On this week’s episode of the Stansberry Investor Hour, Dan invites an incredibly special guest onto the show.
He’s spent 50 years on Wall Street… survived 9 bear markets…
He’s appeared numerous times on Fox Business and CNBC’s Mad Money – where host Jim Cramer said he’s learned NEVER to bet against him…
The one and only, Marc Chaikin.
Marc has created one of Wall Street’s most popular indicators, the Chaikin Power Gauge, which has become industry standard, appearing in every Bloomberg and Reuters terminal in the world, used by hundreds of banks, hedge funds, and every major brokerage site…
During his conversation with Dan, Marc shares how lessons from legends like Warren Buffett and Seth Klarman led him to use a unique blend of fundamental and technical analysis to create his Chaikin Power Gauge…
Marc explains the key factors his indicators value most, how they’re weighted, and even a few sectors of the market – including some company names and ticker symbols – that the Chaikin Power Gauge indicator says are screaming buy right now.
Plus, Marc explains how you can try the Chaikin Power Gauge, 100% free, just by signing up for his upcoming webinar at www.2021prediction.com.
If you’re serious about managing your own investment portfolio, this is an interview you don’t want to miss.
Listen to Dan’s conversation with Marc and more on this week’s episode.
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.
2:23 – Dan shares a startling quote from Jeremy Grantham… “My guess is in the next few months the termites will get to the rest of the market…”
5:10 – This week’s quote comes from Lacy Hunt… “We simply do not have the resources to fund ourselves and to obtain a higher standard of living, which means that the economy will falter as we go forward, inflation will move lower.”
10:04 – “I’ve felt for some time, and felt, and felt, and felt… that we’re in for one of these big episodes, whether it’s a bear market or some kind of huge crash in some important market like the bond market or the stock market or both… I’ve felt for some time that we’re there…”
14:14 – This week, Dan invites Marc Chaikin onto the show. Marc has spent 50 years on Wall Street as a trader, stockbroker, analyst, and head of the options department at a major brokerage firm. Marc founded Chaikin Analytics which delivers stock analytics to investors and traders and has helped develop computerized stock selection models and technical indicators that have become industry standard.
16:28 – Marc shares the story of how he started his career as a stockbroker on the very day a 9-month bear market ended… “For the first two and half years of my career, everyday felt like an uptick.”
20:49 – “Where I’ve created a very profitable niche, is to say fundamentals drive the market… So, I am a strong believer that the sweet spot for investors is a combination of fundamentals and technicals…”
24:34 – Marc explains how the Fed’s commitment to keeping short term rates at zero means that, “P/E ratios, in theory, can continue to stay up at lofty levels…”
28:04 – Dan asks what investment trends Marc is most interested in today… “I think there’s two areas of the market where there’s real opportunity. One is anything involved with digitization… The second area is anything to do with the infrastructure bill…”
29:48 – “There’s an interesting company I’ve been following for a year, called Quanta Services, the symbol is PWR…”
33:14 – “There’s another area of opportunity… Cybersecurity is a major growth industry right now. You need a way to differentiate between the cyber stocks that are going to prosper going forward and the ones that are either overvalued or behind the curve…”
35:38 – Marc explains what goes into his Chaikin indicators… “When I built the Chaikin Power Gauge, which has been in the public domain now for 10 years, I drew on everything I had learned from these very successful fund managers…”
41:34 – Marc tells Dan the story of how a money manager’s suspect advice for his wife inspired him to create some of the financial tools he still uses today…
47:27 – The Chaikin indicators have garnered a lot of praise and attention… “One point of validation, in 2014 the NASDAQ came to us through a former colleague of mine, and said, we’ve been following the Chaikin Power Gauge and we’re wondering if you would go into a project with us…”
50:37 – Marc explains how you can try the Chaikin Power Gauge, 100% free, just by signing up for his upcoming webinar at www.2021prediction.com.
53:42 – Marc leaves the listeners with one final thought, “In order to make money in the market, you have to have a plan and you have to stick to it, through thick and thin. If you use the right tools to create that plan, you can confidently invest in the stock market…”
56:20 – On the mailbag this week, one listener writes into Dan with high praise for last week’s guest, Hugh Hendry… Another listener asks what Dan thinks of the latest inflation numbers… And another listener has a question about one of Dan’s favorite stock picks. Dan gives his take on these questions and more on this week’s episode…
Announcer: Broadcasting from the Investor Hour studios and all around the world, you're listening to the Stansberry Investor Hour. Tune in each Thursday on iTunes, Google Play, and everywhere you find podcasts for the latest episodes of the Stansberry Investor Hour. Sign up for the free show archive at investorhour.com. Here's your host, Dan Ferris.
Dan Ferris: Hello and welcome to the Stansberry Investor Hour. I'm your host, Dan Ferris. I'm also the editor of Extreme Value published by Stansberry Research. Today, we will talk with Wall Street veteran – 50-year veteran – Marc Chaikin. This week in the mailbag, comments about last week's guest, Hugh Hendry, and a question about Altius Minerals, a company I've discussed many times. Remember, the mailbag is a conversation so talk to me. Call up and leave me a message on our listener feedback line, 800-381-2357, and hear your voice on the show. In the opening rant this week, I'll try to reconcile some competing viewpoints on inflation and whether or not stocks are really risky right now. That and more, right now, in the Stansberry Investor Hour.
I was thinking about this week's rant and just running through a bunch of numbers, and charts, and articles, and things. The first thing that really caught my eye was an article on Bloomberg. They often check in with Jeremy Grantham from the firm GMO. GMO.com is a pretty neat website. They have all kinds of cool research there from all kinds of different people. So, recently, Jeremy Grantham, who is 82 years old now, and he's seen multiple stock market bubbles come and go. The firm is known for their analysis of market bubbles. He says, "This is the third or fourth I think genuine Real McCoy," I think he called it, "bubble of his career."
