A sales miss and more weakness ahead. Is it time to trade out. The Investment Community is ready to go. The Halftime Report starts right now. Welcome good to have you with us on this tuesday. Our Investment Committee at the terrible joe terranova, josh link and the chairman and ceo of the gobelli finds and chief executive officer of merrill private bank. We fin where else, the manchlgts a manchlgts. First though stocks lower as the twoday meeting in washington gets under way mr. Gobelli, the fed is going to cut, right im assuming 20 basis points and the real challenge is the currencies, the negative Interest Rates around the world are causing the dollar to get stronger so how does and what is the impact of that you think the fed should cut . Lets start there. Markets not that far. I dont spend a lot of time on it. I just assume that they will be cutting 25 beeps thats baked into the market of the for example, we have 100 u. S. Treasury fund. No sold taxes and its assuming that already, so 25 is done. Well, you dont have a point of view whether the feds should thats not true. It is i know you have a point of view of whether you think ive been doing the same thing for 55 years, and my own sense is that the the numbers are baked into whatever the market tells me on shortterm rates on the tenyear bond however, ive been very surprised. I was on a show with you in may and and its dropped again. Its now 2 06 or 2 07 and that doesnt fit in with the real gdp growth however, youve got to look out on a global context. Not just the u. S. So i suffered from a case of tunnel vision. So do youthink the fed is embarking on a rate cut cycle . You going to be with us for a while and what does that mean for the stock market then . The stock market iss to the degree that im looking at the future stream of cash flow and earnings and im modeling in the 6 to 8 over the next ten years on a global basis, the present value of that supports the multiples of ebitda companies are selling at so it provides a cushion on the downside at 2 at 3. 3 at the end of october of 2018 that was proi riding some kind of a he hadwind so at 2 thats an issue. The second part, however, is that it impacts Corporate Cash flows because most companies that have Pension Plans have a discount rate. That discount rate is going to come down which means that the leeblts go up which means they will have to put more cash into the pension plan for the to define benefits and not contributions but define benefits theres always a give and take on Interest Rates, on corporate profits and multiples but key thing for me is profits. You expect a big surge in the market between now and the end of the year because of what the fed is doing i know. There are a lot of elements that go into that of which beijing is obviously one. Britain is another one what is belgian going to do, so theres moving parts i think the market is discounting a lot of the upside. What the market is not doing is sectorwise is discounting a a new infrastructure bill. We as a country need roads, bridges and infrastructure and that will provide a real good stimulus for a lot of the companies. You do not want to be an elected democrat or republican or vote against an infrastructure bridge and have a situation to what you had in genoa you know the fed is going to cut tomorrow more than likely. The question is what happens next whats baked in . Tomorrows baked in. 25 is baked in, and i think they can do it, especially with the core pce at 1. 6 today and also the slowdown around the world. Thats obvious i think the language obviously is going to be important for sure, and then i think we have to get through china pmi tomorrow night and see if theres any sablization at all those numbers have been contracting. We need stabilization there so thats the second thing im going to be looking for and finally its corporate profits earnings will driest market. If they are good and rising and are going up, the market will follow for sure. And you get multiple expansion. I dont know. Weve had multiple expansion this year. I think we now need earnings to actually revise higher, and i know several firms are out there revigz numbers lower, b revising numbers lower durable goods, consumer data. All the data today was good can have sumer confidence through the roof. Yeah. Personal spending consumption. A lot of things are actually not so bad, so thats why i dont think necessarily this is a rate psychth in terms of the fed is going to be doing. I think thats one and done and hopefully they can get data dependant and watch whats going on in inflation because that will be the tell going forward. Why then, chris, if things are pretty good 2,900 is fair value s p . Thats what you say. Why . Markets trade above fair value. They tend to trade above fair value as youre going into the next year and they are starting to discount things like lower rates. They are starting to discount potentially higher cash flow Free Cash Flow is pretty good and as stephanie said they are starting to discount what we believe is an earnings and dare we say a profit driven cycle next year so fair value is just a point in time, and youre looking at fair value of 2900. We think fully valued is 3100 so the problem i think in the industry is we tend to look at targets on a calendar basis, but if you go back over the last 18 months, the market is only up 5 or so, in 18 months time so i look at it on a roll 12month basis, if your fair value is 2900, if youre headed into the next 29 months, whats the fair value then in you think the fed is going to give you 25 and stop, or will the fed be on a new cycle of cuts it appears they are insurance cuts for the what if, and what the if is some of the data which is on the right side of the economy which is manufacturing and on the left side is the consumer the consumer is fine manufacturing side, most of it outside of the United States, and they are fearful a little bit that that can get exported to us. Isnt that more bullish if you bullish on the stock market