Turned upsidedown, to be honest with you. You marvel about it, but switzerland borrowed money and negative Interest Rate. Hard to think about. Somebody gave money to switzerland, give it back less than 50 years. Japan negative Interest Rates. Germany, negative Interest Rates. Im trying to operate in a world where i have to figure whats normal. So normal to me is maybe an economy grows, the labor force and economy grows about half of 1 per year. Productivity of labors for, 1. 5 a year. Basically makes a real gdp. 2 real gdp. Add on 2 inflation. 4 nominal gdp. That kind of world, normally fed rates 2 currently 37. 5 basis points. Current government around 150 now. May take two, three years to get to those rates. That kind of world i think the market multiple would be about 17 times. People could argue 17 is too low relative to Interest Rates and inflation, or too high relative to other issue, Profit Margins and country moving to the left, those kind of things, but 17 times my estimate, 127 next year is 2159. S p around 2165. Market is fairly, but fully valued. Okay . I would not expect the market to do that much on the upside. We have to accept the reality that if Interest Rates belong where they are, thats a slow growth world. We turn to the equity, lower than historically. I accept that fact. Yet you have a Federal Reserve which appears to be growing more hawkish by the week. You had that from jackson hole, stan fischer on this very network. Hawkish . Ten year government, 155. On average, the thing ive made this point in the past, past programs. Eight Interest Rate psycycles se the 1950s, on average market rose. Markets not discounting 37 fed funds rate. The market knows its got higher. Question, slope. Gradual slope, i think gradual, feds afraid to move. I thought move two years ago. Employment going up 200,000 people a month, automobile sales running near 17 million. Clear theyre concerned about the Dollar Strength and going slow because our trading partners are keeping rates very low. Interest rates are artificially low and the market understands that. What happens if the fed moves in a couple weeks, as i said . You know, you get the clue on friday. If the employment report comes in say 200,000 or more, go for sure in september. Coming in 150,000 or less, probably wait until december. I just see that as a tactical one two, three, four percent correction, not the end of the market cycle. The rising Interest Rates are indicative of an improving economy, rising earnings. Rising dividends, and you know, its not competitive. The rate levels that youre talking about. In the last 50 years, the market multiple was 15 times, ten year government was like 6. 6 something and the treasury bills almost 5 . Currently 25 basis points. So i think the market understands Interest Rates will be higher. You do think, though, that there would be a correction albeit a shallow one . However you want to characterize it . Yeah, yeah. You know, a little bit of a selloff. Crazies run the market. All the machines. And you have to get used to the volatility and im hopefully smart enough to capitalize on that volatility. Questionable, but well talk so much more about the markets. I know the guys at the table, though, want to join the conversation, too. Joe . Yeah. Lee, you mentioned Profit Margins. Concerns . Six consecutive quarters now of contraction in Profit Margins. I think thats a little bit of a misnomer. Take out energy. Non Energy Profits are not declining. Look where Corporate America what theyre doing, not telling profits are declining. Dividends growing in the last 12 moss, corporate buybacks about, shrinking the cap by 2 . I think Corporate America is comfortable with earnings outlook. Wouldnt see Dividend Growth or buybacks. Take out energy, doing okay. Interesting you mention dividends, and certainly theres been a hunt for yield on, because of where Interest Rates are and you document sort of the environment that were in very clearly. Do you think because of the fact that the market knows that Interest Rates are going to go up, that those socalled dividend play, whether the utilities or the telecoms are going to fall out of favor and youll get more of a move or a rotation into more cyclical areas of the market where theres not so much focus on a hunt for yield . Yeah. I agree with that motivation. The Manufacturing Sector seems to be coming out of its mini recession. And gaining traction. I think mostly highyield stocks in the Consumer Staples area are fully valued. I would not want to traffic in that area. More of the opportunities for possible short sales. Hmm. Lee, if you if you go back to the strength in the dollar and the hesitancy of the fed to raise before because afraid of Dollar Strength if they do hike rates, thats sort of takes some of the burden off draghi and perhaps off japan to further cut, because its a de facto ease for them for the dollar to strengthen. That sort of puts 40 of the s p, the nutmultinationals at k because of stronger currency for earnings offshore. Following that through, would you then prefer to go to some russell companies, smaller cap, which are, tend to have more on shore earnings profile . More based in the u. S. . Depends upon the degree of strength in the dollar. Im very bottom up. Vie to look at each individual security, in its own merits. I think that we may be misunderstanding the effect of negative and low Interest Rates. One of the things that concerns me is, you know, how do you retire today . You spend your entire life working 30, 40 years. If youre lucky, accumulated some sum of money. Go to your financial adviser. What its my return on savings . The answer, guy cant afford to retire. The feedback, younger