Sean Brodrick, Editor of Wealth Megatrends and contributing analyst to Weiss Ratings Daily, joins us to outline opportunities that he is seeing in the more defensive sectors of insurance, cybersecurity, REITs, regional banks, and utilities, as geopolitical uncertainty increases, and as macroeconomic factors continue to weaken.
Sean points out the resurgence of the Japanese Yen leading to more carry trades unwinding, which could then be further exasperated if the Fed rate cutting cycle leads to any US dollar weakness versus the Yen. He points to the oil markets being subdued, with expectations for a slowdown in the US, European, and Chinese economies. While he doesn’t think a recession is imminent in the US, even though macro data is weakening, he does believe Europe is slipping into a recession without their access to cheap Russian natural gas.
One recent trend Sean highlights is the rotation out of the big tech leadership like Nvidia, Apple, Google, Taiwan Semiconductor, and into more defensive A.I. adjacent sectors like fintech, insurance, and cybersecurity. We also discuss the more defensive trend recently of investors rotating funds into REITs, regional bank stocks, and utilities for the better dividends and variable dividends.
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Hello and welcome into the K.E. report. Chad and Corey here getting an update from Sean Broderick, editor of Wealth Megatrens and contributing analysts to Weiss ratings daily. And Sean, it's always great to get you on the show just to see what has your attention in the markets. A lot of times we really focus on some of the individual commodity sectors, but I think most people listening will know last week was kind of an ugly week across the board in the commodity sector. And you mentioned at this point, you're seeing more opportunities really in the general equities and some different sectors. So maybe just start off with an initial comment on while you're maybe hitting the pause button on the commodities and looking further afield. Yeah, well, last week was big bite and ugly really was. And this might be a good buying opportunity, but I'm not buying at the current time. That's mainly because in addition to some other short term bearish forces that were in place last week that I'll get to, one thing that happened last week was the Japanese yen carry trade started to unwind again. This happened in August. It's happening again, what the yen carry trade is because the yen is so cheap people borrow money in the yen and they buy equities and commodities all around the world. In August, the Japanese central bank surprised the markets by raising its benchmark rate. And so that caused an unwind then that stopped after a bid after some job boning by the central bank over there, but it's back on. And so that adds to a whole bunch of problems, but the yen carry trade is a problem in itself because that's a source of cheap money and markets and especially commodities love cheap money. And so as this is playing out, we could see more pressure on them. We could see more pressure when the Fed starts to cut at its next meeting because that cut will make the US dollar less attractive compared to the end so that could trigger more Japanese yen carry trade unwinding. However, maybe we're seeing that unwinding right now. And so when the Fed finally cuts, which has been really overdue, the Fed's behind the ball, I think everyone knows that by now, when the Fed finally cuts though, maybe that will actually signal the end of it. That's kind of what I'm hoping. But we'll see. There are other forces at play though. I mean, there is a big budget showdown at the end of this month in Congress. They have to pass a continuing resolution to keep the government open. Republicans, at least let's call it a majority of the Republican contingent in the House of Representatives have shown they are quite willing to block this to get what they want. What they want. It's just not helpful. So that could be a real problem. You might see the government shut down and I don't know when it would reopen. I mean, maybe not until the election, maybe not after or else maybe it won't. Again, it's uncertainty and that's an idea I'm going to continue returning to throughout our talk today because uncertainty is hanging over the market. People don't know how the elections going to work out in November. So I think that makes a lot of investors not want to put money to work because what have they put money to work wrong? There are definite differences between the two economic proposals of each party. And even though I've seen a lot of people on Wall Street saying, oh, it really doesn't matter what they say, you know, it'll be a split Congress. So things won't change. Things can change. And so I think that's what Wall Street is also thinking that plus we've had weakening economic data. We aren't going into a recession, by the way, I have to emphasize that. In fact, the Atlanta Fed just raised its GDP now forecast to 2.4%, I think. So things actually look good, but there's a lot of negative sentiment out there, especially in the oil markets. I mean, they're really pricing oil for a recession. And part of that is due to they think that OPEC+ will start pumping more, but if you look at the US commercial supply situation, that's been tightening for a couple of weeks. So there's actually less supply and yet prices are going down. So we're really dealing with a sentiment thing on the one hand and then less easy money because of what's happening in Japan on the other hand. And then to all that, let's add the fact that China continues to