Episode 15: Jason Brady on Barron’s Live

Jason Brady, president and CEO of Thornburg Investment Management, joins Barron’s to discuss the outlook for financial markets, industry sectors, and individual stocks.

Transcript

Jason Brady on Barron’s Live Transcript

Lauren Rublin:   Hello, everyone, and welcome to Barron’s Live, our daily webcast and podcast that offers an in-depth look in investing in financial markets. Thanks for joining us today, an extraordinary day, in financial markets. The Dow Industrials are up 4 percent. The S&P 500 is up almost 3½ percent, and the NASDAQ Composite has rallied 1.2 percent so far today as Wall Street celebrates Joe Biden’s Presidential victory declared over the weekend, and Pfizer’s news this morning that its COVID-19 vaccine looks to be more than 90 percent effective in preventing the deadly virus. That’s the news we’ve all been waiting for, although we all know there’s a long way to go. Joining me on the line today are Barron’s Deputy Editor Ben Levisohn and special guest, Jason Brady, President and CEO of Thornburg Investment Management, a global investment management firm headquartered in Santa Fe. Jason manages Thornburg’s top performing, global fixed income and multi-asset investment solutions. He holds a BA from Dartmouth College and an MBA from Northwestern’s Kellogg Graduate School of Management, and he previously worked at Fortis Investments, Fidelity and Lehman Brothers. Welcome Ben. Welcome Jason. We’re so glad to have you on the line today.

Jason Brady:       Thanks so much –

Ms. Rublin:          Jason I’ll start with you. What do you make of, of today’s amazing stock market rally?

Mr. Brady:           Yeah, it’s breathtaking. I’ll note that overnight we when we got the news of the vaccine’s efficacy from Pfizer, that’s when things really were off to the races. So I think that’s playing a little bit bigger role than anything else. The other thing I think is really important is a lot of rotation. You mentioned the various indexes and this year has generally been one where Nasdaq has been outpacing for example, the Dow or the S&P and today it’s the reverse. So I think that’s pretty significant.

Ms. Rublin:          So, is this a rally that you’re buying into or is it the kind of thing where you think you want to capture gains, take profits and get out of the way?

Mr. Brady:           For us as we look at the longer term at Thornburg, we would note a lot of complications involved in delivering the vaccine it’s still a bit of a ways to go; the logistics in that delivery are significant. So, that’s one piece. The other piece I’d say is a big move today has been in U.S. interest rates so the 10-year treasury is back up to levels that we haven’t seen since March. That I think is going to cap some gains, or be a challenge for certain sectors particularly at technology while being a boon for financials. So, the most important message for us is to make sure that your portfolio has balance. I think a lot of folks got behind the growth rally significantly and for good reasons. But some rallies once they get to a certain point it’s a good story but the valuations are more and more challenging. So, fading some things investing in others.

Ms. Rublin:          So how would you define balance in this case? Are you looking for a balance between fixed income and equities or a balance within the equity portfolio? What’s your perspective on that?

Mr. Brady:           All of the above actually; all of the above. So just sticking with equities alone there have been some really big themes that have gone on in 2020, really ‘19 into 2020. And that’s been domestic rallies of the United States and it’s also been in growth names. Some of those growth names we refer to as sort of the new utilities like Microsoft really changing their business models to software as a service and cloud, and those have been successful. Other elements of tech may be a little bit less fundamental and underpinning. A lot of names trading at significant multiples to revenue a little bit reminiscent of 2000 actually. So what’s been left behind financials for sure. They’re having a great day today, as interest rates rise and non-US, non-US actually doing pretty good. So, I think just within equities it’s important to have a balance across sectors and geographies. There are initial complications certainly when you talk about asset classes and fixed income and stocks, that’s also a good deal.

Ms. Rublin:          We’re going to come back to fixed income in a moment but I want to go to Ben now and cyclicals are rallying as we can see with the Dow and stay-at-home stocks are sinking. Peloton and Zoom video communications for instance; the ultimate stay-at-home stocks are down about 16 percent last I looked. Ben, do you think this is the end of this year’s great stay at home trade?