He's saying – the quote that they published in the Bloomberg article I'm looking at – Grantham says, "My guess is in the next few months the termites will get to the rest of the market." He was talking about how he says, "U.S. technology stocks and the blank-check company craze, those have both peaked and the broader market is vulnerable." Because that's the way it tends to go. So, the dot-com crash was a crash of dot-coms and technology then gets into the broader market.
The same with the financial crisis. It started out as subprime mortgage crisis and all the subprime mortgage companies got hammered. Then the thing just bled into the financial system and the rest of the stock market. So, he's saying, maybe we're going to get that phenomenon starting with the blank checks and the tech stocks. He says, "My guess is the next few months." Now, when people make those kinds of predictions – he's guessing, obviously – you can't take them too terribly seriously but I noticed that he said, "In the next few months" not over the next six to 12 months. You'll hear me, I'm always hedging that way. I always say, "Over the next six to 12 months." [laughs] But he's more specific. He's kind of reining in the time frame there. So, we'll see. We'll see. For me, it's confirmation bias because I've been bearish for a while here. We shall see.
So, that's my first – it's not a data point – but we'll call it an anecdote or just first observation. The second one is in the numbers that came out recently, the Citi Inflation Surprise Index hit a new record high in May. They publish the numbers back to like 2005, I think it is. You know, it's higher than any time in that whole time frame. So, last 16 years or whatever. So, OK, maybe inflation is a problem, maybe. Then the next thing that caught my eye and my ear is actually the quote of the week. I'm going to mash the quote of the week up in with the rant this week... I just have to do it. It's Lacy Hunt, an economist who works for Hoisington Investment Management. He's been right all along for decades now. Every time somebody says "inflation" he says, "No. the fundamentals indicate deflation, lower bond yields" and of course he's been dead right on that because they've just gone lower, and lower, and lower.
Hunt says, "We simply do not have the resources to fund ourselves and to obtain a higher standard of living which means the economy will falter as we go forward. Inflation will move lower." OK, so inflation will move lower, not higher he says. But we're seeing – if you look at all the indicators, pricing at all kinds of levels – retail and manufacturing – all the pricing is moving higher because there are shortages of everything.
The shortages have impacted my life. I mean, we're all COVID statistics. My wife and I are COVID statistics. We thought we were moving into a new house in March and cross your fingers that we'll be in there by June 9 – I think 11 at the latest. But I think June 9 is the day, finally. It was all a big holdup – we finally found out, no one would tell us – we finally found out because they couldn't get appliances. We found that out, then a couple weeks later I read an article in I think it was Financial Times or someplace, "homebuilders are having trouble getting appliances." Right?
So, maybe this inflation push is a function of where we stand in the playing out of the COVID lockdown scenario. It shut everything down, that's created shortages, people are getting back to work, they're getting kind of back to normal so demand is up, prices are up, restaurant prices are up. I saw another article on that today. Maybe that's the dynamic. Maybe just maybe Lacy Hunt is ultimately right.
Because, you know, I saw another chart that compared inflation now. It said maybe this inflation we're seeing at this moment is similar to what followed World War II. Right? Inflation spiked up, same kind of thing. All kinds of things were rationed here in the United States when all the resources were put into fighting the war and all the servicemen were overseas. Everybody came back and the capacity was still geared up for war. So, there were shortages, prices went up, inflation soared. But then it fell. It was a spike over a couple of years and then fell back. Maybe this is like that.
We've heard this analogy of the COVID episode to the World War II right. It's like we're fighting a war, "The War Against COVID." Maybe the economic implications are similar and maybe all this talk about inflation – which is a pretty new thing to take inflation seriously. It hasn't been taken seriously for a long time. Now, it's starting to be taken more seriously but maybe that, too, is a temporary phenomenon. I know what all the – I won't call them "keyboard cowboys" there's a lot of smart people that I'm thinking of right now. They're going to say, "Oh, Dan, you know the CPI is fixed and it's not calculated right and they leave out energy and other things."
Yes, I understand all of that but I'm looking at things like equity returns and bond yields. You know, bond yields like at 1.5% or 2%, whatever the 10-year is now, I don't know what it is. I don't keep up with it from day-to-day. But we all know it's extraordinarily low, historically speaking. We bounced off like what Jim Grant calls "5,000-year lows" right? Maybe bond yields are right. Maybe that really is the smart money talking and maybe Lacy Hunt is still right and will continue to be right.
There's another discussion behind this one that we've had again and again about the role of the Federal Reserve and what it really means for them to load their balance sheet up with now seven trillion of mostly Treasury securities, mortgage-backed securities. I think they own a fifth of the mortgage-backed securities market now. What does that really mean? Why is it not inflationary? Aren't they printing money and buying assets? Well, they technically are, but the effect is not inflationary as you would think. It's a much more complicated discussion than I ever thought. People who say, "Well the Fed prints money and that's inflationary," they've been dead wrong. There's a lot to think about here.
I've felt for some time – and felt, and felt, and felt for some time – that we're in for one of these big episodes whether it's a bear market or some kind of a huge crash in some important market like the bond market, or the stock market, or both similar to the 2008 financial crisis. I've felt for some time that we're there. This influx or this confluence of things like really low bond yields, and people talking about higher inflation, elevated equity prices, I've just thought, "Isn't this just what the top looks like?" Yet, you know, we haven't gotten a big top.
