WOYM: A Market Opportunity is emerging in 4 Weeks - Are You Ready?

Ram: All right, we got a bonus edition of what's on your mind. 

Justin: Yes, indeed. We were talking in the past few days and few weeks about the markets, and you were, I would say, excited, maybe the wrong word, but anticipating an opportunity. And we thought, good time to sit and talk about why. Why do you think there's an opportunity?

How does it compare to the past that you've seen and are thinking about? And why do you think We're paying attention to certain economic [00:01:00] indicators. 

Ram: Exactly. 

Justin: So 

Ram: we got slides this time, this will be fun. And we're going to share this with all of Lumida clients. We thought we'd publish it to the public too.

So like the headline messages are, we're in an economic expansion, economy strong, and we'll show the data behind that. Second, this is a bull market. Third, inflation is coming in sticky. And hot. And that has a couple conclusions. One is Mr. Market's pricing and higher for longer. The Fed is getting their head around that.

You're seeing that in the pre FOMC chatter. And you're seeing that also in the 10 year moving higher, and that's going to cause volatility over the next few weeks. And we think that when this wraps up in a few weeks time, there'll be some compelling opportunity to get in the market. But we do expect some volatility ahead.

So those are the main messages. We'll unpack that. I'm going to share my screen here. 

Justin: Is it the volatility [00:02:00] that creates opportunity? 

Ram: Yeah it's yeah, sure. Look the volatility And usually when people refer to volatility, they usually refer to the downside of volatility, but yeah, it creates opportunities to get, good investments at a better price or worse pain, an overly valued price it creates fear and and that fear is often a sign that there's a good potential opportunity to get involved.

What we saw in the last few months, especially around semiconductors and a lot Chatter from raising 6 billion from open AI and all this stuff. Those were actually peak sentiment moments, and the markets traded down since then on semiconductors. So yeah, volatility is a it creates an opportunity.

So here's some of the things we're going to discuss one is on the macro side, earnings and then semiconductors. And the first thing I want to point out here is the economy continues to exceed expectations. This is the Citigroup economic surprise index. You can see that it's [00:03:00] well ahead of what consensus expectations are.

So this is one of the reasons why a lot of investors are caught off sides and have been forced to chase this rally and still the economy's outperforming expectations. Okay. And we expect that'll continue, but a little moderate. We saw, for example, 5 percent year over year spend on visa network.

Now it's around 3 percent or slow or so. And the leading indicators are turning up. These are the leading indicators that notoriously missed Kind of the October 22 bottom, but they're generally been reliable and these are on the upswing. That's a good sign. Housing data came out today. The housing data was strong.

Housing's a multiplier effect on the economy. So that was really good to see, despite the fact that you have higher mortgage rates. People are not selling [00:04:00] existing homes, but they're buying new homes and they're investing in new homes. And this is one of the most exciting stories in the economy that no one's really talking about.

Productivity rates are strong, and that enables corporates to earn more. It enables people to earn a higher real wage after inflation. We haven't seen productivity rates like this since the late 90s. So even though there's a period of elevated inflation, even though there's rates volatility that I expect we'll see from the upcoming FOMC meeting where I expect they'll be very hawkish.

These are, the bright lines and the, that are supporting the economy and earnings growth. So I'll pause there. This 

Justin: chart is showing quarterly percentage change. Is that the right way to read these charts here? 

Ram: That's right. That's right. So productivity is a measure of how much output can you get per your inputs.

And those inputs are labor commodity inputs. There's more labor in the economy. Cost of commodities like lumber are [00:05:00] dropping, which helps the housing sector. Other commodities have obviously gone up, but the fact that other commodities like oil have gone up is also a reflection of the global economy strengthening.

And they've gone up, at a relatively measured pace. Not in a way that is see here's the price of oil, for example. So oil has ramped up since December 23 in line with a strengthening global economy. Obviously it's come back a bit from some of its recent highs. So yeah, headline messages, this is a growing economy.

Justin: Within that growing economy. How do you think through the different things? Investment themes that we at Lumida have. Is this a growing economy across all sectors, across certain sectors more so than others? And how do you think through that dynamic when you're looking for opportunities? 