Ben Levisohn:    Uh, no, I’d have agree with Jason on this is that the move today has been massive. A huge repricing of the above the stay-at-home stocks and the cyclical stocks. And I don’t think it’s going to be a straight line from now to the end of the Coronavirus; I don’t think anyone does. And so, just because some of these moves are so big I think there’re going to be those moments where you want to be owning stay-at-home stocks where there are going to be and we’ll have an article up later today that’s about why refrigeration stocks might do well because of the vaccine and there are all these things that are needed to get the vaccine out there. And there’re going to be hiccups along the way and so I don’t think that the trade is completely over at this point. Though, it’s probably lost a bit of its fuel today.

Ms. Rublin:          It would seem that way. So, we’ve talked about the vaccine, let’s go back to the election and, Jason, I’d like to ask you where you see the Biden administration having the biggest impact on the markets?

Mr. Brady:           Sure, so I think first of all, one of the biggest factors moving the market up until COVID was US-China trade relations. And I wouldn’t expect the Biden administration to have a really significantly different stance on that. Probably a fairly different approach in style but not so much in substance. So, we can expect those conversations to continue to add volatility to the market. I’d say there are some key domestic areas where Biden may or may not have a hand and acknowledge the outcome of the Georgia runoffs. One would be in healthcare, so any move towards more extended healthcare would be negative for a number of names in the sector. The other is energy, domestic energy policy certainly focused on much more on a green new deal that sort of thing. So, the last piece which I think is also a question and likely to be a fairly significant factor across the board is tax rates. So, I think we can expect higher tax rates both individually and on the corporate front although perhaps not as much as we might have expected had there been a blue wave. So tax rates overall energy policy and healthcare but really one key element of congruence which is US-China trade relations.

Ms. Rublin:          Ben, do you agree with that or do you see any other areas of influence?

Mr. Levisohn:    I also had a question for Jason because it seems like a lot of people have taken the tax cuts off, or tax hikes off the table now because it looks like it will be a Republican-controlled Senate so, the Georgia elections has yet to determine that. But you still see taxes going up in some way?

Mr. Brady:           Yeah, I think that you’re right it’ll be a tough call but there’s certainly an appetite for spending across, bi-partisan appetite for spending. And I think some elements of the Republican party maybe more modern elements are really going to be concerned about, or at least, suddenly events of concern for deficit spending. So, I can see us having some kind of compromise from a tax standpoint and a spending standpoint on corporations perhaps or closing some loopholes. So, I think that may be a big list from a Congressional standpoint but it’s not going to be anywhere near what it would have been or what it might be. If Democrats capture Georgia from a Senate perspective, but I do think that there’s going to be higher taxes in our future, yes.

Ms. Rublin:          Do you think any of that is priced into the market? Jason? We seem to have lost Jason and Ben.

Mr. Levisohn:    No, I’m, I’m –

Ms. Rublin:          Ben, are you there?

Mr. Levisohn:    I am I would, I would think that not a lot of that is priced into the market. I think that what we saw from the market was you know; I do think the market was okay with the blue wave. At least it was going to be initially. But I think that the rally since the election was really driven by this idea that tax hikes were not going to happen they’re off the table completely and I think that there might be uh, some at ease if we find that they, that they’re back on the table even if they are smaller than they would have been otherwise. To go back to your question about any big changes. I don’t see many largely because I think the stock market is more dependent on the economy and what it’s doing when they president takes office rather than any individual policy that the margins, they certainly can help. But I think you would still see something like solar stocks or, renewable energy stocks over the long term are going to probably do better just because that’s the way people are heading with or without government regulation. They would certainly get a, more of a boost from a Biden presidency than a Trump presidency but it’s hard to turn back the clock on what’s happening. And if COVID is contained, and that’s one thing we haven’t talked about is just how COVID is really starting to look out of control in United States and the vaccines work and the treatments also show that work I think you can get a very nice set of a lot of economic momentum going but I think that still remains to be seen.

Ms. Rublin:          For sure. I understand Jason is back on the line?

Mr. Brady:           I am, I’m sorry, I had some technical difficulty. Just in response to that Ben or just comment on that. You, it really seems to me that, you know, we’re in a rock and a hard place I guess; or some good and some bad in context of the market today, vis-à-vis COVID, because obviously you’re seeing a surge in cases and now sudden optimism. For us at Thornburg what we look at really is, you know, not to have a session with letters or shapes but, kind of a, the square root recovery or a little bit of the swoosh in the context of well, a lot here even with the vaccine kind of notably on the rise and there’s a lot of shifts that are occurring in our economy.