So, I hate to leave you without a conclusion but I have to because I don't have one. I just noticed that there are a lot of conflicting viewpoints at this moment. That makes sense. To me, that may be a toppy thing. I think at the top you start to hear some voices like Jeremy Grantham going, "This is the top and we've seen it four times in my lifetime." Then you also hear really smart people like Lacy Hunt saying, "Look, inflation is going to move lower and bond yields are going to stay low." So far, that has meant that stock prices kind of stay high.
It doesn't mean that necessarily, right? It doesn't mean that necessarily. So, we'll see if this is really it, if this is really the toppy moment I've been saying it is for like four years now finally. We'll see what the stock market looks like over the next – as I say – six to 12 months. And I still own puts. I do. I still own puts. You know, they don't perform well... they tend to expire worthless, but I still own them. You know, it's a tiny position. You put a tiny amount of money into puts – if you do it at all. You can do what you want. I'm not telling you – but I put a tiny amount of money into puts and I think, "Well, it goes to zero" but it's like an insurance policy because if we get the kind of crash that would be associated with the sort of bubbly moment we're getting right now, that's when you puts would go – who knows what – 50 or 100 times or something. You'd have a bunch of cash to invest with stock prices down low. Hopefully, that's the way it works out. We'll see. Or not. Or, you're just insured and you pay your premium and away you go.
I'm going to leave you right there. All right, let's talk with today's guest, Marc Chaikin. He's been around Wall Street for five decades. He's been there and done that and he's created a really cool system that combines fundamentals and technicals. We'll talk about his career, and we'll talk about his system, and we'll do all that right now. Let's do it right now.
Dan Ferris: If you listen to this podcast, you know that our mission is to help you become a better investor. At the start of every show, I tell you I'm the editor of Extreme Value published by Stansberry Research but I always stop short of explaining it. Well, I spend hundreds of hours each month poring over balance sheets and SEC filings to find stocks trading at huge discounts to their true net worth giving subscribers a large margin of safety on their picks. Look, I'll be honest with you, Extreme Value isn't for every investor and it's not in everyone's price range. But over many, many years, it's been proven that our method works. Extreme Value picks have earned us one of the most impressive track records in the industry. Learn more and purchase my Extreme Value newsletter right now at investorhourdan.com. That's investorhourdan.com. Check it out.
Dan Ferris: Today's guest is Marc Chaikin. Marc Chaikin has spent 50 years on Wall Street as a trader, stockbroker, analyst, and head 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. Wow, we got to talk about that. Marc, welcome to the show.
Marc Chaikin: Dan, it's good to be with you.
Dan Ferris: So, 50 years, you've seen a lot of things come and go on Wall Street.
Marc Chaikin: I have. Most importantly, I've lived through nine bear markets and sort of know what they smell like, know what they feel like, and have learned how to deal with them.
Dan Ferris: Yeah, so what do you think the prospects are for a bear market happening any time soon?
Marc Chaikin: Very unlikely. We've still got this coordinated fiscal and monetary stimulus going on to get us out of the deep hole that the economy went into post-pandemic or during the pandemic. There's so much cash in the system and earnings are so good that it's hard to envision a bear market anytime soon.
Dan Ferris: Yeah, that sounds reasonable to me. I'm curious, how did your career start? Were you one of these guys who was buying stocks when he was 10 years old? Or, how did you start out?
Marc Chaikin: No, I actually started out working for a commercial lender. They were called Factors back then. We were lending to garment center companies so I learned how to read a balance sheet, and learned about shipping invoices, and basically got excited about the stock market because all the partners in the firm were trading the market. So, I thought, that's a heck of a lot more interesting than lending money to small retail operations. So in 1966, I went into the training program for a major brokerage firm Shearson Hammill at their main office at 14 Wall Street. And got registered as a stockbroker on October 7 of 1966. That was the day that a nine-month bear market ended. For the first two-and-a-half years of my career, every day felt like an uptick.
Dan Ferris: [laughs] That's a nice way to start out. Felt like a genius, huh? [laughs]
Marc Chaikin: I did. And I got to know the firm's analysts and the firm had a really fine research department. A lot of the analysts went on to start hedge funds and their own money management firms. But then, 1969 reared its ugly head and that's when a bear market began that lasted for roughly 18 months. Fundamental research was not as productive, to say the least, in a bear market as it had been in a bull market.
Dan Ferris: Did that first experience with the bear – let me back up a little. A lot of the people I interview here, some of them are younger folks and they say, "Well, I started out during the dot-com craze and I sure learned a hell of a lot in the dot-com bust." It sounds like you did a similar thing 30 years prior to that. Did that first bear market kind of reorient you and send you in a different direction?
Marc Chaikin: It really did and I might point out that in the dot-com bust – as I'm sure you know – value stocks actually did quite well. It was the tech bubble that burst.
Dan Ferris: Yeah. Yep. I was sort of born as a value investor during that time.
Marc Chaikin: Well, it served you very well. What happened in 1969, analyst would get excited about a stock that was selling at 100. At 80, they would reaffirm their bullishness, at 60 they would say, "Load the boat up. This is as good as it's going to get in terms of a buying opportunity." And then at $20, they would throw in the towel because there were tons of stocks that dropped 80% in that bear market. So, you know, sort of halfway into that cycle, I started looking at technical analysis based on a mentor of mine who had been using technical analysis for many, many years – decades actually – which made him a pioneer. I quickly came to the conclusion that a combination of fundamentals and technicals was the approach that would work for me. I've continued to do technical analysis research since that time which was well over 50 years. It's served me very well because no matter how good your fundamental research is, if the market doesn't agree with you, Dan, guess who wins.
Dan Ferris: [laughs] The market every time.
Marc Chaikin: A very humbling force.
Dan Ferris: It sure is. So, you came through that brutal, brutal bear market. I remember that's the one where Buffett said he felt like an oversexed man in a harem or something. You came through that. Has your strategy ever since then been focused on this, sort of, dual fundamental-technical idea?
