On this week's Stansberry Investor Hour, Dan and Corey are joined by Marc Chaikin. After 50 years of working on Wall Street, Marc founded our corporate affiliate – Chaikin Analytics – to guide everyday investors. His signature Power Gauge system rates more than 5,000 stocks on 20 fundamental and technical indicators in order to find the best investing opportunities.
Dan and Corey kick off the podcast by discussing a zany cast of characters, including Federal Reserve Chair Jerome Powell, WeWork co-founder and former CEO Adam Neumann, and convicted FTX founder Sam Bankman-Fried. With coworking-space company WeWork declaring bankruptcy last week, Corey notes that this could be a sign of more trouble coming in the commercial real estate sector. He also notes that Neumann, who stepped away from WeWork in 2019, left his mess for others to deal with...
It has a Sam Bankman-esque feel to this... "kicking cans down the road" sort of thing and hoping you get away with it.
Next, Marc joins the conversation to explain why he created the Power Gauge for individual investors after the great financial crisis... how it can identify stocks that are likely to outperform the market over the next six to nine months... why it excels in timing investments... and how it can help prevent major portfolio losses by showing which stocks to avoid. He says...
No matter how good your fundamental research is or your quant model [is], if the market doesn't agree with you, guess who wins? The market always wins... You're investing in what I call "dead money." Where you really get serious outperformance is when the market agrees with the model. And that's where the timing element comes in.
Then, Marc explores 2023 being a difficult year for bearish investors, the likelihood of a recession, and how artificial intelligence ("AI") has led to unprecedented productivity enhancements. Dan quips that "software ate the world. Well, [now] AI is going to eat software." Marc mentions that cloud computing in particular will be crucial to large-scale AI adoption and further innovation...
That's where this whole convergence of technology, data, and machine learning comes in. I think it's going to unleash unbelievable advances in medicine, in data analytics for retail, and self-driving cars eventually. Because that's what you need to get this next generation of enhancements into the marketplace.
The conversation then shifts to the damage done by a decade of near-zero-percent interest rates, Marc's strategy for finding winning sectors and the best stocks within those sectors, and the general outlook for the market. Most notably, companies that took advantage of zero-percent interest rates to float short-term debt are now going to have to roll that debt, putting them in a very tough position. Marc poses an important question...
Is there a ticking time bomb – like the credit default swaps in 2008 – which is going to result in a big existential moment for the financial markets?
Finally, Marc shares his thoughts on today's market, including the "Magnificent Seven" stocks, the U.S. national debt, the real estate sector, and 10-year Treasury yields. He explains that he and many other leading investors are bullish on stocks, but the media prefers doom-and-gloom headlines for clicks. "They just don't want to put optimists on TV because it's not controversial," he says simply. But Marc explains how his Power Gauge system cuts through the clutter of mainstream media and information overload to provide the cold hard facts. "Think of the Power Gauge as a reality check."
Founder & CEO, Chaikin Analytics
Marc Chaikin has spent 50 years on wall street as a trader, stockbroker, analyst and had of the options department for a major brokerage firm.
Marc founded Chaikin Analytics which delivers stock analytics to investors and traders, and helped develop computerized stock selection models and technical indicators that have become industry standards. Marc even pioneered the first real-time analytics workstation for portfolio managers and stock traders.
Dan Ferris: Hello and welcome to the Stansberry Investor Hour. I'm Dan Ferris. I'm the editor of Extreme Value and The Ferris Report, both published by Stansberry Research.
Corey McLaughlin: And I'm Corey McLaughlin, editor of the Stansberry Digest. Today, we interview Chaikin Analytics founder Marc Chaikin.
Dan Ferris: And today, Corey and I will talk about a zany cast of characters including Jerome Powell, Adam Neumann, maybe Sam Bankman-Fried. Anybody else we can think of?
Corey McLaughlin: And remember, if you want to ask us a question or tell us what's on your mind, e-mail us at [email protected].
Dan Ferris: That and more right now on the Stansberry Investor Hour.
A zany cast of characters. Who do you like first? I like Adam Neumann, but Jay Powell, he came up big recently.
Corey McLaughlin: That's quite the crew. Let's go Adam Neumann for $100, Dan, because we talk about Jerome Powell all the time.
Dan Ferris: We really do.
Corey McLaughlin: We will again today, I suppose, but Adam Neumann is a little more timely.
Dan Ferris: Just a little. So for anybody who doesn't know, Adam Neumann is the co-founder and former CEO and chairman of WeWork, the coworking company that leases office buildings for 10 or 20 years and then rents the space out to tenants. As few as one tenant could rent a desk in these things. It's called coworking, but for little as a month. So they are taking on the long exposure and trying to make a business on the short end of that. They declared bankruptcy last week, as we thought they would. I had written about this previously that there were murmurings in the press that said they were preparing a bankruptcy filing abruptly about a couple of years after they should have anyway. They finally did it. They finally did it. None of us are shocked, are we?
Corey McLaughlin: No. I was surprised they hadn't gone bankrupt before. So I've been ready. We talked about last week maybe this is a little sign of the trouble in commercial real estate coming in general, but we covered that already. So, go ahead.
Dan Ferris: Right. So the thing that grabs me here, there's two things that grab me. I suppose it ultimately boils down to one and it's just the craziness of Adam Neumann, but he came out with a statement at the same time that WeWork had filed bankruptcy. I have to read it. It's very short, but it's incredible. It says, "As the co-founder of WeWork, who spent a decade building a business with an amazing team of mission driven people, the company's anticipated bankruptcy filing is disappointing. It has been challenging for me to watch from the sidelines since 2019 as WeWork has failed to take advantage of a product that is more relevant today than ever before. I believe that with the right strategy and team, a reorganization will enable WeWork to emerge successfully."