Ms. Rublin:          So, Jason, since you’re back, let’s go back to the fixed income market for a minute. As we’ve noted today, stocks aren’t the only thing rising. We’ve got the 10-year treasury yield is up about 16 percent last I looked. It’s above 0.95 percent and that is a significant move. Of course, it means a drop in treasury prices. So, as a fixed income investor how are you navigating this market and where do you think rates are headed from here?

Mr. Brady:           Yeah, somebody smart once told me never put a number and a date in the same sentence but I’ll give it a shot. So, I think 10-year treasury are certainly headed higher in the context of a cyclical recovery. So in essence being long value names or financial energy or things like that, it essentially looks like the same trade or same investment as being short treasuries or believing that rates will rise. I think that the big question here is what is the Fed’s appetite for rates rising? And they could step in and increase our purchases and have clearly indicated they want to continue to be significantly accommodative as long as unemployment remains anywhere close to elevated. I would argue 6.7 percent is not too far away from what we used to think was inflationary at 6.5 but that’s speaking has changed quite dramatically. So rates could rise here I would say to the low 1’s, maybe 1¼ percent but I think you’ll get a lot of monetary policy stepping in in the case of anything further than that. What we saw in 2018 was a much higher treasury yield starting to really slow the economy down and that was that that caused the Feds to get back in the game and stop raising rates, in fact, start lowering them at the end of ‘18. So, lots to think about here. From the fixed income perspective, I think what you really have to realize is fixing it is a much, much more interesting, complicated environment than it was, say, 10 or 20 years ago. Aa lot of money has come into the marketplace, and there’s been a response from a lot of issuance across all kinds of issuers, corporate consumer ABS, sovereign, etc. So, it’s a much, much bigger market with much, much more variation than it used to have. That’s good and bad. There are good things out there; there are bad things out there but certainly it’s not all just treasuries.

Ms. Rublin:          So, you mentioned this diversity of the fixed income market to me when we were speaking last week, and you said that there are some interesting opportunities and some scary parts of the market, and I wonder if you could spend a minute or so on the interesting parts, and then we’ll take a look at some of the scary parts.

Mr. Brady:           Yeah, sure. I think the most interesting part of the fixed income market today is really in lending to consumers, so, what’s happened over the last 12 years is bank regulation has really pushed issuance into the marketplace, and generally often bank balance sheets as regulators have said two things. One, let’s have banks be less risky, and two we still want a lot of lending in the economy. So, we saw the consumer really be at the forefront of the troubles of the financial crisis particularly in the mortgage market. So, underwriting has gotten a lot better there. What’s also happened, obviously, is a significant amount of support from policy makers for the consumer. The consumer entered this crisis in pretty good shape, and this has been the only recession I think ever where personal income has actually gone up, largely due to transfer payments, but has gone up in the recession. So, that’s the positive place. There’s a lot to do there. Again, underwriting, much, much better than it was in ‘06 and ‘07, and this sector really is asset backed securities and mortgages, so, both kind of mortgages of all types across a lot of different credits a lot of different credit classes, but also other kinds of consumer lending be it credit cards or auto loans. So, there’s a lot to do there. It’s a huge diversity as banks have retreated from those markets.

Ms. Rublin:          All right. And now for the scary stuff you promised.

Mr. Brady:           Yeah well, if there are three balance sheets you can invest in, a consumer, a corporate, and a sovereign. Those are broadly get you most of the things you can do in fixed income. Outside of consumer, it looks a little scarier. So, sovereigns, obviously rates are very, very low negative on a real rate basis, and sovereign balance sheets are much, much worse. So, there’s not a lot to do other than get hurt. On the corporate side, it’s been a huge increase. We’ve seen record issuance this year as, again, the Fed has spurred lending across the board. The problem here is corporations went into this crisis in worse shape than they’ve ever been, and that was before we had the recession. So, it feels to us like the Fed is trying to solve a solvency problem with a lot of liquidity and that doesn’t work terrifically well for industrial companies. Sometimes for financials, as in the great financial crisis, but there are companies with huge amounts of leverage, and access to more lending isn’t really helping. At the same time, you see spreads or compensation for that risk be not so great. So you see prices pretty high and fundamentals pretty bad. It looks to us like you’re going to see a default rate even with a sort of steady recovery, a default rate in high yields upwards of 10 percent –

Ms. Rublin:          Wow.