Marc Chaikin: It has. The original technical research that I did was in the area of relative price strength. I built on and tested the work that a couple of pioneers, a guy named George Chestnut who did industry group relative strength starting in the mid-'50s. Then a PhD candidate named Robert Levy published a thesis on the relative strength concept of investing. That really intrigued me. The theory was and still is that stocks that have outperformed the market over the last six months will continue to outperform the market over the next six months. Where I've created a very profitable niche is to say that fundamentals drive the market.
So, I want to know the stocks that are best positioned fundamentally and then I want the market to confirm that. There's no better confirmation in the market than relative price strength. When you look at what the money managers – active money managers and this was before there were passive ETFs like SPY that basically attracted so much money – we still have a lot of active money managers and they're measured against a benchmark which is typically the S&P 500. So, any stock that's underperforming the benchmark is dragging down their performance and ultimately hurting their compensation. I am a strong believer that the sweet spot for investors is a combination of fundamentals and technicals.
Dan Ferris: You know, it's funny because I hear that a lot from people who've spent a lot of time doing fundamental analysis because they inevitably run into that period like you ran into in the '70s – or late '60s, early '70s. They always – the experience is kind of so gut-wrenching because everything that they sort of believe in gets turned on its head and it doesn't matter for some period of time whether it's 18 months or three years or whatever it is. Among several people, I know it's kind of a holy grail to bring these two things together and kind of smooth out the experience over time especially during those periods when fundamentals don't seem to matter much. And it's not just in bear markets, is it, when the fundamentals don't matter. On the upside, they seem not to matter as well. Isn't that so?
Marc Chaikin: It is. Let me give you an example. In 1973, you had what was known as the "nifty fifty." These were stocks that were "one-decision stocks." You'd buy them, put the stock certificate in a drawer and that will show you how ancient the concept is because I doubt that anybody has seen a stock certificate in 25 years. These were household names at the time like Xerox, Polaroid, Avon, Eastman-Kodak, IBM. These stocks went down 80% or 90%.
But let's look at a much more mundane company, McDonald's. McDonald's peaked at about $75 a share in 1973. The bear market low was probably $40. It took McDonald's nine years to get back to that 75 level – I'm sorry six years, through 1979. In that period, McDonald's reported 24 straight quarters of better-than-expected earnings. Their earnings per share went from $1.20 to $4.80 and the stock did nothing. You can sum it up in two words: P/E compression. From a very high P/E to 9 times earnings when nobody cared about the fundamentals.
Dan Ferris: Right. Of course, there was another pretty big fundamental that compressed P/Es in the '70s, too, wasn't there?
Marc Chaikin: There was, interest rates skyrocketing. So, a big problem for the market. That's another problem that we're not facing right now. With the Fed committed to keeping short-term rates at zero and the long-end of the curve pretty benign with a 10-year at about 1.58%. P/E ratios in theory can continue to stay up at lofty levels except that so many of the concept stocks – what I call the work-at-home, stay-at-home, shop-at-home stocks that were so popular during the lockdown don't even have earnings so you can't put a P/E ratio on. Let's say a company like Teladoc which has been around for 20 years. I was actually shocked when I did some research on these high-flyers. I thought Teladoc was a recent creation... Teladoc has been around for 20 years. They still don't make any money. I know telehealth is a big concept and I'm convinced that over time and it will win over more and more advocates. But if you don't have earnings, you can't have P/E compression, you can only have price compression.
Dan Ferris: Yeah. To me, there are aspects of the current situation that feel a bit like the late '90s in that respect. I saw another chart this morning on Twitter of all of the questionable companies with no earnings and really horrendous balance sheets that have performed so incredibly well lately. That feels to me like Peapod grocery and Pets.com and some of the other – I think Women.com was another one of them – some of them didn't have revenues and they didn't have a business model much to speak of. You know, they owned a website and that was it. Then they went public and got a huge valuation and of course in the end, they disappeared off the face of the earth. I feel like there's some of that going on.
Marc Chaikin: There was a company named Exodus which was a hosting company. Now we've got AWS and the Amazon cloud, Azure, Microsoft, and so forth. But Exodus was the big hosting company of the day. They'd put together racks and racks of Cisco routers. Ironically run by Meg Whitman who has presided over a number of – let's call them – mini disasters over the years. Exodus went out of business and some of the company – I actually was involved with a stock market tech startup back then. You couldn't get to your routers. Exodus went out of business and the routers were sort of locked down.
So, I do see some parallels. I think that separating the wheat from the chaff is really important. I think we're in a stock-pickers' market just as we were between 2000 and 2002 when you cut your value teeth. I think that there are real areas of opportunity but I just don't think they're in the same sort of horses that everybody rode during the lockdown.
Dan Ferris: OK. I'm literally on the edge of my seat right now. I'm sitting on the edge of a chair and now you have me figuratively there as well with that. Do you have any names for me or industries?
Marc Chaikin: Well, I think there are two areas of the market where there's real opportunity. One is anything involved with digitization. The one legacy and carryover from the lockdown is that people are much more confident and comfortable transacting over the Internet, consuming entertainment. I read a lot about people going back out to the movies... I'm not sure I'm going to be in a movie theater anytime soon but I'm sure using up a lot of bandwidth watching video on Amazon, and Netflix, and Roku. So, I think anything involved with digitization is an area of opportunity and that extends to car dealers. There are car dealers who are projecting 20% to 25% of their sales online, conventional brick and mortar car dealers.
The second area is anything to do with infrastructure build because we are going to get an infrastructure spending bill in congress. It's been painful but clearly rebuilding the infrastructure in America (bridges, the electrical grid) is going to be top-of-mind. I think companies involved in those areas are really attractive.