slow down. There are parts of its economy that are experiencing deflation. And that's not good, especially since China is now about 20% of the world's economy. Europe is heading into recession, they were relying on cheap Russian natural gas for so long. And like, I've had this discussion with people and they said, well, they've had two years to adjust to the fact that they don't have cheap Russian natural gas anymore. Yeah. And the adjustment is their economy goes into recession. They need cheap natural gas. That's how everything is structured over there. So there are weaknesses in certain parts of the world, the US is not in recession, but nonetheless, we get the ripple effects of those things going on around the world. And then we have our own political problems piled on top of it. So you can see why people aren't buying and why many are selling. There are things that are working, things like REITs, real estate, pretty much any stock that can do better when they see lower interest rates. And right now, of course, this can change, but right now, the market is pricing in over the next year, 2.4% cut by the Fed to its benchmark interest rate. That'll bring it down to about 3%. And so that would be good for any interest rate sensitive stock that really does better when it has lower interest rates. And we're also seeing the lowest gas prices since, I think, 2021. So that puts a lot more money into consumers' pockets. There's a lot of bullish things to talk about in the US economy fundamentally and also looking toward the future, but the political uncertainty that hangs over us is a real problem here. And then we have the global problems just kind of rippling into our economy as well. That's basically what I'm looking at. Hey, you're right, Sean. There's a lot of uncertainty out there, not just in the US, but around the world. But we are in what seems like it's going to be a rate cutting cycle. But we've also seen in history, rate cuts not necessarily spur of the markets immediately. It sounds like with your portfolio, maybe I'm putting words in your mouth, but you're going in a very defensive nature. Does that tie tech into it too? Do you consider these tech stocks because of their large cash reserves as defensive plays right now? Well, you know, I have two premium services. One is resource trader. We mainly do resources. The other is super cycle investor and a super cycle investor. We've been playing the tech super cycle with great effect. We took a bunch of triple digit gains, we took other gains and all the stuff, but I've sold out of most of my big tech names. I did that back in early July when they started to weaken. So you know, I'm out of Nvidia, Amazon, Taiwan, semiconductor, stuff like that. However, there are names that appeal to me. And in fact, I have a bunch of them on my radar now, probably recommending one this week. What we're looking for, or at least what I'm looking for because I think that the market is looking for it, is those companies, they aren't chip stocks because chip is still in oversupply though. They may be reaching the bottom of that zone and they aren't AI stocks because there's a lot of competition in there now, but they're AI adjacent and they've shown in the last couple quarters that their earnings can accelerate, whether it's in FinTech, whether it's in insurance, which is also FinTech, I guess, whether it's in any one of these number of other things. Because there is an ongoing tech super cycle, maybe not in a straight line, but AI is the accelerator in that, if it's used properly. A lot of companies haven't been able to use AI effectively. A lot of them are pouring money into it and not getting anything out of it right now. Now, eventually they probably will, but that's really made investors quite upset with what these companies are doing because they don't see the light at the end of the tunnel for them. But like I said, there are companies that are actually doing quite well. Cybersecurity is another one, for example, we have Checkpoint software and that's doing quite well. Either in cybersecurity, my Wednesday column is on the new cyber threats, which are unbelievable. I don't want to go into too much of it now, but it's getting worse every single day. What that means is that cyber stocks, they'll be doing well anyway. And if they can use AI to accelerate, to enhance what they do, because the bad guys are definitely using AI, well, if the good guys can use AI to help them out, they'll probably do pretty well over the next six months to a year. So there are opportunities out there, but on the other hand, you can have big companies that are in cyber and yet they fall flat on their faces just because things aren't working out for right now. I think many of these big companies can bounce back, but at current valuations, the market was really priced for perfection and subscribers aren't getting that perfection. So they're selling. I think a lot of that has to do with the nervousness that we talked about earlier. And so, you can see money rotating out of big tech. Like I said, I took my games on Nvidia, Amazon, Google, stuff like that, and I'm happy with those games. I might be a buyer in the future, but right now I'm looking at other tech names that I think can do well over the next year to six months that aren't named Nvidia. Well, some interesting points there on the tech sector, Sean, and I know we've talked about cybersecurity and some prior discussion that we also talked about defense and how different defense companies are utilizing AI as another area. Yes, that's also true. Yep. Yep. But I want to circle back to