Mr. Brady:           – and spreads that don’t compensate you much for that at all.

Ms. Rublin:          Now, that doesn’t sound too attractive. So I want to move on to the news of the week, which we can cover on Mondays, and look at some corporate earnings. Before I do, I want to remind listeners that Ben and Jason will take questions at the end of the call, so, please send us questions, and we’ll try to save some time for them. So, Ben, we’ve got a batch of corporate earnings still coming this week. Why don’t we start with McDonald’s? Tell us what’s going on there.

Mr. Levisohn:    So they had what looked like pretty good earnings this morning. They reported up an adjusted profit of $2.22 a share, and that easily topped estimates for $1.91. So, continuing the thing we’ve seen through the last earning season and this earning season, companies are really beating their numbers quite easily. And their same store sales, so they fell 2.2 percent. That was also better than the 2.6 expected and was much better than the almost 24 percent decline that they had in the previous quarter. The stock, though, is down about 2 percent right now, and it’s likely because the company said that its 2021 free cash flow or, that seems to have its free cash flow will be approaching 2019 levels by the end of 2021, and, and I guess that investors really had hoped to see a return to those pre COVID cash flow levels before that time period, before the end of next year. And I think this actually goes back to something we’re seeing with the vaccine is that a lot of you know, with this news today, a lot of stocks have jumped considerably, and they’re really pricing in the same, kind of a return to normalcy by the end of next year, and if McDonald’s earnings are anything to look at, you know, we might be getting back there, but we still don’t really know for sure. So, there might be a little too much enthusiasm in some of these things, but I think that’s why McDonald’s is falling today

Ms. Rublin:          We’ll have to watch that. McDonald’s also announced that it’s going to launch its own plant-based burger. I love the name, the McPlant, and that has not gone down well with holders of Beyond Meat stock. Give us the low down –

Mr. Levisohn:    That, that really hasn’t. Beyond Meat is getting hammered. It’s down about 8 percent today on that news, and what what’s interesting there is that it is reporting after the close today. And so it’s one of the few stocks that’s actually down on this day where so much is rising, and that’s actually probably good for the set up into earnings. They’re expecting to report a profit of 5 cents a share. It’s down slightly from 6 cents a year ago but you know, so if anything, this makes the response, I mean, the sell off that’s it’s not too big or if it’s not too much of a sign of things to come, you know, this could set them up to have a good response to their earnings.

Ms. Rublin:          Okay. We’ve had a mega rally in some of the cannabis names, and I imagine that’s because of legalization passing in some states. Also, we’ve got some earnings news. Give us the low down.

Mr. Levisohn:    So, we’ve had two cannabis stocks report earnings today, Canopy and, and Aurora. And Canopy is the easiest to really parse. It reported a 9-cent loss, which is much better than the 37-loss that was expected. And it really seems to be sort of back on track in a way that it really was kind of looking almost off the rails a bit ago. And, so, it’s up 9 percent, and then you have Aurora, which has had a ton of problems, and you can see that it, even in how they describe their earnings. Its adjusted EBITDA loss as defined under the term credit facility.

Ms. Rublin:          And that just sounds like ordinary earnings.

Mr. Levisohn:    No, they have a special requirement as to how they can do it, and based on that requirement, they have a 10.5 million loss. But the stocks are just flying today. So, you had they were up a lot more, but Canopy is up 9 percent today. Aurora was up even more. They were up 23 percent, right now. The problem here, though, is that they gained even more last week. So, you look at Aurora and it gained 140 percent almost last week, and this was really just on the on the political change. And the, in the hopes for legalization they are, what worries me is just after these kinds of runs it gets you know, the stock starts to look like, okay, well, what’s really changed that much from just a week ago, or 2 weeks ago. It’s a very big move very quickly. And so I would be pretty cautious with some of these stocks.

Ms. Rublin:          All right, so, I had a question from a listener. What is the outlook on pot stocks now that states have legalized some states have legalized marijuana and it, Biden promises to decriminalize it.

