you.

Why are politicians getting involved in this situation at all? Come on, give me a break. It’s like those people who have opinions on how you should raise your kids, yet their kids are on meth, they dropped out of school or ran away from home. Focus on your own damn kids instead of everyone else’s. Everyone has an opinion about everybody everything. About the NBA apologizing. Hey guys, the NBA’s a business. They generate billions and billions of dollars from China market. If you’re a business generating this amount of money from another country, communist, democratic, whatever, would you really tell them to go F off or for what? Just to gain some points with a few of our politicians, especially ones that are doing a terrible, absolute terrible job in the states where they were elected. This is about business and the NBA, just like every other company in the world, would do anything to keep one if its biggest partners, that’s their growth market.

Seriously, there’s so many other things to get pissed off about if you’re a politician trying to gain media attention. Talk about student loans, and don’t go after Navient and the company making the loans. Have some balls and go after the schools who raise tuition like 10 times faster than the rate of inflation over the past 15 years. Why is nobody going after the colleges? Are you kidding me? They’re the ones… Are they 100% responsible? No, but they’re feeding into it. Oh well these guys are going to get loans for low rates and they’re just giving them $100,000, $200,000 loans, hey you know what? Let’s just raise tuition and keep raising and raising and raising.

No you won’t do that though will you? It’s kind of like the housing crisis. Want to go after everybody except the people who actually signed a loan where they’re going to get a $600,000 loan and they make $30,000 a year. It’s not that person’s fault either. Let’s get true. Have some balls. Go after the people who cause problems. There’s so many things to talk about. Talk about abortion rights, trade tariffs, immigration, stay out of the NBA. They’re going to do everything they can to salvage their relationship with China. It makes sense and I really hope they do. I really hope they do. You know why? Because sports is the greatest thing in the world. It’s a place where all races come together and compete. Play basketball, there’s no racism. If you could play you’re on the court, if not you weren’t. It’s peaceful unless you’re playing soccer or football, sometimes it gets a little crazy. It promotes teamwork, it keeps kids out of trouble, it’s fun, it’s a way for countries to bond together.

The dumbest example North Korea and Dennis Rodman. Why he was there whatever, but if you watched the special and they had an inside look on that, you’re seeing the players taking pictures with the US players and they’re all hugging and they’re hanging out. Just it’s a way to bond, to ease tensions when it comes to sports. Again, that was at a time when tensions were extremely high between North Korea and America. Americans were really pissed that Dennis Rodman went there, but when you see the whole backstory and you see all the guys come back, they were all thankful they did it. They’re like, “Wow, we met a lot of cool people. Not everybody’s crazy and nuts,” which is what we think because some people have different opinions.

Again, as crazy as it sounds it provided a platform for fun between two nations that were close to going to war at the time. I truly hope the NBA solves this because it’s going to be really sad if 800 million people in China are not going to be able to watch NBA games simply because one fricking person, who nobody knew existed until a week ago, sent out a pretty innocent tweet. Again, I disagree with it but just supporting people who were fighting for something they believed in. Again that’s no disrespect for China. It’s a serious problem, I know why you’re pissed off, but it’s not Trump tweeting, it’s not Nancy Pelosi tweeting, it’s not a popular NBA figure tweeting, it’s just a random guy with an opinion who apologized right away and removed the tweet.

Let’s not blow it out of proportion here and get politicians, everything going crazy here. There’s just too much at stake including hundreds of millions of kids who just want to watch the NBA with dreams of maybe becoming the next Jeremy Lin or Yao Ming. You’re really going to stop that because of a fricking tweet? Don’t take that away from them, definitely don’t take that away from them.

Anyway, little bit of a rant there. Need a little bit of pause. Getting worked up, a little sweaty here. Let’s move on because I have an awesome interview set up for you today. It’s with one of your favorites who’s John Petrides, who jumped ship and is now portfolio manager at Tocqueville. Very prestigious money management firm with billions in assets in the management. John is a great analyst, one of my guests I can go anywhere with. Meaning we can discuss topics that are relevant in the media right now, which we’re going to do. Including the recent weakness in the US economy and can it continue to decouple itself from the rest of the world? The rest of the world seeing much more slower growth, the US economy seeing a little bit of slow growth.

Talk about what the Feds going to do the rest of the year in terms of easing, especially after the latest round of data showing that things are kind of slowing and the manufacturing part’s pretty scary. Talk about the current trade war with China, if there’s a resolution before year end possible, we’ll see. And as always John will share some of his favorite stocks as we head into a really, really very uncertain earnings season. Where earnings are expected to climb year over year for the S&P 500 so we’re going to really dig into it. We’ll provide lots of cool ideas. Dividend paying stocks, income stocks, and I know you guys love. It’s a really great interview coming up.

