Michael Santoli: Joining us now on the markets, Noah Blackstein, Dynamic Funds vice-president and senior portfolio manager. Noah, good to have you with us. Good morning. Talk about the setup a little bit here. We’ve had this little eight-week round trip in the major indexes, you had the 5% pullback. We’ve come all the way back. Another scare that maybe the soft economic landing isn't going to be there, or yields are going to run away from us. We’ve settled back into a comfortable zone. How do you read the risk/reward from here?
Noah Blackstein: I think the risk/reward is going to probably change over the next little while from our perspective. I think that this is a market where obviously we're quite confident we're getting rate cuts this year. I think real rates are way too high versus where inflation is right now. But I think that if you look at what is going to be the driving factor behind companies and stock prices, it is clearly shifting more to focus on earnings and revenues versus a recovery or low volatility. The market seems to be rewarding those companies that are delivering on earnings. I think that has to do with volatility calming down somewhat, the equity markets still elevated volatility in the bond market. but as volatility has come down, and the stock specific or idiosyncratic factors come to the fore, I think we're moving into a market that is punishing losers who aren't delivering clearly and rewarding winners. For stock pickers, you know, taking the macro albatross that’s been around those markets’ necks since '21 and allowing people to focus on individual stocks both on the long and short side is much better. Earnings seasons matter and company outlooks matter for sure. But there are drivers to be excited about. in terms of the overall market, it is a tougher call because the overall market is so top heavy, probably the heaviest it's ever been in the last 50 years, so, you know, movement of a few of the large companies could affect the index. But underneath the surface, we certainly are starting to see broadening overall and that's fundamentally driven, which is a big positive.
Michael: So, you said you're confident you were going to get rate cuts. Is that just because based on, you know, the Fed's assessment, policies restrictive right now, or you think inflation is going to show big decline from here, how do we get to multiple cuts?
Noah: Certainly, I think that you're going to -- the things that are propping up the inflation numbers are, you know, overfitted. Back-dated surveys like owners are crippled with rent and other things like that. I think in other markets look at things like mortgage payments and other things, the inflation rate topped a while ago. I think sometimes it is hard to get the Fed message because one of the things that former chair Bernanke did was everyone goes out and says what they think, and the message gets a little muddled, the joint chiefs of staff, one person speaks, all the generals don't come out with different opinions and so the message gets muddled a little bit. it is fairly clear from what Powell is saying if you just focus on that things are much more balanced between their dual mandate of labor and overall inflation. The numbers are coming down. De facto as inflation continues to fall. As the Federal Reserve holds, they are continuing to tighten, and so we're seeing the early signs that things are coming down. Target this morning unfortunately is not having a good morning. A couple of days ago, they announced price cuts on over 5,000 items. Their press release today talked about lowering prices. McDonald’s is trying to entice people with $5 meal to bring people back. That is not the sign of hyperinflation for sure. When that makes it into econometric models,it is clear in the high frequency data that things are coming down. The Fed could pause, and then continue not to ignore those signs and that's a serious risk for the overall market, too high for too long. But in our view, they should be, and the sense we get from the Federal Reserve is they will be cutting at least twice this year.
Michael: You mentioned that there are some themes to get excited about. A.I. and many of its aspects is the main one and the massive urgent investment cycle that is connected to that. In your world, the kinds of stocks you play in, how does that filter into the equation?
Noah: Nvidia has been a great company, I think a lot of its move is fundamentally driven for sure. We like the company. I have no view on what earnings are going to be tonight. it is obviously strong, but that's expected. and they are in a product transition. so, you know, we'll what the reaction is. They are clearly at the core of the GPU side of this transition. I think though if you look at allocating dollars, the beneficiaries really have been on the I or the investment side. Where you’re looking at the hardware companies, semiconductor companies, the data center companies or even people's pipe dreams about no new nuclear plants all over the world to power these data centers. That's the investment part. The return on that investment is going to come at the application layer. And at the app layer. that really hasn't even started. Certainly, there are companies like Service Now who are embedding A.I. into software, we really think where A.I. gets monetized is at the software layer. we look at software today, it’s trading at a significant discount to where it was five years ago and even ten years ago, where semiconductors are near all-time highs in terms of relative valuation. So I think the next phase as we move from training these large language trillion parameter models, we move to small models and move into real time models, and more active chat bots and stuff is that I feel the pendulum is going to swing. And software is certainly is an area of one M&A. And we think we are seeing a lot of M&A from private equity and from other companies. It’s also going to be the monetization layer of a lot of this A.I. and it is really not priced into anywhere in the semiconductor space -- anywhere in the software space, whereas a lot of discounted and semiconductors right now. in terms of where we're looking and how we're thinking about things over the next three to five years, it is definitely in that software layer, which are trading at a ten-year discount to the historical average, ex-Microsoft.
Michael: It is amazing how much the A.I. story has mostly been about buildings and real physical assets at this stage.
Noah: That's always true. it is always the hardware layer where it starts, and then the monetization occurs at the app level and that's coming.
Michael: Fiber and all the rest of it. Noah, good to talk to you. Thank you.
Noah: Thanks, Mike.
