Transcript:

Caroline Woods: Joining us now is Mark Malek, chief investment officer at Siebert Financial. Mark, welcome to the desk. Great to have you.

Mark Malek: Great to be here.

Caroline Woods: So we have stocks pulling back this morning as the ten year yield pushes above 5.3%, its highest level since what 2002. Yeah. Are higher yields finally catching up with stocks or is this just a little bump in the road.

Mark Malek: Oh boy. That’s that’s that’s the question of the day. You know, I wake up every morning and ask myself the same question. Is this the is this the day when stocks are going to take off the noise canceling headphones and pay attention to the bond market? Right. But the reality is, is that there are a lot of stocks that are paying attention to what’s going on in the bond market, just not the usual suspects, just not the ones that are most heavily weighted on the S&P 500, which is what we all like to watch every single day.

Mark Malek: But the reality is, is that that that these yields are extremely important, especially for the growth stocks that we all know and love and that we’re all counting on.

Caroline Woods: So to kind of build on that, because I was going to start by asking why aren’t higher yields breaking the market. But then if you do take a look underneath the surface, you do see that small caps have pulled back the S&P 500. Equal weight has pulled back. Almost every sector was negative last month. We started the week a bit more positive.

Caroline Woods: Do you think that the the headlines and the AI stocks are sort of masking what’s going on? And what does that all mean about where the overall market can go from here.

Mark Malek: Yeah. So that is a it’s a very challenging question right. There’s a there’s a technical side of it. And then there’s the feeling side of it. Right. And the market doesn’t always act like it should act from a financial standpoint. But from a financial perspective, there is a world where where higher yields can exist and growth stocks could still be going up as long as those growth stocks are expected to grow faster.

Mark Malek: Right. So if we still have feel that there’s such great prospects for some of the usual suspects that we talk about, you know, the invidious of the world, the AI ecosystem stocks that we like to talk often about, the stocks that we expect in the long run, to really continue to knock it out of the park. If those growth rates can continue, then in fact, they can out ski the avalanche right of these higher yields.

Mark Malek: But then of course, there are. You mentioned the you know, the feeling side of things. Right. So everyone’s hearing about these yields. Everyone has been trained. Investors have been trained over the years. Well at least more recently, especially in the growth world as yields go up, that could sort of hamper growth in terms of stocks. So whether or not the stocks will start to slow down simply because investors are backing away just because they’re uncomfortable about hearing about the headline risk or recognizing the challenges that might come with these higher yields, that could hamper as well.

Mark Malek: Right. So there are two sides of it. But for now, I think investors are still very comfortable with the growth story. And I think for now, people have been used to getting these great annual returns on equities, driven mainly by principally by these types of companies. And the thesis of a lot of these companies hasn’t really materially changed.

Mark Malek: So I think people continue to look there. You know the I don’t want to bring it back. The old Tina right. There is no alternative. But right now, look, if you want to invest in equities and you want growth and you want a story that’s ironclad, the thesis is still pretty ironclad when it comes to a lot of these stocks that are leading the S&P.

Mark Malek: Well two days ago or yesterday at least to new highs.

Caroline Woods: So bottom line this is a bump in the road. And you think this market can power higher because of growth stocks.

Mark Malek: Well I hate to be the the it depends kind of economist but it does depend. Right. Because we’re starting earnings season right. We’re literally they’re starting to bubble in a little bit right. Starting to hear a little bit about consumer. We’re going to hear a lot from the financials next week. And of course then comes the tech. And of course if we continue to see if we see these types of earnings growth, you are going to there’s absolutely there’s no reason to to well, of course there’s always a reason to, to pay attention to this stuff.

Mark Malek: But if we don’t see any material cracks in the story, big misses forward guidance, you know, what are they saying in the, you know, in the in the earnings announcements? These are the things that can trip up. Right. So these things are all when you’re at these levels, at these multiples, at these frothy levels. Stocks behave well until they don’t.