Now my educational segment, even though the markets are trading around 4% off their all-time highs, there’s tons of names trading down 20% to 30% this year and most of them happen to be small caps as investors are lowering their risk exposure, so many uncertainties in the marketplace, political, global, I get it. But in this segment it’s going to be awesome. Going to show you how to find the best depressed names or ones that have the best opportunity of bouncing back. These are the names that could show you 30% returns in just a few months once sentiment turns from negative to positive again. Again, fantastic segment, going to share a lot of names with you, dig into my methodology when it comes to finding the best depressed stocks with huge upside potential. But before we get to my educational segment, let’s bring my buddy John Petrides, so let’s get to that interview right now.

John Petrides, thanks so much for coming on the podcast bud.

John Petrides: Hey Frank, thanks for having me on. Good to speak to you again.

Frank Curzio: Well a lot of changes in your life. Maybe we should start there actually. Recent job change. Why don’t you tell everyone what you’re doing these days.

John Petrides: Well before we go to me I was going to ask you the same thing about you. How are you feeling after the surgery?

Frank Curzio: I’m actually walking close to a light job already, so-

John Petrides: Oh that’s good news.

Frank Curzio: Yeah it is good news. So far so good and just got to strengthen up a little bit, a couple months, and then I’ll be back playing basketball hopefully, we’ll see.

John Petrides: Good recovery, we’re wishing the best for you.

Frank Curzio: Thanks buddy.

John Petrides: Yeah, so I joined a new company, Tocqueville Asset Management. We have about $10 billion in assets and I am on the wealth management team where we manage investments for individuals and families and institutions. Our team has about a billion dollars in assets and one of our key strategies is our enhanced income strategy where we’re building portfolios for clients in retirement or institutions looking for yield where we’re getting about 4% to 5% in income based on a variety of different asset classes targeting 4% to 5%. Using individual stocks, bonds, preferred stocks, bank loans, emerging market debt, and it’s been a great transition so far. I have reunited with my team from Bear Stearns over a decade ago and Larry Fields, Heather [inaudible 00:21:48], Michael Meltzer and Tocqueville’s been a great place to be so far. I appreciate you asking.

Frank Curzio: Congratulations and I’m familiar with those guys, fantastic, great reputation. Yeah, I know you’re going to kill it there. All right, now let’s have some fun. I wanted to start off, because you’re one of the guests that we can go anywhere with, so let’s go anywhere with it. Let’s start off with the US economy, which has been okay. Manufacturing was terrible, one of the worst readings since the credit crisis, sentiment is low due to political, global uncertainty, which is expected, but we’re also seeing strength in the consumer in terms of spending and the housing market’s catching a bit a little bit. Unemployment remains near stark lows, so my question to you is can a US economy stay relatively strong, if you want to say strong it’s not really that strong but kind of strong, in the wake of what we’re seeing with the rest of the world, or at least most developed emerging economies that are actually seeing slower growth?

John Petrides: Mm-hmm (affirmative), yeah I think it comes down to two points. One is how strong and how resilient can the US consumer continue to be. The US consumer is 70% of the US GDP, and how aggressive and how accommodative will the Federal Reserve be? Unemployment rate is low, the consumer is spending money, maybe they’re a bit more nervous given the volatility we’ve seen in the stock market and just in general more people’s wealth is tied to what happens to the stock market, but by in large the US consumer is really healthy. They’re not taking on nearly as much debt as they were say post the crisis, home values are significantly higher, and by in large the consumer spending. As long as the consumer remains confident and comfortable, the US I think should avoid a recession.

Frank Curzio: Now on a scale of one to 10, how would you say how nervous investors are? For me I feel like this is a very nervous environment where people are very worried. It’s not the typical some people are bullish, some people are bearish, it feels like most people are leaning bearish, which [inaudible 00:23:55] is a good sign that maybe stocks go higher here, but again there’s a lot of political uncertainly, things going on with China, the NBA now, all this nonsense. We’ll get to earnings growth, which is going to slow to not even growing year over year, but do you feel like investors are more nervous today than they’ve been in the past? At least I’m feeling that but maybe it’s just me.

John Petrides: No I agree with you. Listen, the fourth quarter of 2018, which we’re lapping here, was extremely volatile. I mean the market dropped, I don’t know, 10% to 15% during that quarter and that spooked a lot of investors who may have been caught flat footed. Volatility, by in large, really has not subsided since then, but again to the upside and downside. I do think that by in large the investment community is nervous. Wall Street analysts are baking in a negative 3%, 3.8% year over year decline in earnings, which will be the first decline in a couple years, which doesn’t feel good, that’s never a good sign if earnings go down. You’re seeing the macro data on the global front slow, if not contract everywhere every day. The uncertainty in trade wars with the tariff situation with the Chinese continues.

You have a lot of people looking at the yield curve, the difference between a two year treasury and a 10 year treasury has been flat to inverted, getting upside down meaning you can earn more on a two year bond than you can on a 10 year. Right now it’s positively sloped but barely. When that has been a negative slope, when a two year bond has yielded more than a 10 year historically that has been indication of recession to come 15 to 18 months later. That happened over in August and that spooked a lot of investors.