Mr. Levisohn:    Well, I think we’re, we’re edging closer to full legalization in the United States. You know, there’s already talk that with New Jersey heading towards legalization that, you know, it’s only a matter of time before New York does, because New York has a budget deficit, that it needs to deal with. And, you know, one good way to do that is with taxing marijuana, and you don’t want to let just you have all the New Yorkers going over to New Jersey and then coming back and not getting a piece of that. So, I suspect we’re going to see more legalization. At some point, though, these companies have to prove that they can they can be run as real businesses. And the other thing they need is it’ll always be tough until the banking system is allowed to handle the money. Right now –

Ms. Rublin:          Good point.

Mr. Levisohn:    – it, it, it really isn’t, and that makes doing business hard.

Ms. Rublin:          So, before we leave the world of corporate earnings, let’s talk about home builders. We’ve got D.R. Horton reporting this week. What are the expectations?

Mr. Levisohn:    Well D.R. Horton is supposed to grow at its earnings point nicely over last year. They’re expecting $1.78 a share versus $1.35. But they’re another one that is really kind of in some ways that’s at the mercy of the market at the of the treasury market, really. With yields rising, the fear is that mortgage rates are going to go higher, and that’s not going to be good for this booming housing sector that we’ve had. The stock is up 30 percent this year, or close to that. I think people are going to be probably listening for comments to them today. The earnings probably won’t matter as much what it has to say about the impact of potentially higher rates and can it keep seeing this boom if, if mortgage rates go higher. So, no, I think that’s where I’d be listening for is, is that commentary there around the future outlook more than anything that it’s going to have in its earnings, because it’s, it’s earnings should be fantastic. I mean, the good thing for the stock is that it’s really been going sideways almost since you know, the beginning of August. It’s just been kind of range bound and going nowhere, and if it can hold this like it has a double bottom right now down around, oh it looks like about 65 or so. You know, if that holds you know, I think the longer it can hold that the better the chance that it ends up going higher, but that’s, well, it’s good, and that’s what you’re going to be listening for is what can be the impact of the higher rates.

Ms. Rublin:          Good point. All right, so, one more company on the earnings front before we go to some listener questions. Walt Disney is reporting on Thursday, and the stock is up a lot today, again, a reopening play. What are the expectations for earnings? And does it really matter at this point?

Mr. Levisohn:    It’s another one where I don’t think the earnings matter all that much. The stock is up almost 12 percent today and it, even though the company is expecting a 65-cent loss and obviously it is a reopening play. You know, the theme parks need to reopen and get back to running at a fairly normal level and getting movies back into theaters. It’s going to be extremely important too. My worry with Disney is just that the COVID crisis has really accelerated the shift out of movie theaters and towards more streaming, and its model of having these massive big budget movies that make billions of dollars in the theaters before they even go to home video, I think, is really challenged by a system where that’s where you’re not going to have those kind of openings anymore. And so, it if it could, it remains to be seen whether they’re going to be able to get people back in the theaters, or you’re going to see these movies usually making a billion dollars or more every time they’re released, or if they’re going to have to figure out the shift to streaming even more than they already have.

Ms. Rublin:          It’s going to be an interesting year ahead for Disney. So, let’s go to some questions. I have one for Jason. What are the major catalysts the market is waiting for now besides the vaccine?

Mr. Brady:           Sure, I think at this point it’s a lot, we have just been discussing, which is corporate earnings, as they are shaped by the economic recovery. So, as you get these earnings coming in the catalyst is do we continue to improve do cyclicals continue to improve over and above a rebound or a bounce? Can we really get sustainable growth? And so, you know, in some cases the answer is yes, obviously, and in others, for example, with the conversation on home builders, I think you really have some challenges. So, it’s an economic recovery story still and that includes with the vaccine, but, but certainly it’s harder from here.

Ms. Rublin:          Do you have a view on growth versus value stocks, growth having been so dominant this year, and value kind of in the background for many years? Do you think value will finally come to the fore as the market shifts?