something you said initially, and that was on the REITs. We've had a couple other people bring up real estate and bring up REITs, and they're a collection of real estate assets, and we had even made the analogy that they're kind of like little royalty, royalty companies because you're spreading your bets over a lot of different properties instead of becoming a real estate investor yourself and somebody else is managing these properties. Do you see that as a defensive sector? Do you think that because rates are coming down, that is a boon to the real estate and maybe helps out some of the regional banks? How are you looking at the REIT sector? Yeah, that's the way I'm playing it. Not only REITs, but you also mentioned regional banks, things that can do well as rates come down. The risk we take in this trade though, and it's for everyone and it's every position that we're adding into this, is what if rate cuts stop for some reason. I mean, it's pretty baked in that we're going to have one in September, but what if they only cut 25 basis points and then say, "Well, we'll see about maybe cutting later in the year. We don't know." If they start to give the market the idea that they're going to keep dragging their feet, that won't be so good for these stocks that even as I invest in them now, I have to recognize this risk. There is a risk there that they could get hit if the market starts to think that the Fed's going to continue to drag its feet. That is an area that I am investing in, and I think people should be looking at good names in this. I am finding some value. I mean, these things have been moving up already. They're not as cheap as you could have bought them a few months ago, but just be aware of the risk. The risk is that if the Fed changes its mind on the rate cut cycle, then we're all going to get host. Sean, are there any areas that you see in terms of dividend paying stocks that you think are potentially more stable, that could provide some cash flow in what sounds like it's going to be a choppy market here, or are you at least just interested in putting your money in something safe like a money market fund and earning some of that interest right now? Well, there are some reefs that pay excellent dividends, and I continue to hold pipelines. I mean, they pay, absolutely, they have fixed rate contracts. There's still natural gas and oil flowing out of the oil fields, which means they're still getting all the business they can possibly get. Look at those, but also in regional financials. They can still do very well, I think, and some of them pay nice dividends too. You have to be picky and choosing this. I always prefer companies that are raising dividends over those companies that just pay the largest dividends. If it pays a large dividend and it's raising the dividend, I mean, how long can it keep that up? But I mean, that's always nice, and something that I always like. Another riskier play is pick up a stock that pays a variable a dividend, and you think it's going to raise its variable dividend for one reason or another. There are some of those in mining, I'm not buying mining stocks right now. I already own those, but I'm not in a hurry to sell them. I think some companies with variable dividends in the mining industry are just going to have a great quarter. They really are, but I already own them, so I'm not looking at them. There's a bunch of things you can do. Definitely look at financials, look at REITs, look at utilities, especially those utilities that are saying they have to build more power generation capacity because of customer demand, both consumer demand and industrial demand. We're all using more electrodes all the time, all of us, and certain companies even more so. So that's another way you can play it, and there are other things that I'm looking at. I definitely like dividends here, but I always like dividends, so I'm a broken record on like that fact. I just always do. I like owning stocks that pay me. That's pretty much one thing that helps me sleep at night. Well, it's a great idea to have stocks that pay you to wait, and like you say, there is a lot of uncertainty that is the theme right now in the markets, and so nice to hang out in some stocks that may pay you a fat dividend while you wait to see how the dust settles. And you brought up some great names that are a little more defensive in nature like the REITs, like utilities, like cybersecurity, so some good ideas for people to sink their teeth into. And if people want to follow along with Sean's work, we encourage you to click on the links below. This takes you over to his Weiss ratings daily page, and you can access all of his publications, Supercycle Investor, Resource Trader, and Wealth Megatrend, so Sean, always great having you on the KE report, and looking forward to our next conversation. Would you mind if I mention two more things? One is that I'll be at the Orlando Money Show in October. I think it's October 17th, and so we'll be speaking there, and then I'll be speaking at the New Orleans Investment Conference in November. And so those are two shows that if people are local to those areas or they just want to come to New Orleans and have a good time. Those are good shows, and this is going to be the 50th anniversary New Orleans Investment Conference, so you know that one's going to be really good, so I just want to mention those as well. I appreciate you mentioning Sean, and we will also be at the New Orleans Investment Conference for the 50-year anniversary, so hopefully we'll see some investors there and catch you in the next conversation. Thanks. Thanks.