The last two weeks of September, I actually can’t believe Frank how resilient the month of September was from a stock market standpoint. If you look what happened the last two weeks of September, we had 5% of the world’s oil production disrupted in Saudi Arabia and I can’t believe that hasn’t spiraled into more GEO political conflict in that region. The fact that that has been relatively quiet is quite scary. We’ve had issue with the president and the Ukrainians and the Democrats beating the drum on possible impeachment. We’ve had FedEx come out with terrible earnings report and really citing slowdown in the global economy, and you have this hiccup in the overnight lending market, the repo market, where the cost to borrow money for banks spiked to 8% overnight from 2.5% in a two day period where the Fed had to come in and pump liquidity into the banking system to allow for overnight lending.

Yet the stock market finished up 1.8% for the month of September. I’m actually surprised that the market has been more resilient than it has been given all of the uncertainty that’s been going on globally.

Frank Curzio: It’s good stuff there. What are your thoughts on the Fed here? It’s such a big topic where I’ve argued that the Fed cutting rates to 1%, which is kind of what they say they’re going to do, that’s being priced in. Has nothing to do with the economy economic data, right? Again, I’m by myself but we almost have to lower rates to be more competitive globally and the rest of the world is easing, every central bank’s lowering rates, and short-term rates are way, way too high when we comparing to corporate buying yield, even treasuries. Is there anything that would stop the Fed from lowering rates to 1%, maybe some crazy inflation number?

John Petrides: I thought the jobs number that we saw on Friday was possibly the best thing the Fed could have wanted. The jobs number were we printed a gain of 135,000 jobs, we have unemployment rate at 3.5%, but they key was wage growth dipped below 3%. Wage growth came at 2.9%. Now when the Fed says that they’re data dependent on their monetary policy, to me wage growth has been the single factor that they’ve looked at to raising rates. Now with wages dipping below 3% but unemployment staying at 3.5%, it’s kind of like to the Fed that’s great because there’s no pressure now for them not to cut rates in my opinion. Why would the Fed increase interest rates? Why would they keep interest rates high?

It’s to cut off inflation. You want to nip inflation in the bud before it gets out of control and if you look back where we were over the last 10 years we’ve been at historically low monetary policy, this is all been a huge experiment post the sub-prime crisis, and there’s many people fearful that the Fed has been printing money at uncontrollable levels and we’re going to see inflation spike like we did in 1970s. Well that hasn’t happened at all, and now that the economy’s slowing, the wage growth is slowing, it gives the Fed more dry powder to raise rates, definitely one cut before year end but possibly two. I don’t think it’s relative to what other countries are doing. I think there’s room to run because the economy’s just not growing nearly as fast as the Fed wants it to, and inflation just really is not an overriding issue.

Frank Curzio: Now John, the Fed lowering rates, say if they go to 1%, is this priced into the market? Because this is a huge catalyst, and forget about your personal feelings. We know this may blow up, it’s supposed to blow up since the 1970s we’ve been talking about how the dollar’s going to collapse, we have too much debt, I mean it’s been an argument since 1970s and this S&P 500 it’s the greatest [inaudible 00:29:52] on the trend higher that you’ve ever seen.

I’m not saying that’s slapped anyone in the face or anything but there’s a lot of people worried, yet we have a decent economy here and not terrible, not great, but not terrible and we’re going to get to earnings in a minute here, but we also have the underlying fact that where the Fed’s going to continue to provide stimulus into this market coupled with the fact that we know, and you know this and you mentioned this to me plenty of times, Donald Trump his economic indicator the S&P 500, every time it goes down he announces something, “Oh I’m talking to China again.” It’s almost like putting a floor under the market here where when you do see selloffs it creates buying opportunities. Do you see that or is the Fed kind of going to 1% already priced in?

John Petrides: I definitely do not think the Fed going to 1% is priced into the market yet. That the Fed has consistently increased interest rates at 25 basis points, at a quarter of 1%, and now they’re going step down to 25 basis points, a quarter of 1%, in those increments. I think to get to 1% you’re looking at a 50 to 75 basis point cut in a relatively quick fashion. I don’t think the market is… The bond market may be there with how much yield have compressed in the bond market but the stock market is not there yet.

There’s some arguments out there Frank that the Fed is basically out of ammunition, that regardless of how low they lower rates it’s not going to help, we’re stuck in this sort of liquidity trap similar to what Japan has been going through over the past 30 years. I disagree with that. I mean look what happened in September, you’re seeing with interest rates going down you’ve seen auto sales pick up because more people can borrow to get a car, 30 fixed rate on a mortgage is one full percentage point lower than it was a year ago. The 30 year fixed was about 4.8 this time last year and now it’s 3.8, that has helped with housing. You had the largest amount of bond issuance in corporate America in quite some time in the month of September as many companies took advantage of the low cost of capital, the low interest rates, and refinanced the debt on their balance sheet. That’s all good stuff.

All that is going to help with growing the economy because one thing the Fed would never want to see happen is deflation. This is the mantra for global central banks, they will print money forever to avoid deflation. The old adage is don’t fight the Fed and I think that’s the case, and when interest rates go down and when the Fed does try to stimulate the economy, it pushes investors out the risk curve and stocks generally do good.