Corey McLaughlin: Sounds like a lot of bankruptcy filings. Yeah.
Dan Ferris: Yeah. Actually, you'd think bankruptcy he would say, "We made some mistakes and we were too levered and we did this and we did that and I made mistakes as a CEO," but there's none of that. There's like I'm really disappointed. Like he left this big mess. The thing never did anything but log operating losses. They went bankrupt with $19 billion in liabilities and $15 billion in assets and the assets I bet are shaky. The liabilities are solid. Assets are shaky. It's still all humorous.
It's still like he's looking down his nose at the mess he left other people and then they of course had to deal with COVID. He didn't have to do that. He got out. This is the thing that really kills me here. Everybody is wiped out. They'll have to negotiate with the creditors and bondholders and stuff and he got out with – at the time when they kicked him out in 2019 he was worth about $2.3 billion. Now it's only about $1.7 billion. Some of it was cash. He cashed out big... I can account for close to $1 billion in cash at least. It's amazing. The guy is still a billionaire.
Corey McLaughlin: Well, good move by him on that part, I guess.
Dan Ferris: Respect. Yes.
Corey McLaughlin: It's got a Sam Bankman-esque feel to this, Sam Bankman-Fried-esque humorous, I don't know, "kicking cans down the road" sort of thing and hoping you get away with it feel.
Dan Ferris: Which he sort of did.
Corey McLaughlin: Did a little bit. Right. Yeah. Except he's not serving jail time most likely. He's just got to probably move on to – when companies get to this point I feel like these guys or girls go away for – out of the spotlight for a couple of years. Then somehow they reemerge five or 10 years later doing something else and they get a second chance usually. So maybe we can start thinking about what Adam Neumann's next venture might be.
Dan Ferris: Just one more thing on this and then we can move on to Jay Powell. I just have to say this. This is where I've wound up on Adam Neumann up to this point. You and I know entrepreneurs. We know people who get out of bed every morning and think about nothing but the excellence of the enterprise of their brain child, this thing they live for. That is a very specific and seemingly all-consuming mindset. I think we're all familiar. We can all name Steve Jobs and Mark Zuckerberg. You can name even Warren Buffett. Just all consuming.
Adam Neumann cashed out in clever ways. One of the things he did was borrow – at the time he was ousted from WeWork – in 2019, he borrowed $432 million from SoftBank, the biggest shareholder. But instead of having to pay it back in cash, the agreement was he would just pay it back in shares whatever their value according to an article by Matt Levine from Bloomberg. It's just a share sale. He just sold $432 million in shares. Now they're worthless. Really getting back to that mindset.
So there was all these different ways that he cashed out and I think if you cash out really well like that you're focused on cashing out. You think about cashing out. Your mind is on that and you're looking for ways to do it. It doesn't strike me as very compatible with that other mindset of being totally focused on the excellence of your brain child. I think in the end he was a very good storyteller who got a lot of people to throw money at him, especially SoftBank, Masayoshi Son at SoftBank.
I have to read a quote by Matt Levine. He said, "Adam Neumann figured out maybe the best and funniest way anyone has ever made money in the history of capitalism, which is act crazy around Masayoshi Son until money spews out of him. Figuring out how to rent out office space for more than you pay has absolutely nothing to do with it." That's where I am. I think Matt nailed it there and it doesn't look good on Adam Neumann. I can't imagine ever giving the guy a dime.
Corey McLaughlin: Yeah. That's a really good way of putting it. Sometimes you just need to find the right person who's willing to give you whatever you ask for. What you're talking about reminds me for smaller entrepreneurs, too, smaller-sized companies. If you ever watch Shark Tank, if they get a whiff of the idea that these entrepreneurs, just all they're there to do is build the company and cash out at a certain point, if it's part of their pitch like, "Oh, yeah. We'd love to sell to so and so at some point," they get shot down every single time by these guys usually. It's because the same thing you're talking about. They don't want to be part of something that's just a vehicle that's a stated goal is to cash out at the end. That's really not a great long term – you don't become a successful business person over and over again by just trying to do that. You have to focus on the product itself and selling.
Dan Ferris: To be fair, I know people who seem really brilliant who talk about all their exits. They talk about the stream of exits behind them that made them rich and even muse about another two or three exits and I'll be done with all this or something. It's maybe not cut and dry, but that mentality of cashing out, I think we're on the same page. It's different than the one of building something great. With that, maybe we'll move on to Jay Powell who saw that winning streak for eight days in the S&P 500 and said, "That's enough of this."
Corey McLaughlin: Yeah. He brought back the speeches from six months ago or a year to say, "Hey, we still might raise rates some more. It's not all over yet."
Dan Ferris: Right. He was at a, what was it, an IMF event?
Corey McLaughlin: Yeah. An IMF event. Didn't get the invite to that one, but yeah. Another one of these speeches. Usually after the Fed meetings they then have – he has press conference obviously, but then a week or so after that they have all these Fed people go out and keep talking to clean up or clarify any messages that they want to get out there. So maybe this was a little bit of that pumping the brakes on the we might be done hiking rates tone that I took from it. I know you thought it was a little more hawkish the last time, but I think cooling the jets with the bond market doing what it did and then stocks responding in kind. I think if he said anything different it might have been kept that going.