that its insurance cut and not because things are so terrible that they have to cut. Exactly. Which is why you could get another point multiple expansion. It is i wouldnt call it dangerous, but its probably a fools game to try to figure out investor psychology, so to actually say that youre going to go up another point in a multiple and build that into your fair value. Thats not the right thing to do thats why markets trade up over time and as liquidity goes up, financial conditions come in multiples go up and then earnings follow. Thats why we try to keep it simple, joe, and say as others have suggested, feds will embark on a rate cut cycle as you have in the past buying stocks. Why make is so confusing the interesting question is its obvious after the president s tweets this morning that the tensions with the chinese will be with us through 2020, so is it the responsibility of the Federal Reserve to pick up the slack for the slowdown in Global Economic growth thats what jay powell thinks it is and what hes doing. Themanufacturing slowdown a were witnessing here in the United States. Can you have an insurance cut of 25 basis points tomorrow and another 25 basis points in september but what is the Federal Reserve going to do from then until 2020 as we continue to have this contraction globally and domestically in manufacturing . Thats the question. The dow would be 10,000 points if not for the higher says the president the sped going to ride to the rescue powell on his white horse is going to come to the rescue and begin saving the day. So youve heard from the smart money. Im the dumb money and i routinely invest no matter what the fed is going to say. Just said, might say, who is going to speak, and and i guess to trumps point the fed has been supportive of lower Interest Rates and obviously looking for the wealth effect to pump up the economy and reflate things going back ten years now. Worked out pretty well the dow hit at low of 6500 its approaching 30,000 so im not sure the fed has held us back so, okay, sure. Big picture. Lets look at stocks number one. You had some really great earnings last week and some very good reactions those reactions today are holding. The big gaps in starbucks, in google, in twitter, they are holding. You want to see that xlp, new all time, not 52week, alltime record highs today. Procter gamble, a 4. 5 gap, new alltime record high and 52woke high for colgate palmolive. These arent cloud or software or services. These are toothpaste are and i think youve got a big enough crosssection when you throw in mcdonalds and throw in companies from disparate industries serving different areas of especially the consumer, you could say that things are very, very good, and so im not sure what the insurance cut is supposed to do other than maybe get the tweets to stop, and so they will do it, and i really dont think it matters tremendously were advocating portfolios that are rational regardless of what the fed does its been the right approach weve been rewarded with 15 annualized returns in the s p over the last ten years for ignoring all the noise why the would i stop today josh paints a scenario in which theoretically stocks could go up based on good fundamental news earnings are good. Now youre going to get the turbo boost of jay powell and company. I know youre shortterm oriented what if its a hawkish cut . Forget that the dow in 75 years, 80 years will be a million. Thats thats an early price target. Thats buffet, you know come on, lets sit here in the year 2020 and what will be it . Whats the secular growth rate in earnings on a global basis, and what multiple do you put on it whats the shortterm Gross Margins of companies in the companies i follow are all concerned in the industrial world about whats iadex said in their industrial businesses uncertainty at the corporate level is havin. Consumer, its in great shape in terms of wealth. 110 million net in debt and the debt is the consumer loens loans, and thats 1. 5 trillion versus 400 billion five years ago. How do we deal with that and solve some of these other soft issues, and do i worry about the fed . Im in the josh camp we just continue to look for fourbaergs and really beatup stocks or try to make a return. Throw me some examples then what are you most optimistic about in your portfolio . What are examples of fourbaggers stocks that people are hitting the momos and algs and they always want to buy what is called dynamics. In atlanta, georgia ive been following the company for 50 years. The rawlings controls it, a Company Called orkin, done a lot of Financial Engineering and split off a company. Res is the symbol. Stock hat 250 million shares and selling at 5. 70 if you look at the wiggles, its been 25 three or four times they are in total control. Theres no debt. They are a pressurepumping infrastrucier 50 of their 1. 4 billion in revenues is that what does that mean . It means that short term things are terrible somewhere in the next three years in oil stays at 60 in west texas youll have a stock thats 15 to 20. Youll make four times your money. Just sit there with a basket and buy while everybody else is puking it out. Mario, can i ask you. Take a look at the xop, annin decks of oil producers, winners and losers from anything the fed might do and Central Banks and the biggest winner for extraordinary stimulus for a long period of time is in companies that youre describing its not their fault xlp, a Dumpster Fire of a chart. Every large publicly traded producer endless amounts of capital on wall vote have translated into endless amounts of supply of oil and gas and drilling, and there seems to be no end in sight, and weve had rates going up since 2015 so now its almost four years of that and were going back down. Like how i know there are cheap stocks, and i know theres like 1,000 of them, but how do you buy these things if cheap money was the problem. We started with a hike in rates and now weve got cheap money for a longer period of time. What is the case for any of these types of rustbelt or energyproducing businesses . Basically on the premise that were going in an esg world where we want to eliminate carbon footprints and plastics in a system, how do you manage an environment like that at the same time as a world we have 100 billion barrels a day that were consuming or whatever the math, is and thats coming down as you go more ev, more wind and more alternative energy, so youve got to be sensitive to that. Meanwhile, thats there, but this is over the next two or three years. If the theres an accident, some guy in iran hits the wrong button, by dont want to do that i want to stay with 50 to 60 whats the cost. Now youre talking about the producers. You know, in a world in which you can drown a river of a sixinch debt if you didnt own anadarko you would be right but if you own it the stock is going from 44 to 73. 