Mark Malek: Right. So all it takes is one sort of off comment by a CFO. You know, one person gets irked by by a growth. You know, higher than expected growth in CapEx. And then all of a sudden, you know, the the the machine starts to generate the sort of negativity that could cause a pullback, buying opportunities, maybe most likely.

Caroline Woods: Okay. So a pullback would be a buying opportunity in this.

Mark Malek: For the most part for me. But you know we’re at a stage right now I believe right. So we’re we’re very constructive on that part of the market. We believe there’s a lot more room to run on those stocks.

Mark Malek: Growth stocks.

Mark Malek: Growth stocks specifically. We like tech very much and we like the AI ecosystem stocks. But at these levels we can’t do what we did maybe last year or two quarters ago where we were just like, okay, stories pretty good. We’re going to go with it. It should work. No more peanut butter and jelly. Mathematics, right? You have to really take a look because they’re not all the same anymore.

Mark Malek: And there are stocks that have real good prospects and good stories justified risk, while others, not so much. You know, you’re starting to see that there’s a difference as a dichotomy between stocks that probably don’t justify the risk. And those that do.

Caroline Woods: Give me some examples of stocks that you like here that justify the risk even at these valuations and some that don’t.

Mark Malek: Fantastic question. Right. So we put things in tears right. So again very generally right a tier one stock would be a company that is investing very aggressive in this space might be a hyper scalar but they have cash flow that have a balance sheet. They have other business lines that they can lean back on. They can pull back the accelerator a little bit if they have to, and they can survive.

Mark Malek: That’s a tier one company.

Caroline Woods: Can you give a name?

Mark Malek: Yeah. Like I would say Microsoft and Amazon. You know, these types of companies, they have even in meta they have the balance sheet. They can do it. They make other revenues. These are behemoths on their in their own right. They’re in a very big expansion mode right now. But then there are other companies that are heavily involved in this that would be that are more heavily reliant on debt to do these builds, outs and things like that.

Mark Malek: And then there’s there’s a whole list, you know, of those companies going down, you know, going down, down the line. Right. So Oracle might be a great company, but they’re a little bit more highly leveraged. So much more risk. That’s like a tier two company for us. And they’re going to be more interest rate sensitive. They still are great company.

Mark Malek: They still have great business prospects. They still are by in many people’s book. But that’s a much more you expect a much higher return for that type of risk. And then there are the tier threes, which are companies that are really just more upstart type companies that are going to that are obviously subject to a significantly higher risk.

Mark Malek: Right. So, you know, you’re more likely to buy the dips on the companies. Again, you know we always look on these pullbacks, right. Is it a company that should be trading off or is it down for the right reason or the wrong reason. If it’s down because everyone all of a sudden has second thoughts about oh my god, CapEx is huge.

Mark Malek: Okay, we all know this. This should be built into everybody’s business model. So it’s pulling back because all the ships are going down. Okay. Now it’s time to load up on some of these fabulous companies. Right. And then.

Caroline Woods: Give us an example of one of those tier three companies, though, that you wouldn’t necessarily by on the dip.

Mark Malek: So a lot of the newer upstarts. Right. So I don’t don’t want to give you a specific names over there because I completely avoid that, that, that tier myself. But, you know, certainly I’m digging from tier one to tier two.

Mark Malek: Okay.

Caroline Woods: You’ve owned caterpillar, Vertov and Eaton. Those are stock picks that you brought in your notes here for a long time. They’ve all benefited from the AI infrastructure bill that. Would you buy all of those here?

Mark Malek: Yes. And so this is the interesting part. Again I love that because those are not the sexy, you know, companies that everyone wants to talk about. But everyone kind of has heard about them.

Caroline Woods: Caterpillar up 50% year to date up almost what 60 Eaton’s up.