Dan Ferris: Right. because his talk is up on the website for the Federal Reserve, FederalReserve.gov, under the news events and things. There was one particular couple of sentences that are getting quoted in the media. Let me just read that. He says, "The Federal Open Market Committee is committed to achieving a stance of monetary policy that is sufficiently restrictive to bring inflation down to 2% over time. We are not confident that we have achieved such a stance. We know that ongoing progress toward or 2% goal is not assured. Inflation has given us a few head fakes. If it becomes appropriate to tighten policy further, we will not hesitate to do so." I don't think stocks liked that.
Corey McLaughlin: No. He saw a pause in the rise from over the last two weeks. But it's so interesting. Literally last week he said, "We think policy is at a sufficiently restrictive stance." He literally said just the opposite. Now a week later he's not as confident. Make that what you will. It's typical Fedspeak I would say.
Dan Ferris: Yeah. So OK. Let's give Jay Powell the benefit of the doubt and try to interpret. Maybe sufficiently restrictive meant we're not hiking right now. We don't see another hike real soon. Then this week he wanted to make sure that everyone knew there could be more hikes. We really are – in other words, the waffling – maybe the waffling is him trying to convince everyone that they really are data driven, such as the data is. It's this backward-looking stream of data that they look at. It's almost like he wanted to say, "You don't understand. We mean it. We really will hike again if we think it's the right thing to do," whereas everyone wants to look for the hikes are done, cuts are not far away.
That has been the impulse since the beginning. "Oh, they'll do this and then they'll cut. They'll do this and then they'll cut." It's just gone on and on and on like that. You can see stocks rallying every now and then with that expectation. Believe me, if you believe that he's as weak as his predecessors and still really dovish inside and still really not wanting to break everything, I can see the argument for that. So far, he's looking to me like he would rather be thought of as the guy who absolutely, positively did not let inflation get out of control and made that his priority rather than not breaking things too badly.
Corey McLaughlin: Yeah. Those are good points there. I think part of it might be maybe he wants to prime the thinking that we can still have another smaller rate hike in December, which is what the committee had projected the last time around I think a month or two ago that they would still have one more because the way he was sounding the last month or so made it sound like they're leaning toward not doing anything. I think yesterday sounded a lot like we could still be doing something. Then I think if he said anything different, as I said before, market would have kept going higher. I don't know if that's exactly what they wanted to see with – it might see bond yields going even lower, which I think he might have not wanted to see, given the part that you mentioned last week about financial conditions tightening that they inserted into their little statement there about contributing to a restrictive economy.
I find myself trying to not fall into the trap of what you're saying, too. They're just going to cut whenever something goes wrong. I think there's a difference between that and holding rates where they are for a long period of time which is what I think – personally, what I think is going to happen as long as they can next year. It may be all of next year. It may be – who knows? I don't know. It may be two years. I don't know. They may raise rates again if something happens that is spikes inflation again, but right now I think there's a difference between that like stance and "Oh, they're going to cut in March immediately if something goes wrong."
Dan Ferris: Right. There is. I think and that's the mindset that I'm talking about in the market. What you're talking about is kind of not appreciated enough. That mindset is not popular enough I don't think yet. The basic one of expecting cuts still is. Also, there was a little clip like Jay Powell got caught dropping an f-bomb on a hot mic, telling somebody to close the effing door. Did you see that?
Corey McLaughlin: No. I missed that. Oh, dang. I missed that.
Dan Ferris: Yeah. I know. I don't know if it's real though because these things can be doctored up and people have doctored up Jerome Powell to say the most hilarious, profane things on social media. I just – there was something about it that caught me as it's quite possible, but I haven't heard anything otherwise. I was just wondering if you'd heard it. It was funny because –
Corey McLaughlin: I have not, but when we get done here, I'm going to look it up.
Dan Ferris: Yeah. It was a climate protester was in the audience and it was this woman who started yelling out things about the climate or something. They were taking a break. So he just stopped talking and walked away from the podium and apparently walked through a stage door or something. He said, "Yeah. Just close the door. Just close the effing door, man." I was just like, "Oh, wow. OK."
Corey McLaughlin: Might be a few memes out there about that one.
Dan Ferris: Yeah. Because he – if anybody, these Fed people, they come off as very stayed, well-behaved, conservative people and I don't know if Bernanke or Yellen or anybody has been caught on a hot mic like that. Probably not important.
Corey McLaughlin: Yeah. Hot mics are always fun. Hot mics – no. They are important. Hot-mic moments are always important because they actually show you what a person is really thinking.
Dan Ferris: Well, with that let's get a hot mic in front of our guest Marc Chaikin. We've had Marc on the program before. He has been around Wall Street for decades and decades. He's been there and done that. He's created indicators. There are things – there are stuff on your Bloomberg terminal that bears his name. He's been there, done that. He's a very wise guy and has a lot of wisdom to offer investors about trading and investing and just markets in general. I'm sure that you'll hear lots of it today. Get your pen and paper out and take notes, write this stuff down. So let's do that. Let's talk with Marc Chaikin. Let's do it right now.
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Marc, welcome back to the show. Nice to see you again.
Marc Chaikin: Dan, it's good to be with you.
Dan Ferris: And I have my co-host, Corey McLaughlin with me today as well.
Corey McLaughlin: Marc, how are you?
Marc Chaikin: I'm good, Corey. Sorry I missed you at the recent conference, but we'll do it again sometime.
Corey McLaughlin: Yes. Look forward to seeing you at the next one.
Dan Ferris: It's just not a party without Marc Chaikin, I have to say.
Marc Chaikin: I was partying in Italy along the [inaudible].
Dan Ferris: Nice. All right. Sounds good to me.