5 today. So this is an equipment supplier at some point they build pipelines from the areas in which Permian Basin is down, the delaware basin, and they get refineries and the gas thats being produced will be made economically profitable and so the companies with that provide the equipment and will do well. What sector are you most bullish about right now . Just given the environment were in, what the sped going to do. Oh, come on. Weve been doing the same thing for 50 years, okay people dont like the autos. Ive got a company, discounted all the negatives and the stock is negative. 197 million shares the stock will be up 50 to 60 in two or three years, but if you want something new. They are slowing, arent they the world is producing this year 92 million of those suckers. 1. 3 billion on the road. Weve got constant chips, going to ev and hybrids, no drivers, no owners and no cars in the future so is the world changes betting, okay. I got you. And simply the notion that we can take whats hidden in the dark world and bring it into the open whether its in game, against games or on a global basis and do it, thats a huge tailwind so egaming is a precursor to that and esports, but Online Gambling in the United States is becoming extraordinarily widespread so you want to buy companies that benefit. One is the intellectual product that our going to gain and baseball is one. Thats an easy one a public company, atlanta braves, they lost last night 63 but they are okay, 4. 5 games above the nationals. Got to play that one the second one is the whole infrastructure and i like a william heal in london and companies in the United States, buyers of caesars, el dorado resource and anybody who does that. The question about sectors and whether to buy cheap stocks or not, for me a lot of that depends on whether you get a resolution in china. By the way, i think you will get a resolution in the Fourth Quarter. I dont have a crystal ball, okay just the rational outcome and i choose to live my life expecting a rational outcome i dont want to go Walking Around all day long with a sandwich board saying the world is ending. Under that assumption, you can disagree, thats fine. Thats how i choose to live my life look at secretariors like the xop or like basic materials and like financials and say thats whats going to make them real you clear the decks on trade tension. I think, chris, you mentioned infrastructure everybody then is cleared to start spending on infrastructure financials will finance it, basic materials will construct it. When is when is this happening that youve already put through . Well, i just answered your question, and you can say, josh, its not going to happen no, no, no, whats going to happen youre going to get a china trade deal in the Fourth Quarter, and if you dont, by the way, if you dont get a china trade deal 2020 will be ugly for stocks of all stripes and sectors. Why why . Because cap x is going to dry up. Powell just came to the rescue. Puts a floor and doesnt help you go higher and if you dont get cap x youll still get wage Growth Without cap x to offset it and create inflation not occurring. I have to echo that comment, and if i were the guy running china xi, these guys, you know, will have another election let me see whats going on not that hes going to watch tonight or tomorrow night, but basically hes hes in power for x, y, z years. Forever. Forever, so im taking the longterm outlook and im saying what dont i want to trade going to the point, the world has an 88 trillion gdp of which the u. S. Is 25 and europe is 25 and china is 16, but the real growth is 6 in china is a Multiplier Effect on the global economy, so if you dont solve their issue, and they are having some structural issues, that can have an impact on Global Growth. If you solve the issue going into 2020, and if i was the president i wouldnt want to solve this thing until spring. I would really february, because i want a very good springtime when people are going to the ballot booth. Soy would have an impact on Global Growth by having this resolved and that will give you another surge in demand. Chris, i want to ask you about what mario is saying thats such a key point. Does it matter as much if theres a resolution, and heres the setup. When they sold the tax cut, one of the main points they sold it on was were going to have an explosion in economic activity, not wall street stuff. Were going to have huge cap x, corporate spending, investment, hiring, so weve had some of that but r d and cap x are up 8 , 9 over the last year, one or the other and stock buyback activity is up 20 , 30 . If they sold it on some buybacks that would not have been palatable especially the republican base, but this is where it is, and i think people in business knew it would turn out that way so maybe the answer is we dont need this explosion in cap x which by the way is never going to come. Maybe we can just get by with continuing to shrink the floats of Large Companies and money stays cheap and maybe thats enough for 2020, 2021. What are you hearing from people your last comment there about maybe we dont need it and maybe we can just continue to float