Ram: It's a great question.

[00:06:00] So as we're thematic investors. We look for long term secular trends that we can get excited about and invest in and look for, value at a reasonable price. So yeah, there, there are a few themes that, that we like. We have a whole separate document on our investment team. So if people want to ping us, we can send that over to them.

They're also on our website, by the way, Lumida. com. I think some of the themes that will do the back half of this year homebuilders, there's a massive housing shortage. We saw earnings reports come out from DH Horton, which are strong, another homebuilder reported earnings today, again, strong, despite the fact they've got higher mortgage rates, especially on that starter.

Housing unit affordable entry price housing in areas we've got favorable geographic and demographic story like Florida and Texas, Southeastern United States. So we like that. We like the energy theme. The world needs more energy. Obviously we picked up on this late last year. [00:07:00] It's done very well for us.

And now the market is looking at energy and energy is great. It's got earnings, clean balance sheet. The valuations are cheap. We still like semiconductors too semiconductor run on a cycle and the second half of this year, we should see an uptick. Welcome all! Fiction and Our topic today is fiction and is that.

The line in red. Now you might say that some of these expectations are getting ahead of themselves. That's possible. That's a different conversation, but the trend is up. This is a good category. It's a long term secular trend. The world needs more GPUs. And so those are some of the themes that, we're looking at.

There are other themes we think will do well to like biotech, but, we think. A category like biotech will do better when the rate climate is more [00:08:00] benign. So maybe in a few months time or when we see rate cuts in view, that'll be a good time. To get into biotech small caps, you just got to pick your spots.

Those that have earnings growth will do fine. Those that have significant debt burdens that have refinancing issues, those could be a bit choppier. There's also a good story in travel and leisure. Boomers are spending money. They're getting more income because rates are also higher for longer.

They're traveling. We see that in backlogs that have record levels for like cruise lines, for example. So those are some of the themes we like, elderly care is an interesting sub theme within our aging demographics. We still like those themes. Those are good themes. It's just when you lean into them based on what we see today is what can change.

I think today where we stand homebuilders energy. I expect that once the market digests the higher for longer, [00:09:00] then that'll be the time to focus on technology sectors, especially semiconductors. 

Justin: So talk more about the dip, right? What is causing the dip? If you're looking at a set of data that suggests strong economy and a growing economy, what's causing the dip?

Some pullbacks and some volatility and the compression in certain, I'll say a few 

Ram: things. One is we had a, an incredible rally off the October lows. As we were buying and encouraging people to buy the October lows. And what happened really in the last few months is markets got ahead of themselves.

You saw earnings come out and stocks would jump 10%. This happened quite often. That's usually a sign of excess enthusiasm and sentiment in the market. We also saw [00:10:00] a record call buying activity relative to put options. That's a sign of excessive enthusiasm. When everyone's all in on the market, then it's hard to find that marginal buyer.

So things take time to reset and for new money to come back in more reasonable valuations. We're seeing that happen as well. I know stocks like Lululemon that, are expensive relative to. Names like NVIDIA, there are quite a few names out there that are like that, that have elevated valuations.

That is working itself. That's correcting, there, there are names that are indexed to the AI theme that have run up quite a bit. Some of that deservedly, Some of that not deservedly because they're not truly indexed to that theme from an earnings perspective. So all that needs to get ironed out.

I'd say that the big driver though is the, the 10 year like 10 year is an interest rate an interest rate that drives valuation [00:11:00] and, a rising 10 year, It means that long duration securities, because all securities are claimed on future cash are discounted less and rate sensitive names are discounted less.

And that's exactly what we've been seeing, in the market. This is a study that Lumida did internally. We looked at the performance of ETFs from August to October of last year, which is the last time we had the higher for longer rate story play out. And then what performed the best. And you can see that the sectors that did the worst were rate sensitive categories.

Including, utilities and real estate and unprofitable technology, which is the same thing as saying long duration technology. Think something similar is going to happen here. And then, you can look at the sectors that perform on the other side of that. 

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