Marc Chaikin: Talk about better to be lucky than good. After we left Tuscany, which was the last few days of October, the rains just came down in epic proportion. I don't know what people did in those towns where we were, Lucca and Milan. Just unbelievable.
Dan Ferris: Well, lucky you.
Marc Chaikin: I'd probably still be there.
Dan Ferris: So I think we should probably reorient our listener about the Power Gauge, which is this really quite incredible tool that you've created. Let's just tell them what it is and what it does.
Marc Chaikin: Good place to start. The Power Gauge is a 20-factor model that I built after the financial collapse of 2008 because I felt that individual investors were of a mind to take back control of their own portfolios and I just felt that they didn't have the tools or the temperament to manage serious amounts of money. In fact, that's what happened. So what I set out to do was to build on my experience with my institutional-brokerage clients in the '80s and '90s and synthesize what they looked at every day, primarily from a fundamental point of view.
My background was really in technical analysis. I had dabbled with fundamentals and things like industry group relative strength, which is a hybrid between macroeconomics and technicals. I was successful after about a year-plus of research in building a 20-factor model that's what I call "eclectic." It's not a value model. It's not a growth or momentum or dividend model. It does a really good job of identifying stocks that are likely to outperform the market over the next six to nine months or more importantly stocks to avoid because they're likely to take a hit. So that's the background and we've had a series of products built on the Power Gauge. Since we're part of the MarketWise umbrella, we've really upped our anti, so to speak, and we're impacting a lot of people and the response we're getting is very positive.
Dan Ferris: Yeah. I've heard nothing but good things about the Power Gauge. What interested me about it, the first time you and I ever spoke about it was what a good tool it is for timing these, like you said, those six-month trades or so and the fact that it's got so much fundamental input because fundamentals are generally viewed as not good timing tools at all. But you have a timing tool that does incorporate fundamentals. I found that fascinating.
Marc Chaikin: Well, there's a timing element within the Power Gauge, but it's only 15% of the model. That's our technical component. We also bring in relative strength and Chaikin Money Flow, which are part of the 20-factor model, but also exist as standalone technical indicators. So what I like to say is no matter how good your fundamental research is or your quant model, if the market doesn't agree with you, guess who wins? The market always wins. So no matter what the Power Gauge is saying, if it's bullish on a stock, but the stock is not outperforming the market then we've taken a mathematical formula and converted it into a red, green – very easy to interpret indicator.
Then you're just investigating in what I call dead money where you really get alpha or serious outperformance is when the market agrees with the model. That's where the timing element comes in. So if you've got a stock that has bullish underline fundamentals that's underperforming the market, it's telling you that the big institutional money is not there yet. It's when that money comes in that it typically starts outperforming the market and then you can get multi, multi, multimonth moves.
Just give you one example of that right now in the cybersecurity space is CrowdStrike. C-R-W-D. The stock has been outperforming now for nine months with a bullish Power Gauge rating and it just keeps going on to make new 52-week highs. Same with Microsoft, interestingly. So it's not just "out there" tech stocks. It can work in a stock like Microsoft where it's just pointing us in the right direction and keeps going up and making new highs.
Dan Ferris: Yeah. I'm just looking at a quick chart of Crowd, of C-R-W-D, and from about – it was $95 in January. I don't know when you guys picked it. It's about $192 now. Not bad.
Marc Chaikin: Right. They say, "It's better to be lucky than good." Sometimes if you've just got the odds in your favor, you can really ride a crest and that's what's happening. It's also happening in Adobe, by the way.
Dan Ferris: Oh, Adobe.
Marc Chaikin: We – yeah. We turned bullish on Adobe last November, so a year ago. Adobe is – again, talk about a little bit of luck. They really have done a great job of incorporating AI into their software. So the initial wave in Adobe was based on fundamentals and acquisition that they were making. The second wave, as it stayed bullish this whole time, is I think based on the enhancements to their product suite with AI. So these are examples of stocks where it's not just a six-month trade, but where the Power Gauge gets you into something and then the market takes over. Some of these positions can turn out to be big, big winners. You notice these are not in the small-cap space.
Dan Ferris: No.
Marc Chaikin: It also works, but it works on steroids.
Dan Ferris: So I'm looking at the Adobe chart and just really roughly. I don't know what your guy's price was, but just say around $330 or $340 or something like that in November and it's $587 now.
Marc Chaikin: Exactly.
Dan Ferris: So you nailed that one.
Marc Chaikin: I look at point and figure charts sometimes to get targets and the point and figure target on Adobe is slightly north of $700, which interestingly once you get up into these telephone-book numbers – in the old days they split stocks. So we don't see very many stock splits anymore, as you know. That's only a 20% move. Think about it. You get from $580 to $700, and it's really just a 20% move. Entirely possible if we're back into a bull phase, which I think is where we are right now.
Dan Ferris: Yes. There's no denying that 2023 has been, let's just say, really hard on the bears despite some recent action even since July or whatever. Just overall it's been rough on the bears.
Marc Chaikin: Again, it depends what you're bearish on. A lot of these folks were bearish on tech because of interest rates and potential for P/E ratios to compress... And that hasn't worked out particularly well.
Dan Ferris: Right. Lots of folks talking about a recession next year, Marc. Do you care?
Marc Chaikin: Of course I care, but I'm just not smart enough to know what constitutes a recession anymore. When I started out at Wall Street I was very fundamentally oriented. The one group that I always avoided were economists. They used to say if you laid all the economists in the world and they still wouldn't reach a conclusion.
Corey McLaughlin: You've said that before, Dan.
Marc Chaikin: Yeah. Really? Oh, cool.
Dan Ferris: All the world's economists laid end to end.