Mark Malek: For exactly. Exactly right. You know, these companies again, they’re not known for their innovation and technology. Right. Well, we think about technology growth companies. We’re thinking about companies that have R&D, you know, huge R&D spends, companies that are innovating, companies that can continue to innovate, not companies that are like reliant on balance sheets or reliant on repeat customers and sales pipeline.

Mark Malek: These are the companies that have always been in our portfolio. These are companies because we’re still we we still have a diversified portfolio. We’re just more heavily tilted in growth more recently. But these are stocks that we’ve owned caterpillar for many, many years because we like caterpillar as a company. Caterpillar used to be a more cyclical type of stock, very heavily tied to construction spending expansion in the economy overseas.

Mark Malek: Right. Remember for a minute they were very highly, you know, tied to growth in Asia, right? So these companies would go up and down very well run companies. We always like these. These were solid holds. Now they’re part of this AI ecosystem right. So you know, I would like to say I knew ten years ago when I bought caterpillars, I knew this was going to be a thing.

Mark Malek: But the reality is we’ve been holding companies like this for a long time. All these companies eating, these are just good industrial companies. Now, the interesting thing is, is when we’re looking at the AI ecosystem, that’s one of the things that we’re changing, which is right. Two years ago we’re only investing in chips. We’re only besting hyperscalers and any it’s a lot of software that has changed a little bit.

Mark Malek: But the reality is, is that we we should all be looking at where are the, the the points of tension. Right. So where the friction points in this ecosystem, where are there points where companies have price power, where companies they have to be the micro is also but a more sexier, similar example to any of these companies. You know where micron you know, just a year and a half ago everyone was Pooh Pooh it as it’s a memory company.

Mark Malek: It’s a commodity business. You know, they’re at the mercy of the market. But now we have all learned the market is very much at the mercy of them.

Caroline Woods: Is micron a buy and hold forever type of stuff?

Mark Malek: No, it’s not a good question. Micron is a very much a buy now right. Because they control a very important part of the ecosystem.

Caroline Woods: By now, even though it’s up 230% year to date.

Mark Malek: Correct? Yes. This is one of those working out run the avalanche. Okay. This is a company that will continue to outrun the avalanche. However, if things do catch up, if if CapEx starts to slow down, everything’s going to struggle and companies like that will struggle the most. You’re taking a big risk here, but you’re getting a big potential return because they’re still a very important juncture.

Mark Malek: Let’s remember that, you know, everyone’s favorite company in Vidya, mine included, is beholden to micron. That’s part of their chipset. So without a boring company like micron they can’t sell a chipset.

Caroline Woods: So you could only own one here. Would it be micron or and hideous.

Mark Malek: Nvidia. Yeah video because Nvidia is the innovator. And so if they can continue to over innovate themselves they will continue to build a moat right behind themselves as they’re going. Micron is now in a very good position as is caterpillar right. Because everyone needs gas generators now. But they’re not going to need them forever. And and so you know I hate to bring another you know apple which is not in this space but apple for many years there were the other done.

Mark Malek: They’re done. They’re done every quarter they’re done. And yet how well has Apple done over the years. Why. Because they keep innovating beyond that avalanche. Right. And so you have companies that are able to do that. Not every company. And they can’t always do it forever. But they have been able to do it in the case of so far within Vedere, as far as we’ve been watching them very carefully as an innovator, not just a game card manufacturer or a parallel processor manufacturer for Bitcoin mining.

Mark Malek: As once we started getting into this, we recognize what great management they have, how they’re able to innovate. And so I think for now, the way I can see as far as I could see, as far as my contacts will allow me to see, I see continued innovation from a company like that management, they’re building all sorts of moats around them by building their own little ecosystems.

Mark Malek: Will it grow at this pace forever? Absolutely not. Right. That will slow down.