people have less opportunity because the people arent retiring and not opening up opportunities for young people into the labor force. I think the academicians running Monetary Policy might be better off with rest rates starting to be normalized sooner than later. What you said at the top of the show, the market being fully valued. Does ta mean youre hesitant to buy stocks today at current levels . You want to see some kind of pullback and would be more inclined to buy stocks or activity looking in the market, any day, to buy stocks . We have lots of stocks, talk about later, we think are very cheap within a market thats fully valued. We have to accept the fact that what you earn in a stock is a function of what the economy grows at, what the rate of inflation is, how corporate profits are performing, and what you can earn in alternative instruments. Whether that instrument a shortterm bill or a tenyear bond. And you know, if the world is relegated 2 , 2. 5 real growth and profits growing say 5 , inflation sub2 , earn less than 2 , earn nothing in cash youre not earning 10 or 15 of stock market. Lucky to earn 6 , 7 . Thats the world were in at the moment. Are you worried about the fed making a policy error . I worry what im missing. When smart guys like Larry Summers comes out says the fed shouldnt move, a think fed policy is inappropriate, i wonder what im missing. You know . I worry about everything. End of the day, i worry most about the 70 or 80 stocks i own and the Companies Performing and understand the fundamentals of the businesses. Lee, speaking of uncertainty, ive got two to shoot at you. One, treasury secretary lew breaks up pfizer allergam, changing the game in the middle of the game. Apple with a tax we just are hearing about, the eu basically saying to ireland, youve got to collect 14 billion from apple. Those kinds of uncertainties, are those things that could be catalyst for some of that volatility jump youre talking about . I think more, trump is probably the big catalyst in volatility. You know . Its unfortunate the countrys moving to the left. The administration, fran antitrust standpoint more engaged in negative context than theyve been in quite some time. This is the reality of life, and i think youre seeing albatross spreads lie humana, spreads because of uncertainty whats going to ultimately happen. Government intervention, is really something that has to be weighed in your decisionmaking. As far as apple is concerned, not followed that closely. Were not involved in the stock but about 230 billion in cash. 12 billion,s 14 billion sounds like a lot of money but they got the dough. A disagreement between the eu and might be years before that appeal well take a break after this question and run through names i know all of you want lees thoughts on. Ubs put on an interest toing note last couple of days, talking about corporate profits where they may head from here, witnessing the end of the credit cycle and a crash is coming. Saying that companies are going to have a harder time using credit because of these low Interest Rates that they start moving up, to juice corporate profits. Thus at the end of the cycle and thats going to cause a crash in the equity market . I doubt it. I mean, plenty of companies have cash on their Balance Sheet that are being adversary impacted by inability to earn on cash and companies have to pay interest and will pay more interest. I was blessed to be in Data Processing 20 years and that company sat on a huge sum of cash ant part of their pricing strategy, earning on the float and that disappeared. So sought to rise adp, ibm, google, benefited and some adversely affected. You have to do analysis. Switch gears to tesla, because unusual activity today, which could be why, doc, this stock has been moving higher. There was an elon musk tweet about autopilot, but sort of behind the scenes under the surface, if you will, some trading going on that youve been paying attention to, by the way, on our program, pointed out earlier. Yeah. And he made a nice heads up on this one. Somebody stepped in, judge, bought 10,000 of the 235 calls out there in october. Sold the 255 calls. This is about 1. 5 Million Dollar trade, because 10,000 of one thersz 10,000 of another. Simple term, putting a mall and a half on the table, if the stack is over 255 by that third week in october, this is worths 20ds million. So thats the kind of leverage youre getting with this. They probably wouldnt be in it that long, but theyre looking for a very fast move over the next 52 days or quicker, and if they get it, obviously its a big winner for them. You told me when i took a look at the spallanzani email and came to talk to you about it, you said to me something to the likes of we dont see these trades all that often of that size. Right. You see those trades in apple. 10,000. Probably Lee Cooperman when we do, but when i see Something Like that in tesla, i dont see a lot of 10,000 lots. Thats in one single trade. Somebody came in, bought 10,000, sold 10,000. Its not total volume. Its a 20point spread . Yeah. Paid 1. 50. To make a. Great risk reward. To make 18. 