Marc Chaikin: It may be that we've been in a series of rolling recessions in various sectors of the economy. I think and we'll only know this in retrospect, I really believe that it's a different market. That's – John Templeton said that's the most dangerous thing you can say in Wall Street. It's going to – this time is different. But because of technology I think that we're seeing productivity enhancements that defy description based on the old concept of manufacturing economy going into a recession or consumer stopping spending, which is always possible.
We're in such an incredible time and AI is just one manifestation of that, but it's a big one, that productivity enhancements could mean that we've already seen the recession and we're now in a rowing recovery. I just don't know, which is why I like to rely on things like momentum trends and the Power Gauge because I'm just not smart enough to know about a recession. By the way, people have been talking about a recession now for over 12 months.
Dan Ferris: Oh, yeah.
Marc Chaikin: So stop clock is right twice a day.
Dan Ferris: That's right. I stopped talking about it some time ago because I realized I was never going to get it right. So we'll have one sooner or later because we always do, but you can't catch me trying to predict it anymore.
Marc Chaikin: What do you think about the notion that maybe we really are in a different world with 24/7 information, runs on the bank possible with just your iPhone and productivity just going off the charts in terms of software enhancements and so forth?
Dan Ferris: I probably don't think that anything is terribly different. I think we do live very differently and we will continue to do so. I also think AI is software and it will enhance every piece of software that it can possibly enhance on the face of the earth. It's Internet 2.0 is really what AI is. That is not another version of the Internet, but the next gigantic, absolutely pervasive, all-consuming innovation. software ate the world what AI is going to eat software. I have no trouble believing that.
Marc Chaikin: I agree. I'd call it the icing on the cake. Of course between the Internet and AI, you had cloud computing and that's really the glue that ties this together. That's the DNA thread and that's where AI comes in because you've got all these data-analytics companies using the cloud and people moving their software into the cloud. That's where AI is so applicable. So interestingly, just to give a little historical perspective, back in the [inaudible] when I was, quote, unquote, retired, I got interested in neural networks and artificial intelligence. The chips to do that were just off-the-charts expensive.
You needed [inaudible] type super computers. Then I found a company called Nvidia. And they were using something called GPU, graphics processing unit. And I could have bought GPU that's the equivalent of all the computers at IBM for about $8,000 or $9,000 in 2003. But there was no software that it could run on. In other words, you had the computing power, but you didn't have the software. Now you have both. I think that's where this whole convergence of technology data and machine learning comes in. I think it's going to unleash unbelievable advances in medicine and data analytics for retail and so forth and self-driving cars eventually because that's what you need to get this next generation of enhancements into the marketplace.
Dan Ferris: Yeah. I have no trouble believing that. My current view though overall about whether or not the market is different this time is really ruled these days by this idea that I've got a hold of that we just don't realize how much zero percent and very low interest rates for that long, let's just say starting 2008, but you could argue before that. But at least since 2008 I don't think anybody knows how much we don't know about how pervasive the effects of that were and how it got into absolutely every nook and cranny financial, economic, and otherwise of our world. I think we're going to learn –
Marc Chaikin: I agree. We're starting to see some of that in the marketplace, companies that took advantage of zero interest rates to float shorter-term debt. That's now going to have to be rolled over, are in a tough position. That's why one of the factors in the Power Gauge is debt equity ratio. Another one is return on equity. So if you just screen the universal stocks and eliminated companies with very high debt equity ratios and low return on equity, you'd eliminate a lot of the problems that you're going to experience going forward. So I agree with you 100%. The question is... is there a ticking time bomb like the credit-default swaps in 2008, which is going to result in a big existential moment for the financial markets or have analysts factored all of this in to their learnings forecast and their projections, not in every case, but in some cases?
Dan Ferris: Right. I don't know. Maybe I'm too much on the short-term action here, but with rates and yields rising as fast as they did and then bouncing off of 5%, lately, and with small caps behaving as horrendously as they have, those small companies employ half of the country even though the market cap of it is less than 10%. They employ half the country. It concerns me, and I think there's certainly trading opportunities there on both sides. There are reasons to be cautious, but I agree. Look, guys like us wind up on the same page.
We worry in big ideas and we invest from the bottom up. So many guests who have had a lot of success over a long time, they do the same thing. Everybody worries top down and invest bottom up. They have their system. They stick to it. They worry. You and I are worrying aloud about these things, but you're not going to go home and say, "The Power Gauge is going to stop working any second. So I'm going to stop using it." You're not going to do that. It'd be foolish.
Marc Chaikin: Yeah. Actually, you've just described the methodology that is near and dear to my heart. The only modification I would make is that industry relative strength is really a macroeconomic representation of what the investment world is seeing and thinking. So I like to do top down in terms of finding the strongest industry groups based on the Power Gauge interestingly and then bottom up to find the strongest stocks within those groups based on the Power Gauge. That's what got me to Adobe and Microsoft and the homebuilders for a very big run earlier in the year. So I think we're talking about a very similar process. I like to filter my universe down to the strongest industry groups on both a technical and the fundamental basis. The Power Gauge ratings for industry groups and sectors accomplish that pretty easily.
Corey McLaughlin: Hey, Marc. That gets me to a question that was just on my mind. You're mentioning top down, bottom up. I think the last time you were here with us earlier in the year you had mentioned that you just turned bullish, I believe, or maybe a couple of months before that. Just curious what your general outlook is now. You mentioned you think we're in a bull phase here, but what do you see generally now?