Mr. Brady:           Well, I think the biggest tail winds for growth names have been ever lower interest rates. So, in addition to the fact that there are some businesses and the folks have built again, you know some of the big tech names are certainly incredible businesses, but from a valuation perspective, the tailwind has been lower rates. And, so, I don’t think that you’re going to get that same tailwind that you’ve gotten not just for the last, you know, 6 or 7 months, but really for the last number of years. So, I think that it’s really important that investors have balance in their portfolios. You know, frankly dividend pairs have been really beaten up along with kind of value names, and I think there’s a lot of potential in those, in those particular names. So, balance is critical. Right now, the market seems a bit out of balance shifted towards growth, and that’s why you’re seeing some of the extreme rotation today.

Ms. Rublin:          Can you mention some dividend pairs who you find particularly attractive?

Mr. Brady:           Yeah, sure. So, a couple of sectors that are beaten up one is financials. So, if you take a look across the board, I think you know, money center banks are pretty interesting. JPMorgan’s a holding of ours. I wouldn’t call it, you know, you’re really digging into the weeds on JPMorgan, and obviously iit’s a very successful global bank but they have great franchises, great earnings power, and banks, you know, similar to our conversation about consumer balance sheets earlier, if you think on this as being relatively positive, and banks were such the locus of challenges in 2008 that everybody seems to be fighting a lost war there. Earnings are good. The quality of earnings are good and balance sheets much better. Another sector that I think investors should take a look at is telecom. So, telecom is in a particularly exciting sector, and, again, if we want to talk about really great businesses with low capital intensity, we talk software, but those names are, the valuation is challenging. With telecom, you have, you know, great cash flow. You have very, very undemanding valuations, and certainly it’s not far away from some of the themes that we’re seeing in the marketplace around work from home. So it’s a bit of a sideways play on work from home. It’s not Zoom at whatever times revenue. It’s much less demanding than that, although I will say given my technical difficulties, you know, maybe telecom still has a ways to go.

Ms. Rublin:          That’s all right. We’re used to technical difficulties in this era. We’re running out of time, but we do have one more quick question, and I’ll give this to you, Jason, as well. Where do you think additional stimulus talk will go from here?

Mr. Brady:           I think it will go well. I think –

Ms. Rublin:          Aah, good.

Mr. Brady:           – it may not be multiple trillions in the very near term, but I wouldn’t be surprised if we saw stimulus before January 20th. I know that there’s obviously a lame-duck period but I think that there is some desire in Congress for Republicans to not be seen as the party of no around this issue, and if they can, you know, in their view perhaps stick the consequences of it with a new Biden Administration maybe there would be some appetite for that. Broadly I think we’re going to get a couple of trillion, and if that doesn’t work, we’ll get a couple trillion more. I really don’t see a whole lot of breaks on spending here. So, I think that if that’s the thing that’s holding the market back, and we need more stimulus I’m relatively bullish. I’m just not sure that’s the barrier today.

Ms. Rublin:          Okay. And, Ben, can you spend 30 seconds on the stock you wrote about this weekend, Biogen? The stock went up last week on hopes for its Alzheimer’s drug, and it’s been crashing today, as those hopes look to be coming to naught.

Mr. Levisohn:    Yeah, and, and we still don’t know what is going to happen with this. You know, the Alzheimer’s drug the FDA clearly wants to approve it. It’s a panel that were considering it don’t think it works. The FDA still might approve it. And it’s one which, I mean, Biogen, if you look at it, has been just going nowhere for the last 3 years or so, maybe even longer than that. And, I think that this is, might not be the big winner necessarily that people have been expecting for it. But there’s still hope that it could get approved.

Ms. Rublin:          There’s been a lot of volatility in that stock over the past few days.

Mr. Levisohn:    A lot.

Ms. Rublin:          So, I want to thank you both, Ben and Jason, for joining me today. It’s been a great conversation. Thank you to our listeners, and thank you to our sponsor, Survey Monkey, and please join us again tomorrow for a special section, a special session, excuse me, of Baron’s Live, the Election’s impact on investors, business, and policy. My market watch colleague, Rob Schroeder and I, will be hosting two video panels featuring guest speakers Selita Marchelli of UBS Global Wealth Management, Mark Sandy of Moody’s Analytics, Henrietta Praise of Veta Partners, and Greg Vollier of AGT Investments. The program begins tomorrow at noon. Until then, stay well, everyone, and have a good day. Bye bye.

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