Frank Curzio: Yeah, and guys look, John and I we see it, we look at the data and we tell it how it is. Like some people say, “Well you’re bullish on the market, you’re not…” We’ve been through this, I’ve been doing this for a long time 25 years, you’ve been doing this for decades as well, you have to put your personal feelings aside because it’s very hard for the market to crash when you have a Fed that’s willing to print money at will. That again, nobody agrees with it, nobody likes it, but we’re talking about your money here, so when you see things like this it seems like even if we do come off and a lot of the risks, manufacturing gets worse or political uncertainly, whatever it is, you name it, China trade, Europe trade, whatever. There’s probably going to be a great buying opportunity and one of the buying opportunities I’m seeing is actually small cap stocks that have gotten decimated, at least most of the rest of 2000, but we’ll get to there in a minute because I wanted to ask you about earnings.

Earning season’s here, everyone is worried, according to facts said earning for the S&P 500 expect to fall 4% this year, year over year, other estimates around 3%, so 3% to 4% fall. You’re seeing earnings growth but we did have stimulus and just tax reforms, so it’s called a bad comp compared to last year, but we are going to see a fall off. More important and I wanted to get your opinion on this John because you cover this as well when it comes to earnings, due to the uncertainties around trade with China and Europe and also politics, political uncertainty, just impeachment, whatever. I can’t see companies, I mean I can see them reporting earnings that are going to be estimates because the institution’s lowered earnings 3%, 4% on a whole going into the quarter, which you don’t hear about. They’re probably going to beat the lower expectations, but do you see a lot of companies, and this is what really drives earnings and drives the markets, raising guidance or issuing positive guidance or not being conservative given all these risks that we have and all these uncertainties in the market, that could really hurt us right?

John Petrides: Yeah, I mean I think when you look at building out a portfolio not every company and not every industry is in the same growth trend. That’s the point of having a diversified portfolio is that you’re going to have some sectors that are just stronger than others and some that are weaker than others. Those companies where they’re in a good secular growth trend upward and they’re able to raise guidance in this environment, well they’re going to be rewarded handsomely. I do agree with you that there’s a lot of skepticism into what potential future earnings numbers can be. I mean right now the market is expecting I think negative 3.8% decline in earnings year over year. Now listen, we have come off very high comps. I mean the market was growing, the growth rates were very high year over year going back to 2017 and 2018, so to grow off of that number is challenging.

I do believe the dance will continue in that companies, more than 65, more than 70% of the companies in the S&P will beat quarterly analysts estimates again, that has been the trend since March of 2010, but guidance by in large has been brought down. I think that’s going to be the case. I can’t see how given the uncertainty, given the slowdown in the global macro environment, given structural issues regarding retailers and ecommerce, given how flat the yield curve is, how are banks going to do in that environment? There are so many issues given pricing pressures on pharma companies from a political standpoint on drug prices. There’s just so much happening out there that by in large I’d be surprised if companies are on average able to increase analyst, increase estimates head of guidance or head of analyst estimates in the future.

That just means that forward estimates are going to be brought down and at the end of the day the market is a discount of future cash flows. But I would suspect that in coming earning seasons, so next quarter, the quarter after, now you’re lapping negative growth rate earnings or 1% or 2% earnings growth so the bar becomes easier to jump over in the out years. A long winded way of saying if the Fed is cutting interest rates, inflation is low, and you have an easier bar to jump over, then next quarter could be better for earnings and today and where possibly by the dips. Does that make sense?

Frank Curzio: No that actually makes sense, that makes a lot of sense. We’re in agreement, it’s going to be really hard for these companies to actually issue positive guidance going forward with so much uncertainty, especially those who’ve had exposure to global markets because again, Europe, China. Say if you’re a semi-conductor company, just some of these names that have gotten blacklisted now. I mean that could account for a big percentage of their revenue where companies are saying well… Who was it? Marvell is probably not going to make their estimates because they’re leveraged to one or two of these companies. It’s very hard to actually go out there. I guess what I’ll ask is a lot of this priced then because I haven’t seen anyone that’s really excited about earnings season. Are expectations so low, and that’s the game guys, it’s all about expectations. When expectations are high, even when you beat you could see a stock fall. When expectations are low they can miss estimates but report less than bad quarter and you’ll see a stock pop 10%, 15%.

When I’m looking at expectations I don’t think I’ve seen them this low heading into earnings season. I wonder if a lot of this is priced in, which again we’ll find out.

John Petrides: I agree with you and the fact that the stock market is only 5% off recent highs or whatever it is really interesting because there is, I would call it a very healthy sense of pessimism. Listen, when everyone things are going well and the economy’s going strong, that’s when bubbles get formed. Go back to 1999, Pets.com, dot com could do no wrong and an inflated stock market, an inflated tech sector, and look how that ended up. Then we went into the housing market and the story was well you could never lose… The US housing market hasn’t gone down since the Great Depression, you can’t lose money in real estate. Well how did that play out?