Dan Ferris: So, we're talking steel and Chicago Bridge & Iron and that kind of stuff?
Marc Chaikin: Yeah, and people who make cranes, Oshkosh and Manitowoc. People who make the equipment to help the infrastructure grow. There's an interesting company that I've been following for a year called Quanta Services, the symbol is PWR. They work extensively in the electric power industry helping utilities expand and update their equipment. It's been a major bull and has had a bullish rating in the Chaikin Power Gauge which is our 20-factor quantitative model for almost a year now. It's not a Johnny-come-lately stock even before President Biden got elected in November. It was clear that there was expansion and capacity requirements in the electric utility area and a company like Quanta Services was going to benefit from that.
Dan Ferris: Right. I feel like I've been hearing about this infrastructure thing. There was that kind of famous report where all the engineers got together in the country and gave our infrastructure a "D." Not even a "C," a "D." Now, maybe, we're finally going to do something about it. But there's a lot of stuff in the infrastructure bill, too, isn't there? Do you care about any of that?
Marc Chaikin: Well, that's sort of a political thing or a philosophical thing if you will. You know, I think anything that makes America more competitive, that makes Americans more productive is a good thing. I'm not going to get into the politics because it does seem to be split blue and red in that regard. But we're in a war with China. It's a war for the global economic leadership that we've enjoyed for the past – we'll call it – 60 years since World War II. I think physical infrastructure is important but intellectual infrastructure, computer skills, math skills, all play into this notion that if we don't look ahead 10 and 20 years like the Chinese do, we're going to lose that war.
Dan Ferris: Yeah, that doesn't sound good, does it?
Marc Chaikin: Not unless you want your children speaking Chinese. You know, there was a joke in – I'm going to say it was – the '90s. In America, an optimist is someone who is teaching his children to speak Russian and a pessimist was someone who was teaching his children to speak Chinese.
Dan Ferris: Mmm... it's funny though, today the mindset of America sort of being the greatest, it's weakening for sure. I know among the little circles I travel in, I don't see any signs that people really believe that – for example – one day we'll all be speaking Chinese. That sort of thing, it doesn't get dislodged very easily and because of that, it creates a huge vulnerability, doesn't it?
Marc Chaikin: It does. And vulnerabilities are everywhere in cyberspace. You know, we've seen cyberattacks that ostensibly are coming from bad actors. You know, countries that don't want to see us succeed. So, there's another area of opportunity, cybersecurity is a major growth industry right now. You need a way to differentiate between the cyber stocks that are going to prosper going forward and the ones that are either overvalued or behind the curve. It's hard to change people's attitudes and sadly it has become politicized. When you think about what we accomplished during World War II, the quest for space that began in the Eisenhower era, the country pulled together. I think in the short run, this country is not pulling together. But that doesn't mean that industry can't be a leader, that corporate America can't be a leader in that regard. There's nothing better than fueling corporate growth than a big infrastructure spending bill.
Dan Ferris: Right. So, Marc, I feel like we just need to shift gears here and talk about this system of yours. Because we're talking about combining fundamentals and technicals and you've built something that really does that quite well, haven't you?
Marc Chaikin: We have. It starts with the Chaikin Power Gauge rating. It's a 20-factor model, 85% fundamental, only 15% technical. It's based on the experience I had at an institutional brokerage firm that I started in the late '80s and ultimately sold to Reuters. We were selling technical analysis to major hedge funds and value investors like T. Rowe Price in Baltimore, Delaware Management in Philadelphia, and the big growth investors up in Boston. In order to do that well, I had to learn what these venture successful investors were doing. What I learned was, they're all using a discipline but they're all looking at different factors. So, value investors like Warren Buffett or Seth Klarman are looking at price to sales and free cash flow. Growth investors are looking at earnings trends, earnings surprises, if they're aggressive, and so forth.
So, when I built the Chaikin Power Gauge rating – which is now been in the public domain for 10 years – I drew on everything I had learned from these very successful fund managers and created what I would call an eclectic model. By that I mean it's not religious. It doesn't only buy value stocks or high-dividend stocks, or dividend growers. It looks at the factors that successful investors look at every day. Recognizing that there are a lot of different styles and time horizons that make up the stock market.
So, the Power Gauge rating is where I start my research. Then, I overlay two technical indicators... relative strength (which we've talked about) and Chaikin Money Flow which has been in the public domain for almost 40 years and measures accumulation and distribution – which is a long way of saying "Are there more buyers than sellers looking back over the last month, over the last three months?"
That combination that I call the "Power of Three" really gets me where I want to be. The other thing that I think is very important is industry group strength. We have Power Gauge ratings for not just 4,000-plus U.S. equities but for equity-oriented exchange-traded funds. Where I do my homework is in the industry group ETFs that have bullish Power Gauge ratings. I find that's a great pond to fish in, using the fishing analogy. If you're looking for the best-performing stocks, they live in the industry group ETFs that have bullish Power Gauge ratings.
Dan Ferris: So, I just want to be clear, it sounds to me like when you say you're "85% fundamental, 15% technical" you are simply referring to the number of inputs? 85% of the inputs are these fundamental things that you named a few of... price to sale, price to earnings. Then, 15% of those inputs are technical indicators. That's what that means?
Marc Chaikin: Actually, Dan, I'm referring to the weightings. So, each of the components, there are four components that make up the Power Gauge rating and there are five indicators in each component. The value metrics are actually 35% of the model but how they're distributed amongst the five factors is proprietary. We've always been very transparent about the factors themselves. So, within the Power Gauge rating, there are actually five technical indicators, but they only have a 15% weighting. Then, once the Power Gauge rating identifies the stocks that have the best potential to outperform over the next three, to six, to twelve months, we use those technical indicators as an additional overlay. So, relative strength, Chaikin Money Flow, and also industry group strength. I think industry group strength is a very underappreciated concept. I view it as a fundamental indicator because it reflects the macro thinking and the asset allocation of big money managers.