Marc Chaikin: I think that we're going to rally into year-end and maybe a little bit more. Then we have to see what earnings estimates look like. We just had a breadth thrust in the market. It was coined and researched by Marty Zweig a long time ago back in the '70s. So it stood the test of time. It's similar in a sense to the breadth thrust we had in January which is part of what convinced me that the bottom had been seen. That breadth thrust was basically the five days through Friday, November 4 or 3. And we've seen a continuation of that, which is surprising a lot of people.
So you've seen shorter-term strength on top of the breadth thrust and typically in a preelection year the market is very strong and to year-end. Interestingly, I was looking for a V-shaped bottom in October. It came later than I expected, but nothing is ever perfect in the market. So you've got a lot of people who are looking for a retest of the lows. Here's an interesting way to look at the market that I don't think you'll hear anybody else talking about... Equal Weight S&P. So everybody is focused on the "Magnificent Seven" stocks that they claim are driving this whole market. And to an extent, they're right.
If you look at the RSP, which is the equal-weighted ETF that monitors the S&P, it was down about 15% or 16% when we made the low a week ago in the cap-weighted S&P. So you could argue that there's been a correction going on all year in the 493 stocks that are not in the headlines every day. Interestingly, the RSP using a weekly time frame work reached an extreme oversold level. In my work, that's associated with bear market lows. So you could argue, as Dan pointed out, small caps have been in a bear market. It's been ugly. You could argue that the other 493 stocks in the S&P have, in the main, been in a bear market. So, pretty tough to put labels on a market that's that bifurcated. But I do think we're going to rally into year-end. My initial target of 4,600 was reached in late July. I thought maybe we could extend out, but I'd be thrilled if we're back at 4,600 at the end of the year.
Dan Ferris: From below 4,400 where we're talking right now?
Marc Chaikin: Yeah. Exactly. Forty-four hundred is a sticking point on the upside because it's the previous-rally peak. So we've got to get through that. If we do and remember, we've got a dysfunctional Congress. So we've got a budget crisis coming up. Nothing is straight up anymore, for sure. There could be some choppy action around Thanksgiving when that whole budget debate gets heated up again. We always get through those and I think we will this time.
Corey McLaughlin: You think we'll agree to spend more money again, everybody will agree to spend more money again?
Marc Chaikin: We always spend more money. That's the way of the world. They used to say you didn't want to be invested in the stock market in a year when there was a budget surplus. I don't know if that applies. We're hooked on deficit spending. Is that good for our grandkids? No, but it's just a fact of life.
Dan Ferris: I'm just going to guess that if the three of us got together and worked very, very hard we couldn't change it if we spent every minute of the rest of our lives trying to.
Marc Chaikin: Exactly. Times a hundred. I don't know how you'd do it. That's really the conundrum in the market. Interest rates at 5% put a real strain on the budget deficit because the cost of servicing the debt is so high. To be fair, I don't think the stock market can stand up on two legs with interest rates above 5% on the 10-year. So to me, bouncing off 5% was a really big deal because above 5% I think you do have effects at the top line and the bottom line that are not pretty. So I'm very hopeful and for a whole series of reasons that 5% is the likely ceiling in which case I think a bullish outlook is justified.
Dan Ferris: So it sounds like it would bother you if we steepened, if the curve steepened from here as it has been for a little bit? In other words, we inverted – yield curve inverted and now it appears to be in the process of un-inverting. Reverting? I'm not sure what the right word is.
Marc Chaikin: Reverting. Yeah. There's an interesting indicator. Goldman Sachs has a Financial Conditions indicator and it's really good at measuring market psychology, actual bond prices, and other variables. It peaked initially, or it bottomed out the end of July. And it was in a straight uptrend, which means financial conditions were tightening up until a week and a half ago and then it just plummeted. So there are a lot of variables in this equation. Some of them are psychological... what's the Fed saying versus what they're doing. Some of them are real. But what encourages me is that mortgage rates dropped so quickly. Obviously, homebuilding is critical to the growth of the economy and we need to get on with that for all these people who are in the marketplace for homes but can't afford them right now.
Dan Ferris: Yeah. I saw affordability is basically at something – I think it was 2005 or 2006 levels or worse.
Corey McLaughlin: Yet real estate still seems – the market still seems so tight. It's very local, but had a neighbor that their house was on the market for less than a day the other day. It was – because of that supply, I guess, that long-term trend we've been talking about for a while.
Marc Chaikin: Well, there's no inventory and anybody who's got a 3% mortgage is going to be pretty reluctant to sell that house and then buy something new at a 6% mortgage or more. It's crazy what that does to your monthly cash flow. So, yeah. There's no supply to speak of. Houses get gobbled up, which is why the homebuilders have to continue to plow forward and hope that interest rates drop and the demand is there clearly. There are millennials who are in the marketplace for homes, but it's just hard to afford them right now.
Dan Ferris: Yeah. That late-October bottom you mentioned, which was peak in financial conditions, just looking at D.R. Horton, it's up 20%, 21% from there, just snapped right back 20%.
Marc Chaikin: Like a rubber brand. Lennar as well. Those are my two favorites in the group because the Power Gauge is bullish on both.
Corey McLaughlin: So what do you think would happen to certain companies or the market if the 10-year went above 5% because I've seen some other people say when inflation is this high or above 2%, 3% it's been historically – before the last 15 years, it was normal for the 10-year to be above 5%, like 6%, 7%, something like that.
Marc Chaikin: Good question. I would not like to see the 10-year above 5%. I think the stock market would react very badly to that. The combination of the algos hitting the market, demand pulling back and PE ratios contracting. The interesting thing here is that third-quarter earnings are at record levels. You'd never know it based on what people are saying and part of that is productivity. In the S&P 500 third-quarter earnings are at record levels. Now a lot of that are the Magnificent Seven stocks who are just cash-flow machines, but it's a fact.