Right now Find Me where there’s overly optimistic… In publicly traded markets where there’s so much optimism, where valuations are out of whack, it’s hard to find. In the private sector, in private equity where because the cost to borrow money is so low and because there is a lot of cash being tossed around, valuations in the private sector are quite elevated and you’re seeing… Look at these tech unicorns that have come to the market, these once privately traded, these private companies like Uber and Lyft and looks what’s happened with WeWork and all these other companies that have now come to market. They’ve all gotten destroyed when they hit the public market because on the private side so much cash has been looking for a place to park money because you can’t earn it and it’s harder to find returns in other places that the valuations got too high once they hit the public markets. Having some skepticism have held back valuation, which it’s maybe counterintuitive, is actually a good thing for investors in the long run.

Frank Curzio: That definitely makes sense. Okay, now for the fun part, which everybody loves when you spout bunch of ideas. I always ask you hey, what are you looking at and [inaudible 00:40:34] look, this current environment it’s great for high dividend paying stocks, favoring those companies. Not just so high dividends but you specifically said high dividends, low payout ratio, strong balance sheets with a good history of growing dividends. Why do you like this area of the market? Is it simply because interest rates are going to lower, it’s harder to find income, and what are some of the names that you actually like since it’s a pretty big pool of what you talk about?

John Petrides: I really think Frank that we’re in the golden era of high yield, low beta stocks. If you take a step back from all the noise, whether it’s political, China, whatever it is, here’s the fact. Right now $14 trillion of bonds in the global bond market have a negative yield. That means people are buying bonds where they’re going to lose money, that’s unbelievable. That’s how low interest rates have come down. Then on the other side the stock market volatility has picked up a lot, and although I do think stocks are the best asset class relative to bonds and cash right now, although I do think people should be diversified, there’s a lot of uncertainty in a stock market. I mean I could argue that bull and or bear for stocks over the next 12 to 24 months. With global central banks basically reigniting QE, quantitative easing, printing money forever, you’re seeing that in the European markets, you’re seeing it in the Chinese market, you’re seeing it now in the US market with the Federal Reserve lowering rates.

Investors are going to be craving for yield, they need it. If you’re in retirement you want some income to live off your portfolio because you’re not working anymore. I think high dividend paying stocks and high yielding stocks are going to continue to do well. On the flip side of that, you don’t want volatility. I mean investors, particularly those that are in retirement or those that are institutions where they have a certain mandate for their returns, they can’t handle the volatility. Low volatile stocks are going to be in vogue again, will continue to be in vogue, they’re continuing to be popular. That’s what we like about our enhanced income strategy because we’re targeting this 4% to 5% type of yield using multiple asset classes like high dividend paying stock, which I’ll go to in a second, preferred stocks, bonds, emerging market debt, bank loans, NLPs, [inaudible 00:42:56], the combination of all these assets we’re able to get this higher above average yield in a lower than S&P volatile way.

Two stocks that I like, one is Plains Group All American, PAGP is the ticker. Frank what I like about this is that it’s an oil and gas pipeline… Now remember the NLPs, the National Limited Partnerships, they got destroyed in 2014, ’15, and ’16 and they really haven’t come back. The story on the NLPs were this group was not susceptible to fluctuations in the price of oil, they were toll roads, well that story really proved false as many of these companies, with the price of oil collapsing, had to go hat and hand and negotiate their contracts lower.

What I like about Plains Group is A, PAGP is not an NLP, it’s not a limited partnership where you get a K1. From a tax standpoint it’s so much more beneficial. You can own it in your IRA, you can own it in your taxable account without getting a K1. Two, you’re getting a 6.2% dividend yield, so really high yield. Three, it’s one of the best relative to its peers in terms of the quality of its balance sheet. It is one of the lower leveraged balance sheets, not that much debt relative to its income. It has an 8% growth rate over the next couple of years on its dividend. It has one of the higher coverage ratios on its dividend relative to its peers. By the way, the energy sector I think has sold off a lot so I do believe that energy by and large is an attractive sector.

That I think is a really good holding that we own for our client portfolios, PAGP. The other one is Watsco. Ticker is WSO. This is an industrial company and Watsco is a distributor of HVAC systems, so heating, air conditioning, and cooling. The market is about $35 billion for the HVAC market and Watsco controls about 12% of that, they’re the largest player in the space by far. It’s only a $6.5 billion company, they have about $4.5 billion of sales. Basically the way they’ve been growing is through acquisition. They’ve been going into larger markets, buying up smaller mom and pop HVAC distributors, and basically leaving them alone. They take out all the synergies on the back end by providing better sales support, better technology, better billing, things like that, and they leave the brand of the local mom and pop on their own.

Why do I like this stock? A, I think there’s tremendous amount of runway. As more people migrate to the southern parts of the states you’re going to have more HVAC systems in use. The company has a 3.9% dividend yield of which they’ve grown a little bit over 20% annually over the last three years. They’ve been growing their dividend 20% annually over the last three years. They basically have no debt on their balance sheet, so why such a favorable dividend policy? If you’re an employee of Watsco and one of the executives, their business policy is you work for the company and you get paid in stock but you can’t vest the stock until you’re 62 years of age.