That's basically what we look at. We look at the fundamentals measured by the Power Gauge, the industry group trends because that's sort of a top-down, macro view that a lot of money managers use, and then these two technical indicators to confirm and give us a better sense of timing.
Dan Ferris: Yeah, I've heard Stanley Druckenmiller talk about industry group strength. Every few years he'll come around and complain about it, "Oh, it's not working. It's not working." Then he'll make a ton of money on it that year. It sounds like you were going to say, you start with the Power Gauge rating and then do something else or no?
Marc Chaikin: Yeah, we overlay relative strength as I said. You can have a bullish Power Gauge rating and a stock that's going sideways and underperforming the market. But when relative strength kicks in, when a stock starts to outperform the market, whether it's because of a positive earnings surprise or an analyst upgrade, that's when I get really interested because that's when you get price acceleration. I wouldn't call myself a momentum investor but I like stocks that the market likes.
It's funny, Steve Sjuggerud and I were talking and Steve and I have a very similar approach. He's built a system. The difference between Steve and I is that he'll tell you that he likes stocks that are unloved but outperforming. I like stocks that are loved and outperforming. So, it's a subtle difference but for me, it's worked. It's worked for our subscribers for over 10 years.
Dan Ferris: Yeah, so, do you manage money with this system, Marc, or you're just a research firm now?
Marc Chaikin: No, we're just a research firm. Our primary client base had been investment advisers but now we're opening up the system to retail investors.
Dan Ferris: Actually, Marc, I wonder – I almost forgot – there's a story that I want to know a little bit more about which as I've gleaned it, a particular episode with your wife and some money manager or another resulted in you sort of creating the tools that you use today. Can you tell me about that?
Marc Chaikin: I can. It's really interesting. I had taken a one-year sabbatical in 1998 that turned into an eight-year retirement. The reason I took that sabbatical was to move up to Connecticut, play some tennis, and read, and everything was going well but my wife had her own business. She was in marketing and public relations. She had previously worked for a major cosmetics company, L'Oréal, marketing men's fragrances. Her business was doing so well that she decided she could no longer manage her retirement plan. So, she hired an adviser who would come highly recommended and between 2002 and 2007, everything was going pretty well sort of like when I started out in the business. Then, we got the financial meltdown and Sandy got really distressed because she was watching her hard-earned retirement funds just dwindle week by week.
So, she would call the adviser periodically. Interestingly, when he took over the account he said, "Look, we're going to put you into 10 different mutual funds." I shook my head and said, "Well, that doesn't make any sense." His rationale was, "Well, it's going to give you diversification and that's sort of going to mitigate some of the risk." Well, when the account was down 20% or 30%, Sandy was calling him every other week. He would say, "Just sit tight." Then, in September of '08, something happened that just shocked me. It had to do with one of the money market funds... it was actually the reserve fund which was an institutional money market fund. It did something called breaking the buck. As you know, money market funds maintain that $1 price, and people are comfortable parking their assets there. Well, I said to Sandy, "This is a problem." She said, "What does it mean?" I said, "It means we're in big trouble."
She called her adviser again and he was really not responsive. Not happy to be taking these calls. She said, "I'm going to get rid of this money manager but what am I going to do with my money?" I said, "Well, open an account at Vanguard and you're going to buy an S&P index fund because you've got to stay in the market." She said, "I agree with you. I've done very well in the stock market over the years." But she said, "There must be a better way. There must be thousands of people like me in the same situation." I said, "There is and I'm going to come out of retirement and basically do something I've always wanted to do." Which is create a fundamental model that goes way beyond technical analysis which is what I had been known for up to then.
In a one-year research project, I built the Chaikin Power Gauge rating, and Sandy and I started Chaikin Analytics and she actually segued her marketing business to Chaikin Analytics where she started learning about stocks for the first time.
Dan Ferris: Sort of the opposite from what I hear all the fundamental investors get religion about technical analysis during huge, brutal bear markets, but you were more technically focused and decided to create a more fundamentals-based model. That is very interesting to me.
Marc Chaikin: There were two reasons for that, Dan. One is that – as I mentioned earlier – I had always believed that fundamentals drove the market but emotions drove the markets to extremes so technical analysis is great at reining in your emotions. But I also – part of the decision was very practical. If I wanted to attract, as I did, the broader, do-it-yourself investor audience, I knew that technical analysis was not the way to go. A lot of people to this day think technical analysis is mumbo-jumbo. So, I felt that if we had something that people had confidence in, a way to level the playing field, to do the heavy lifting because fundamental analysis is hard.
Charlie Munger who is Warren Buffett's longtime partner once said, "Anybody who thinks investing is easy is an idiot." You know, fundamental analysis is hard. It's time-consuming. Everybody brings baggage to the investment process. So, I felt if I could create a fundamental indicator that was visual – the Power Gauge is very visual – it looks like the gas gauge on your car. But under the surface, there's a lot of number crunching going on that I could gain credibility with people like Sandy.
As it turned out, when we started Chaikin Analytics, about $100 billion had transferred from full-service brokerage firms to self-directed accounts at online brokerages. That number swelled over two years to 1.3 trillion. So, people left the big investment firms and moved that money over. But I always felt that people didn't have the tools or the temperament to manage that kind of money. That's the genesis of the Chaikin Power Gauge rating.
Dan Ferris: Oh, I see, OK. So, that's how you built Chaikin Power Gauge and now today, it sounds like Chaikin Analytics is all about this combination of RSI plus Power Gauge. You are getting pretty darn good results with it.