So I just don't know that you can use analogs anymore because of so many different variables that are in the mix... like 24/7 access to your bank accounts and the ability for people to do what's called at-the-money offerings. Companies can just sell into the marketplace when they need to raise capital if their stock is strong enough or not weak enough. So it's a different market to me. They say once the yield curve goes positive again that you then get another leg down in the market. I don't know. Maybe.
Dan Ferris: Neither do I.
Marc Chaikin: I don't think so. I just don't. I do think though that credit conditions are such that you could easily see the 10-year pull back to 425 and that would fill a big year-end rally.
Dan Ferris: Yeah. You're not the only person talking that way at all. It certainly wouldn't be unusual.
Marc Chaikin: They don't get the headlines. So that's what's interesting. We really have, what I call a negative clickbait mentality, not just in the Facebook and Google and Huffington Post world, but in the stock market. They just don't want to put optimists on TV because it's not controversial. So you don't get the bullish picture very often if you're watching CNBC. Maybe Dan Lee or there's one bullish guy out of a whole crew of naysayers.
Dan Ferris: No kidding. For a long time it was the opposite, wasn't it? For a long time you were basically fired for a bullish view if you were a talking head or a bearish view, I mean.
Marc Chaikin: Right. A bearish view. Now it's all about clicks. So clicks on the website. It's an interesting world we live in. All the more reason that you need something like the Power Gauge to just cut through the clutter. Those were some of our original marketing messages. Just cut through the clutter and solve the information overload problem with something that is reliable and not going to work all the time, but it's going to work over time. That's been the case now for 12 years since it's been in the marketplace.
There's so many conflicting views out there. They get amplified. When you see, there can be a negative pattern in the stock market that I studied 35 or 40 years ago. Now when it triggers, everybody is tweeting about it and blogging about it. So that's why I say it's instant access to information and I just think you have to go with the tried and true when you're investing and avoid the losers and back up the winners.
Dan Ferris: There we are once again. I've been doing this since 2018 and we've interviewed a couple of hundred people. Lots of traders, lots of folks like yourself who have been around for a while and seen a few things. They often wind up right where you just said... tried and true, stick to your system, cut your losers, back up your winners. The amount of times I've heard that – I wish we could keep a running count of the number of times we've heard this from different people. It just comes again and again. I feel like we're writing a Market Wizards book in real time with these interviews.
Marc Chaikin: I was just going to refer to Market Wizards. Jack Schwager nailed it in the first one. Every one of those people that he featured in the first book had a system. They were all different. They stuck to it and they implement it every day, day in and day out. That's how you make money on Wall Street. Not going to be right all the time. You're going to have some rough years, but you've just got to believe in what you're doing. Every day just implement that strategy.
Dan Ferris: Right. Your system has to work in the first place. It's got to be worth doing, but once it is trying to second guess it, it's disastrous. Schwager has those stories, too.
Marc Chaikin: Exactly. Well, someone once said if you use the right money-management scheme, risk-management scheme, you can make money by flipping a coin in the market and the right money-manager scheme is ride your winners and cut your losers. So flip a coin, buy a stock. If it doesn't perform, get it out of your portfolio. If it keeps going up, then stay with it and maybe buy more on a pullback. That's a little bit flip, but clearly it works.
Dan Ferris: Well, no. Right. It's – well, it's only a tiny bit flip, Marc, because you and I both know that people are obsessed with the entry. Everyone is obsessed with the entry. Few people talk enough about the exit. Nobody seems to talk about risk control and position sizing and all the rest of it being more important than the entry and just the discipline to stick to that like glue.
Marc Chaikin: Have you ever read those books on risk control? There's a guy named Van Tharp, who I think was actually involved with Porter back in the '90s.
Dan Ferris: Early on.
Marc Chaikin: Then has written a fabulous book on risk control. It's dry as dust. A friend of mine co-wrote it with him. Nobody reads that stuff.
Corey McLaughlin: Right. It's very hard to conceptualize in your own head.
Marc Chaikin: Yeah. Position sizing so critical. You make outsized bets because you really believe in the story more so than some other bullish Power Gauge rating. It never works. It didn't work for me and I do it occasionally. I fall in love with a stock with a bullish Power Gauge and take too big of a position relative to my capital and it somehow never works.
Dan Ferris: There you go. Go ahead, Corey.
Corey McLaughlin: I was just going to say one thing about the Power Gauge that hit me when I first – a couple of years ago when I first saw it was like you were mentioning CrowdStrike and Adobe and the bullish Power Gauge range, which by the way it's so simple. If nobody has tried it, it's so simple to follow, this Power Gauge, and make sense of it. Like you said, you have a rating on each stock and we could infer and people will infer any sort of – in the market will make any kind of reason up for why stock is performing the way it is.
This really just breaks it down to the numbers, which is at the end of the day, if you're interested in making money, which you want. I remember a couple of years ago when we were talking, I was just clicking through and there was a bullish Power Gauge rating on some Greek shipping company. I was like, "Why is that the case?" Then you connect some dots and make some sense of inflation at the time and supply chain issues and all of that stuff. So anyway, that Power Gauge is also useful just to look at what may be happening in the market and connecting it with the price action, I would say. I don't know if that was an intentional thing that you did way back when, but that's what hit me when I first saw it.