Frank Curzio: Interesting.

John Petrides: If you leave the company, if you get fired, or whatever you lose all of your stock. It provides for senior executives significantly large incentive to stay with the company, and basically management pays themselves through the big dividend. Management is on your side, on shareholders side to continue to pay out and grow the dividend. They’ve never had a balance sheet, a debt leverage of more than one times net debt-to-EBITDA, so they don’t like taking on leverage. Here’s the kicker too Frank that I really like and why from a business standpoint why I think Watsco is really interesting. They own 80% of Carrier Enterprises. Carrier is the air conditioning unit out of UTX, United Technologies, and Watsco owns 80% of that entity. They’re vertically integrated through one of the best carriers, one of the best HVAC systems in the world from a technology standpoint in terms of Carrier.

You have a tremendous amount of runway to go from a market share standpoint, you have a 3.9% dividend of which the management has grown that dividend forever, the management has aligned themselves along with shareholders to drive shareholder return. In the short-term there’s some volatility with this stock and with this company because there’s always an argument as to what inning are we in in terms of the HVAC replacement cycle because it’s not necessarily new houses with new air conditioning units that’s driving growth here, it’s all those homes that are in Arizona, Las Vegas, Nevada, and Florida when their HVAC breaks these guys come out and fix it. Watsco is a really interesting company and one of the holdings that we own in our enhanced income strategy and type of holdings that we own.

Frank Curzio: Yeah, two fantastic names and anyone who lives in the south is very familiar with HVAC systems.

John Petrides: Right exactly, exactly.

Frank Curzio: Yes.

John Petrides: Frank when it’s 116 degrees in Arizona in August, you’re not waiting around to call somebody if your HVAC breaks, so you’re on the phone with these guys right away and you need someone there instantaneously. Watsco has done a great job from a technology standpoint where they’ve built out apps on their phone for all their distributors where they can get order, they can get replacement parts to their distribution centers really within a one to three day type period so their customer service is where they’re picking up a lot of market share as well. We think that’s an interesting holding.

Now listen, from a valuation standpoint it is definitely not the cheapest stock out there, it is trading at about 23 times forward earnings, that is a premium to the market. But going back to the theory on where we’re finding income, where’s the management team that’s looking to grow that income, where’s a company where the balance sheet is very healthy, this fits the bill for us.

Frank Curzio: Yeah, it’s great stuff. Okay a couple more questions here, running out of time and this is probably the most important question I’m going to ask you out of all of them is how’s your fantasy football team doing this year?

John Petrides: All right, so thank God I’m co-managing my four leagues with my 12 year old son. He’s done a great job. We’re four and one in one league, three and two in two others, and then one in four in the last league that we’re sucking some wind on. By in large we’re doing okay. The fantasy Gods helped me on Monday Night Football game. I was down by 10 points going into the game, I had George Kittle the tight end and he had Robbie Gould the kicker, and thankfully the kicker missed two field goals so I wound up winning by two points. The fantasy Gods smiled down upon me for once to keep the season alive.

Frank Curzio: It’s so funny because if you’re not in fantasy you’re like, “Ahh,” and if you are in fantasy you know exactly what you’re talking about.

John Petrides: Really, and yourself?

Frank Curzio: Two leagues and one of them I am four and one, and the other one I’m two and three, just won this week. But the one I was two and three I was one and three, listen to this, leading the league in points. I was almost O and four because I literally played… I came in second in points almost every single week, have the second highest score. I just happened to play the best team every week but a lot of teams make the playoffs so I’m going to be fine in that. Doing okay in both of them and yeah, I love it, I enjoy it, I’ve been doing it for over 20 years so it’s really cool. I guess John we’ll end with this. If anyone wants to learn more about you, your new place, how could they do that?

John Petrides: I appreciate that so I’m at Tocqueville.com, Tocqueville Asset Management, T-O-C-Q-U-E-V-I-L-L-E. My email is jpetrides@tocqueville.com and you can find me on Twitter @jpetrides2. I have a new Twitter address, so @jpetrides2.

Frank Curzio: All right, great stuff John. As always love having you on here. We go everywhere, talk about everything, you always share ideas and that’s why people love you so I really appreciate you coming on buddy.

John Petrides: Thanks Frank, really appreciate it.

Frank Curzio: All right, talk soon. As always great stuff from John. Love hearing his thoughts about the economy, he’s all over TV still, I love the fact that he’s working for such a great firm, really like Tocqueville, good guys, great company, and been around for a while, so yeah I’m really happy for him and he loves coming on here. I was worried because sometimes his firms, because of their compliance department, we start with Stephanie Link who would love to come back on the show but sometimes it’s a little difficult. I’m glad he can still come on and be a regular because he always provides great stock picks, but I say this all the time in podcasts about you, not about me, so let me know what you thought about that interview by emailing me at frank@curzioresearch.com, that’s frank@curzioresearch.com. Now let’s get to my educational segment.