Marc Chaikin: We have been. I mean, one sort of point of validation, in 2014, the Nasdaq came to us through a former colleague of mine and said, "We've been following the Chaikin Power Gauge rating and we wonder if you would go into a project with us?" I said, "Sure, what do you have in mind?" They had three indices… large cap, small cap, and dividend achiever. It sort of mirrored the S&P 500, the Russell 2000, and then a dividend portfolio. They said, "What we'd like you to do is see if the Power Gauge can find the best stocks in our indices." We did that and they were so impressed with the results that they started publishing the performance. What we did was really simple. We just eliminated all the stocks with neutral or bearish ratings from the indices.
So, based on the Power Gauge rating were the best of the best in these three indices. In the first year, they outperformed by between 20% and 50% the underlying Nasdaq indices. They were actually – to exchange-traded funds based on these indices in the marketplace today. So, there was an example of how you could take a passive index that's rebalance once a year and improve on it using what in essence is a quantitative model. The Power Gauge rating is a quantitative model.
Dan Ferris: Yeah, quantitative is a word that we – I feel like we never heard it until about 10 years ago or so, and now we hear it quite a bit. But it's usually in the context of something that is kind of out of the reach of normal people, right? People talk about Renaissance and their incredible success. It seems like when we're always talking about quantitative models, it's always something that it's just not for the rest of us. It's for big money managers. But this is sort of for the rest of us, isn't it?
Marc Chaikin: It is, Dan, and that's an interesting point. I won't name the brokerage firm but a major investment bank rolled out a quantitative model in 2013, a couple of years after we did. They didn't give it to their advisers, they gave it to their institutional clients who were looking for an alternative to the firm's research. The Chaikin Power Gauge really does level the playing field and its quantitative modeling for the rest of us. You know, for the do-it-yourself investor and for someone who wants to outperform the market. I've always said, "If you're not interested in outperforming the market, just buy an index fund." But if you really believe in American exceptionalism, which I do, then you need tools that you believe in that can point you in the right direction. That's really what we've created with the Chaikin Power Gauge rating.
Dan Ferris: Cool. Marc, you're doing a webinar about all this, aren't you?
Marc Chaikin: We are. We're sharing our visions, some of which we've talked about on this podcast, about how you can outperform the market.
Dan Ferris: Using the Power Gauge. Which I've seen, by the way. I want the listeners to know, I haven't used it, but I got a really interesting tour of it. I have to say, it's a lot more intuitive interface than many, many other things that I've seen in my life. It really does – you take one look at it and you intuitively have a feeling for what's going on. But like Marc said, there's number crunching underneath but you just look at it and you're like, "Oh, OK." It's very easy to understand and very easy to get a handle on. So, we can find out more about this. I got a link here for you. It's 2021prediction.com. 2021prediction.com. You're actually going to give us at least one name during the webinar, aren't you?
Marc Chaikin: I'm actually going to give you two names. One which I think is an outstanding buy and one which is a stock to avoid and it's a very popular stock that everybody will instantly recognize.
Dan Ferris: The avoid is the real popular one?
Marc Chaikin: Yeah. The stock to buy is a very little-known stock that I think is on the cutting edge of a lot of the technology that's going to drive companies forward over the next five to 10 years. But the one to avoid is a very popular stock.
Dan Ferris: Are you on the webinar by yourself? Who's on there with you? Anybody?
Marc Chaikin: Well, we've got a host on there, Tom Mustin, who really is doing a great job. Then we've got some guests coming in. We've got Steve Sjuggerud who made a guest appearance. My wife Sandy made a guest appearance. Then, we've got a mystery guest who I knew long ago. He was a client of mine when he ran the technical analysis department at Fidelity Management Research. So, we've got a really good lineup of guests and we've really got some valuable content that we're sharing with people.
Dan Ferris: OK, yeah. We don't want to give too much away. Just, a system based on 85% fundamental and 15% technical, and really intuitive and easy to use, and available to us regular folks. You can find more about it at 2021prediction.com. So, Marc, we've actually been talking for a little while here. I have a standard question that I ask all my guests. It's the final question for every guest on the show. It is, simply, if you could leave our listeners with one thought today, what would that be?
Marc Chaikin: That thought would be that in order to make money in the market, you have to have a plan and you have to stick to it through thick and thin. If you use the right tools to create that plan, you can confidently invest in the stock market. Over the course of my 50-year career what I've learned is that if you get out of the market because you're fearful, because you've been reading the headlines, it's really tough to jump back in. But you need the confidence that your plan is going to work through good markets and bad markets which is why we've combined fundamentals and technicals. For me, that has been my plan for over 40 years.
Dan Ferris: It sounds like you've done it. I mean, you're getting some great results. I can't wait to tune in and find out what that little-known stock is that you think could be a serious winner. Again, 2021prediction.com. Listen, thanks a lot, Marc. Thanks for making time and being with us today. This is very interesting.
Marc Chaikin: Dan, it's been a pleasure for me. Thank you so much.
Dan Ferris: I'm a little jealous of Marc and Chaikin Analytics. Not that I ever sat down and made a serious effort at it, but this idea of combining mostly fundamentals with technical analysis, it's one that people talk about a lot but you tend to spend so much time – whether you're a technical guy or a fundamental guy – you tend to spend so much time kind of perfecting and practicing that discipline that combining the two of them together just feels a little strange to most people. You know, usually they got their head so much in one or the other that they don't really know how to approach the other. So, to find a guy who's been around for 50 years who's put this together is pretty cool.
I did take a look at it. I had a little – they called me up and sort of ran me through it. It looks really cool. I thought, "Wow, I'm never going to understand this" but it's really easy to use. All of the stuff that Marc described it's sort of underneath and you just get the result of that on top as a user. It's pretty cool. You can find out more at 2021prediction.com.