5 basically net on that trade. Thats a big bet, and most probably, you know, somebody that any of the hedge fund folks that we talk to on the show, probably why wouldnt a mutual fund put that trade on . They could. I dont see a lot hedge funds dont cause aids. Its not a bad thing. Not a bad thing. A great and smart trade. With all of the concern about hedge funds, wondering whether president obama and Elizabeth Warren would take up a collection for us . Well, well get to your political thoughts coming up. Ever been involved in tesla, though . Not really. Been in a car a few times. Its a beautiful car. Why not inclined to buy the stock . Im basically a more value oriented investor. Assuming somewhere down the road General Motors or somebody buys tesla when the stock collapses, but its highly Competitive Industry and has a market capitalization probably greater than the Auto Companies that are generating big revenues and profits and really a subsidized company. Tax authorities are giving you big breaks. Its not in my wheelhouse. My opinion on tesla is irrelevant. A quick break and back with Lee Cooperman with us today for the hour. Were going to talk about the stocks he likes, the stocks he doesnt and do that when we come back. Narrator it wasnt that long ago. Years of devastating cutbacks to our schools. 30,000 teachers laid off. Class sizes increased. Art and music programs cut. We cant ever go back. Ryan ruelas so vote yes on proposition 55. Reagan duncan prop 55 prevents 4 billion in new cuts to our schools. Letty munozgonzalez simply by maintaining the current tax rate on the wealthiest californians. Ryan ruelas no new education cuts, and no new taxes. Reagan duncan vote yes on 55. Sarah morgan to help our children thrive. All right. Back on the Halftime Report. With the Hedge Fund IconLee Cooperman of omega. With us for the hour. Love to talk additional stocks. Went big picture kicking off the show. Talk individual names. Alphabet, google is your top holding . Yeah. Trades like water. For what it is, its not expensive. You know, we have a multiple on next years earnings. I think something around 18 times next years, 18. 5 times earnings. A premium to the market, which is 17 times, but has, you know, fortresslike Balance Sheet, grown 20 a year, creative, innovative management. Doesnt take special intellect to be long google. Seems fine. Most of our stuff is complex. Example, one we like a lot, trading, so i dont misstate anything. Nine times our estimate in a 17 multiple market, a first data. Everybody hung up on their Balance Sheet. Company the got 19 billion of debt, virtually no maturing debt next five years. A billion dollar cashfree flow. Looks extremely cheap. 8, 9 multiple points lower than its competition of companies that do similar things. Credit card processor, relatively noncyclical business, kkr and not exactly fools. Buy something at nine times earnings half a market multiple and a bunch of things like that. I know at least from, i take sort of 13 fs with a grain of salt. Never know the timing. Company citigroup as a holding. In the name . Were out. Its okay. You know we sell a stock for one of four reasons the highest reason we sell a stock, bought a stock at x, thought worth y. Went to y. Nothing changed and we sell it. Second reason we sell something is i tell my team, stay on the company like flies stay on you know what and talk to the competition. To suppliers. Talk to the company. Try to see what you can understand and learn and sometimes things are not unfolding as you anticipated, and lets get out before we get murdered. Okay . The third reason we sell is were not the Federal Reserve board. We cannot keep buying without selling. We develop an idea with a ratio of reward to risk more attractive than something in the portfolio might rotate out of one name and go into another. Fourth reason to sell, change your mind about the market, become defensive, reduce exposure. Start selling futures, options. End. Day, you got to sell physical inventory. Those are the reasons we sell. Its hard. We have a bunch of financials in the portfolio seem cheaper than citi bank, but i think theyll work if Interest Rates start to rise do you think were entering an environment, finally . We might guess. Interest rates, the bigger problem for the market, in my opinion, i could be dead wrong, but the bigger problem for the market in my opinion is a year from today were sitting around asking whether feds going to raise rates by 25 basis points and theyre here. Saying something about it a disappointing pace of economic activity. The stock market anticipating growth and rise in corporate profits. But, yeah. I would say i would expect Interest Rates to rise and i think some of the Interest Rates and stockless do better. The other stock that jumped out in a lot of people, from the 13 f was netflix. Gone. Youre out . Gone. How long darn it [ laughter ] im still in it. Hoping you were going say you added to it. Well its no particular reason. You know . Basically, again, its the doing other things. Youre looking at an allergan, gotten crushed this year. Down substantially because of the disappointment couldnt deal with pfizer. Probably buy back 10 this year, now a proprietary drug company, rid of the generic business and sales awfully low multiple. Take that money, put it there. But given my overall view of the market, were only about 65 exposed to equities at the present time. And, which is low for us. Very low for you. Yeah whashlgts would. What would be typical for you . 85, 90. Only 65. Yeah. Sitting on a lot of cash . No. We have a credit exposure. About 8 of portfolio in select high yield credits yielding 10ish percent. 8 to 10 feel comfortable about and my credit team is doing a fabulous job for the firm in structured credit. Maybe a quarter of our book. High yielding, fixed income and some equity exposure in credit. You cant read anything ultimately netflix will work but somebody buying the company at a nice premium. Is that what drew you . A bottomup guy, a high valuation stock. A lot of questions about it. You could raise parallels to some of the things you said about tesla and yet you were drawn to netflix . I think Tesla Netflix is an acquisition candidate for somebody, again, another idea came in. I didnt wa