Which is about finding the best depressed stocks and there’s a lot of them because let me tell you something, I ran a screen on Tuesday, yesterday, the Russell 2000. I was focused on names that were down 20%, 25%, 30% off their highs, talk about 2,000 names, small caps in the Russell 2000 index and you’re not going to believe what I found. I mean I didn’t believe it, but close to 30%, 30% of the index of the companies in the Russell are down more than 15% year to date. That’s kind of crazy when we’re trading 4% off all-time highs, and again that’s the major indexes right?

Let’s focus on Russell. What’s even crazier is 25% of the index is down 20% or more, so 25% of the names. That’s a lot of names. There’s a reason why if you have small caps in your portfolio that you’re seeing them pull back and a lot of them are down a little news, just overall selling of the Russell or risk off trade. But I’m talking about popular names I came across. I’m sure you heard of some of these names, I’m going to run them by you. I know that you love them, I give you as many names as possible, here we go. Hecla Mining, Red Lion Hotels, E.W. Scripps, AMC Entertainment, Petmed Express, Uranium Energy, Neighbors Industries, Ligand Pharmaceuticals, a few [inaudible 00:53:57] specialty companies in the pharmaceutical space, American Eagle Outfitters, Movado Group, Tanger Factory Outlets, iRobot, MSG Network, NetGear, Callon Petroleum, Golar LNG, Spirit Airlines, Spirit is down 40% from its highs this year. Tupperware brands down 50% from its highs this year. Stamps.com, Cars.com down 55% from its highs this year, and then you have companies like McDermott down 70%.

I don’t know if you heard of all those names but I bet you heard quite a few. Now how do you find which names are worth buying, because you don’t want to try to catch a falling knife, you just want to try to find the diamonds in the rough because when these things turn around you can see massive, massive gains because they’re so depressed. One of the first things I look at when I go hunting for depressed stocks is the industry they operate in, in other words is the industry that these companies work through, operate, are they growth industries? They operate maybe in cosmetics, cloud, big data analytics, connectivity, digital advertising, biotech, which I like specifically with biotech is immunotherapy, gene editing, DNA analytics, or growth markets. Healthcare, which is a massive growth industry and so many names have come off their highs, mostly because of the political uncertainty where some candidates have pretty crazy plans that are going to make drastic changes to healthcare plans. There’s a lot of uncertainty there, which is providing opportunity.

Industries that kind of skeptical about oil drilling, oil services, retail not all retail, there are some retail companies doing perfectly find. But specifically those leveraged to apparel, gambling industry, actually little growth you see in this industry in terms of the casino front, seen a little bit of growth in sports betting after legal changes, Supreme Court Ruling, online gambling, so not everywhere but the casino front not too crazy about. Commodities in general, which are high leverage to manufacturing where US manufacturing had its lowest level since September of 2009. There’s a reason why companies like McDermott, floors a bigger companies. US Concrete have gotten smashed along with most copper companies.

Some of the names that I looked at, let’s take a name like Spirit. They are highly leveraged to Boeing since most of their fleet are MAX planes, which they’re having trouble getting off the ground, but I see this as a temporary head wind. Eventually this is going to be solved, it’s taking a lot longer than expected and that’s fine, but I will look at Spirit, I will look at their valuation, if it’s attractive, I want to look at catalyst that would move the stock over the next three to six months. That’s important because cheap names will get cheaper if they have zero short-term catalyst, that’s why it’s not easy buying uranium here, there’s no real short-term callous in uranium. Look at all you three, six months from now.

Demands exceeding supply but there’s no urgency there, and when you really have no callous in the market they’re going to punish you. You get punished if a company says, “Oh this quarter we’re pushing out… A lot of our contracts got pushed out to the following quarter,” and these companies sell off 25%, they don’t even care, it’s just a three month lag, they don’t even want to hear it. Even if companies are expected to generate $2 in earnings and they maintain that figure but lower their earnings reports at weakened expected earnings because a lot of those contracts didn’t hit this quarter, they’re going to hit next quarter. You’ll see a company like slow 20%, 25%. The market just when it comes in that factor I mean three months they hate, but you want to find companies that have short-term catalysts, and most important is I want to know if insiders are buying.

This is where insider buying is extremely relevant because if a stock is down 30% plus and management’s not buying then why the hell should I? Why the hell should you? Real quick guys, when I talk about insider buying I’m not talking about 10% owners and hedge funds. That’s okay, that’s a good sign don’t get me wrong, but a stronger sign is when you’re seeing the CEOs, the CFOs, management, upper tier management buying shares aggressively that already had big positions, that’s a big buy signal. That’s one of the reasons why I like Ford, $8 million purchase when the stock fell of its highs, that’s showing a lot of conviction despite everything you hear about Ford and why the stock should be sold tremendously, I covered that in Frankly Speaking last week.