Wow, neat stuff. All right. Let's look at the mailbag.
Dan Ferris: In the mailbag each week, you and I have an honest conversation about investing or whatever is on your mind. Just send your questions, comments, and politely worded criticisms to [email protected] I read as many e-mails as I can and I respond to as many as I can. You can also give us a call on our new listener feedback line, 800-381-2357. Tell us what's on your mind and hear your voice on the show. How cool would that be?
All right. Our first question comes from Dave S. Dave S. says he's a paid lifetime subscriber to Extreme Value. Dave, you know, I thought you were a really smart guy. I have to say, just based on your e-mail. Being a lifetime subscriber to Extreme Value tells me that you're a really smart guy. He says, "About six months listening to Investor Hour." He just had some comments about Hugh Hendry. He said, "I really enjoyed this show. I usually listen twice to understand the details of what your guests are saying but this show required three times plus a few rewinds because it was so much fun to listen to. He has a Monty Python-esque twisted way of understanding and explaining his views and his expansive top-down analysis all makes sense to this non-economist. Thank you." Dave also says he's planning to visit hughhendry.com. I would definitely recommend that. He suggested looking at Jeff Snyder's writing at Eurodollar University on alhambrapartners.com. Hugh mentioned that in our interview.
I started watching the Eurodollar University videos recently and that is a big part of what I'm trying to do with understanding the role of the Federal Reserve. Jeff Snyder from Alhambra, he's been there. It was like you said, Jeff Snyder has forgotten more in a lunchtime about the Federal Reserve than he'll learn in his remaining lifetime. There must be 80 of these videos. I think they're in episode 77 or 78 or something. But there are two-parters. So, there are a bunch of two-part videos and I think there's more than 80 of these things. I plan to watch them all because, hey, if Hugh Hendry recommends it, why not? Right? You'd learn a lot.
And we need to learn a lot about the Fed. Investors need to learn about the Fed if only to forget about it and not worry about it. Or, maybe we should worry a lot about it. I don't know.
Anyway, thank you Dave.
Next comes Steven H. and Steven H. has a lot of questions that I can't completely answer. But he says, "I do not believe that the inflation I am experiencing is in line with what is reported. I believe from your conversations with your guests that you are also struggling with the sense of a disconnect." Then he asked me four questions about, you know, what's in the numbers, what are they doing to massage them? I don't know those things but I feel the disconnect, Steven. I feel it strongly. I know a lot of people do. Just the simple fact that inflation numbers are published – they publish the CPI and then they publish the CPI without energy and then without food. It's the dumbest thing in the world. Who doesn't consume energy and food every single day? So, to take those out of there, it doesn't make a lot of sense. You know, if they're a big component and a big part of the movements in the CPI well that makes sense, right, because they're a big essential part of our life. Good question, Steven. Good comments. Maybe we'll try to find a guest who really understands that extremely well.
Last question this week is from Roy W. and Roy W. says, "Hi, Dan. When Altius spun off Altius Renewables, were the current holders of Altius entitled to any compensation or shares of the new company? I'm a longtime Altius holder and I didn't see either reflected in my brokerage account. Thanks, Roy W." Roy, you actually did see it because the price of Altius in Canadian dollars now is $18. It hadn't been there for quite a while. It's been consistently higher. It's been consistently $16, $17, $18 recently. That's because this was not a spinoff.
If I used the word "spinoff" at any time to talk about Altius Renewables then that's my bad. This was an IPO. They sold the shares. The proceeds went back to the company. Plus, they retained – you know, they sold about 40% of the stock and they retained about 60% of it, roughly speaking. So, they got $100 million in proceeds and they have this company now with a $250 million market cap which is great. That's why the stock is consistently higher now because the market can see into Altius holdings much clearer.
It can see, "Yep, Altius Renewables is definitely worth at this moment, today $250 million." They got $100 million of that from the IPO and then they retained 60% of it and that's worth the rest, approximately $150 million. It's a good question. I'm glad you asked that because I may have used the term "spinoff" at some point just being really sloppy about it, but it was an IPO, an initial public offering. They sold the shares, collected the proceeds. So, all that value is still on the Altius balance sheet even though it sold the shares into the market. But it got the proceeds, Roy, so that's why your Altius shares are higher. Good question.
That's the way Altius works. Every now and then, they're constantly collecting these bets. Most of them are pretty small investments. Maybe even less than a million dollars or a few million dollars. Usually not very much more than that. They collect dozens and dozens of them. Now, at this point in the cycle, they're monetizing. They monetize 60-odd of these little – usually exploration mining type bets. But this one was different. This was just a whole different renewable royalty business and it's worked out pretty well man. $250 million – boom – just like that.
All right. Good stuff. That's another mailbag and that's another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as I did. We do provide a transcript for every single episode but sometimes it takes a week or so to get it done. Just go to www.investorhour.com. Click on the episode you want the transcript for, then scroll all the way down and click on the word "transcript" and read and enjoy.
If you liked this episode, send somebody else a link to the podcast so we can continue to grow. Anybody you know who might also enjoy the show, just tell them to check it out on their podcast app or at investorhour.com. Do me a favor, would you? Subscribe to the show on iTunes, Google Play, or wherever you listen to podcasts. While you're there, help us grow with a rate and a review. You can follow us on Facebook and Instagram. Our handle is @investorhour. Follow us on Twitter – our handle there is @investor_hour.
Have a guest you want me to interview? Drop us a note at [email protected] or give us a call on the feedback line at 800-381-2357. Tell us what's on your mind, hear your voice on the show. Till next week, I'm Dan Ferris. Thanks for listening.
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