Marc Chaikin: Well, Corey, it all ties back to fundamentals. I like to say that fundamentals drive the market, but technicals drive the market to extremes. So you have to combine fundamentals and technicals and the place where that really shows up is people who are persistent bottom fishing. I hear this all the time with Disney. "Isn't Disney a buy here?" I say, "Well, if you like bottom fishing it is. Bottom fishing is probably the most expensive sport in America." That's something I've never been good at, although I've tried it. A lot of this is "Put your hand on the stove as a child and get burned and you'll never do it again."
So a lot of what's in the Power Gauge is basically positive, but what it leads to is conclusions that sometimes go against what you'd like them to be. The Beyond Meat craze, the – you name it – it's going to happen in AI with some of these overblown evaluations. You just need a reality check. Just think of the Power Gauge as a reality check. I think you've nailed its usefulness.
Dan Ferris: I feel like we should tell the folks where they can find out more about the Power Gauge because we've mentioned it so many times. What's your website, Marc?
Marc Chaikin: It's ChaikinAnalytics.com.
Dan Ferris: There you go. So, ChaikinAnalytics.com. Sounds good. It's actually time for our final question, which you've answered before. I hope you forget it because it works best that way and it's the same question for every guest no matter what the topic, even if it's a nonfinancial topic. Same final question. That's simply if you could leave our listeners with a single thought today, what would it be? If you've already said it, feel free to repeat it.
Marc Chaikin: No. I'm going to go in a different direction. Love thy neighbor and dialogue. We're in a really tough time in America right now where everything is so polarized. And no matter how much money you make in the market, if you can't have a Thanksgiving dinner with discourse because people don't talk to each other in the same family, it's not worth it. So I'm going to go in a very holistic direction with that one.
Dan Ferris: Very good. Previous guests have taken a similar direction, but I don't think I've heard that one. Thank you for that. That was great. So Marc, great to talk with you as always. I know – I certainly hope we'll be doing so again soon.
Marc Chaikin: It's always a pleasure. You guys are doing the investment community a real service because to get an in-depth airing of your ideas is unique in this clickbait world. So thank you, guys. Really appreciate it, Dan and Corey.
Dan Ferris: You bet. I'm sure you've had your share of experiences on TV where they give you two seconds to talk and cut you off and everything else. I've had those experiences. They're not pleasant. I don't like them.
Marc Chaikin: No. Even worse is going into New York and finding out that Fox has canceled you because there's a breaking news story.
Dan Ferris: Right. You fought the traffic for an hour and now you're canceled. Yep.
Marc Chaikin: Right. This is much better. Be well.
Corey McLaughlin: Thanks, Marc.
Dan Ferris: You too, sir. Thanks.
Marc Chaikin: Thank you.
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Hey, it's always great to talk to Marc Chaikin. Before I say anything else, though, I want to say 2024Prediction.com. At that website, you can sign up for a presentation. Marc is not the main guy – the main guy on that is going to be our friend, Greg Diamond, who's been on the show before. Great trader. Speaking of great traders, which we did during the interview, Greg has something very serious to talk about. When he gets a signal in his trading system, he's sending me e-mails and calling me up and texting me. It's intense. I think he's got a big one to share in an upcoming presentation that you can sign up for at 2024Prediction.com.
Corey, maybe I'll start with you and ask you what – you got a takeaway for me from Marc?
Corey McLaughlin: I just love listening to Marc talk about the markets in general. Every time I listen to him or talk to him, you just feel like you're talking to some yogi of the markets and you are really. He's been around for – doing Wall Street and trading for almost 60 years, I think. So he's seen it all literally and I think you could hear that from him. Some of the best traders just say, "I don't know why this would be happening, but I'm just going to manage my risk and move on."
Dan Ferris: Totally agree. Completely agree that that is the takeaway. It's like every word – every sense that comes out of his mouth he could say – at the same time he could say, "I've been there and done that. Listen to me, please." He drops another nugget of wisdom. Believe me, if you can do it, Marc has probably done it or seen it done right next to him with one result or another over the years. You can just hear it in his voice as well as the logic of his words. When he says, "I just stick to my system," and then he'll say, like you say, "I don't know." People are afraid to say they don't know in this world especially when you put a microphone in front of them and say, "This person is important. Listen to them."
They feel – they don't want to say, "I don't know," but people who have been there and done that like Marc say "I don't know" all the time. So I agree with you. It's funny because there's certainly a lot of that type of wisdom in print and the impact isn't always necessarily as great as sexier-sounding stuff like, "Buy this now, sell this now," etc., etc. It's more important and it's more valuable. We got to find a way to make Marc Chaikin sexy, man.
Corey McLaughlin: Wow. I don't know if I can do that one, but he does know what he's talking about for sure. I will say just about you mentioned him and Greg's video event coming up. I know Greg obviously comes at it from a technical analysis perspective. A lot of times his views align with Marc's views. I don't know if that's exactly the case this time, but I'm curious to hear if that's the case. I always say when I see different people who know what they're talking about and their views align at the same time, that's a time to pay attention and at least hear about.
Dan Ferris: Yeah. When a guy like Greg and a guy like Marc agree, I just, knee jerk, throw a little something at the trade right away. I don't even think about it because it's a little something. You don't want to knee jerk serious money, a little something meaning what I can afford to lose. When those two are on the same page because they both have great tools and they're completely different tools. Then when they line up you're like, "Woah," but yeah. I enjoyed that as always. When I talk to Marc, it's just – he's one of those people you got to talk to the same way you need to read good backs over and over.
Corey McLaughlin: Yeah. I always feel better after listening to him talk about the markets. He speaks with just such like a confidence and just an easiness about it all. I'm glad I was in on this one.
Dan Ferris: Yep. He's avuncular. All right. Well, that's another interview and that's another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as we did.
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