I’ll look at a company like Tanger Factory Outlets, yes this is retail but outlets are pretty crowded. They have low vacancy rates, especially the outlets that focus on high end luxury stores, crowded all the time. I know this probably pays a high yield because I believe it’s a [inaudible 00:58:31] at that high yield I figuring in because the stock is down so much but I’m looking to see if the yield could be sustained and maybe it won’t. Maybe I’m looking at a company that has to suspend the yield, which is not the worst thing, suspending your yield to save cash, to improve your balance sheet. However, there’s income funds invested in these high dividend paying securities that their mandates are if they cut the dividend you got to run and you’ll see these companies fall 10%, 15%, even further then they already come down. Maybe you want to wait for that because that could provide an amazing, an amazing opportunity for you to buy it at a really rock bottom price because it’s going to be for selling.

MSG Networks, that’s MSGN, which owns MSG Network and MSG Plus, it’s different from Madison Square Garden, which is MSG, which owns and operates professional sports franchises. Same thing here, are insiders buying with the stock down so much and why is it down so much? I mean Yankees are on fire right now, the rest of their games are going to be broadcast on national television for the playoffs, but this team’s intact, they’re going to be great for a long time. You see tremendous viewership increase next year, again Yankees are here, they’re good, they’re a good team. I hate to say that being a Mets fan. That’s despite the Knicks having a terrible off season signing basically none of the superstar free agents that were on the market but still, it’s a stock worth looking at. Media, a lot of media companies been beaten up.

Now I’m going to be honest with you, I don’t know if any of these are buys. I’m just giving you examples here. After my research I may say, “Hey guys, remember Tanger, remember MSG Networks and Spirit? They were all shorts.” I don’t know but it’s a starting point. This is part of my research and methodology that you don’t see as subscribers. All you really see is the pick I’m actually recommending, but the work leading up to that pick it’s a big process. I’m probably analyzing 20, 25 companies for choosing one name. This process is important because if you find a depressed name with numerous short-term catalysts where insiders are buying, this is a name that could easily pop 25% in a few weeks. All they need is just a decent earnings report, or one that shows that things are not getting worse.

Stocks down 30% a lot of its factored in that they’re not expecting too much out of the quarter, probably not going to get too much higher unless they really, really bomb the quarter, but if they report in line estimates this thing’s going to pop 10%, 15% right away. And if they happen to see a turnaround this stock’s really going to take off and you’re going to be in at such a great price. You know what happens, the stock goes from 10 to 13, 14, 15, you’re up 40% that all technical analysts like. Now you got to buy and it goes to 17, 18, 19 and you own it at 10, it’s pretty cool. I’m not telling you to sell your conservative holdings, like staples, utilities. These are sectors that are doing very well just by having little growth because investors flock to these areas, market for safety and there’s a lot of uncertainty out there. When it comes to your speculative money, this is the area you want to research, which is small cap names down more than 15%, but there’s plenty that are down more than 20% for the year, 25% of the index, a lot of stocks.

Because a lot of these names are down mostly because of the overall weakness in the Russell 2000. Again, risk off environment not because anything is fundamentally wrong with these companies, and you’ll find a couple of them that offer tremendous opportunities, again if you’re a speculative investor. This is what I’m doing right now. This is what I always do to encourage venture opportunities, finding hidden gems at super depressed prices that have short-term catalysts. Also have insider buying and operate in a secular growth industry. Okay, hopefully you got all that, wasn’t too much for you, but again I like to take you behind the scenes of how I’m researching stocks, something that you don’t see where you just see the stock pick and everything, 12 page report and the details.

Encourage new venture opportunities, I will also encourage a research advisory, but there’s so much that goes into it that I’d love to teach you and hopefully I taught you a little bit there about how to find some of the hidden gems in the market and the best place to look right now is in Russell 2000 has really, really, really underperformed the overall market.

Okay guys, quick note here before I go. Getting a lot of emails on this now that I covered it last week. Our Dollar Stock Clubnewsletter it’s live, it’s here, so learn more about how to get a stock pick a week from some of the leading experts on Wall Street for just a dollar, it’s no joke, no BS, you can cancel anytime. Just go towww.mydollarstockclub.com and it’s a super low-price newsletter. It’s going to give you a ton of new ideas from experts I interview on Wall Street Unplugged, this podcast, guys like John Petrides. Some of them come from names that they mention on the podcast and you’ll see names that they didn’t mention on the podcast because I talk to these guys before and after the interview too. We discuss some of our favorite ideas and catch up. These ideas are really cool guys. I’m not talking about just large cap… No, they range from international ETFs, cryptocurrencies, gold plays, biotech, small cap tech, shorts, income names, safe haven plays, so no limitations on these ideas and trust me, most are original, are names that you likely never heard before.

Really cool product. You definitely won’t find another newsletter like this anyplace in the industry, so if you’re interested again, want to learn more just go to www.mydollarstockclub.com. If you’re not interested in getting a new pick every single week delivered to your mailbox for just a dollar no worries. Just trying to offer you a low priced product a lot of you asked for where you don’t have to pay thousands of dollars or have millions of dollars in a hedge fund to invest alongside some of the smartest stock analysts in the world. Guys, that’s it for me. Thanks so much for listening. I’ll see you in seven days, take care.

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