Caroline Woods: So let’s shift away from tech and talk about how else you’re diversifying your portfolios outside of names like caterpillar, which are now, you know, AI beneficiaries. Because you are getting a bit of a pullback and other areas of the market. I mentioned that, you know, almost every sector was lower in September. So what looks attractive to you outside of AI beneficiaries and tech stocks?

Mark Malek: You know, look we are always on the lookout. We have we are always on the lookout for companies that have growth prospects of different variation. Right. So you can’t only invest in stocks that are going to grow 100% a year. Right? It would be nice to do that. But you know, there’s a cost to that. Right. And that is risk.

Mark Malek: And so, you know, we have to be mindful of that risk. We have to try to diversify as much as we possibly can. And so that said, you know, we try to look at other sectors, we try to find exciting opportunities in healthcare. And that for now would be companies in pharmaceuticals. The usual suspects there.

Mark Malek: Lily.

Mark Malek: Yes. Okay. These are companies that are innovating. These are companies that are solid. They have great prospects. Again, it’s not it’s not exciting, but it is. It’s very, very real. They to have a bulletproof a bulletproof thesis. And the numbers keep proving out. And so you know.

Caroline Woods: What about financials?

Mark Malek: Okay. I knew you were going to get to that. I was waiting for you. Financials. This has been an interesting one. Okay. For us financials. We have a love hate relationship with financials. A couple quarters ago, you couldn’t deny the the prospects of financials. There are a lot of well-run financial companies right now. There has been, again, there’s probably the best management we’ve ever seen in that, in that sector right now because they have survived so much.

Mark Malek: These companies, they survived when I thought was a pretty tough, almost a nuclear winter from, you know, from Covid through post-Covid, where they saw a deal flow disappear, where they saw, you know, rates all over the place and, you know, managing a book, a loan book in those types of environments, which is very, very difficult. But there became a time after the storm where the skies cleared and the sun looked very bright for them.

Mark Malek: Right? Because all of a sudden you saw a deal flow pick up, you saw M&A flow pick up. You saw trading pick up. You saw, you know, all these areas of the market going. So you know wealth management like a company like Morgan Stanley’s more heavily weighted in wealth management. So all of these things okay. Gave one or the other a good sort of a good leg up even interest rates.

Mark Malek: It was very clear. Well not very clear, but it was pretty clear the direction of interest rates. So we can understand which way the curve was going. And and look, the banks can make money despite what everyone thinks, no matter what the curve looks like, but not when it’s going like this. It’s very, very difficult. But when they know which way it’s going, they can work their way through those situations.

Mark Malek: I think that those conditions persisted through last quarter. Last quarter financials had an amazing quarter, unbelievable quarter.

Caroline Woods: So the best is behind us. Is this all leading to.

Mark Malek: I’m going to say financials I’m going to be paying very very close attention to financials next week.

Caroline Woods: What would you need to hear to come back and say now is the time to buy financials?

Mark Malek: I’m not saying financials are sell, but I’m not buying them right now. I’m I’m holding right now here what they say I want to hear what the guidance is like. Clearly I want to hear guidance on those areas I was talking about. How are they seeing deal flow. What what is their pipeline, their M&A pipeline look like? What is their capital markets pipelines look like.

Mark Malek: Can they still get these. Great. Because remember their diversified across all these areas, their businesses. We can understand we can come up with an idea, you and I, of what we think trading is going to look like because we’re here watching it happen. We could see if the markets continue to behave the way they are. They continue to go up.

Mark Malek: We know that wealth management, wealth management fees are going to continue to grow. But I want to hear about all that stuff, not so much the net interest income. I mean, yes, of course you want to see health over there, but I’ll tell you that the biggest learning that I get from those from the banks, the reason I love them first, is because they give you a good bead on what’s going on with the consumer, right?

Mark Malek: Two thirds of the economy comes from people like you and me spending money. So if we stop spending money, if we start to struggle with our credit cards, then that’s just for me. It’s a canary in the coal mine. And the banks are in a great specialty. The large commercial banks that JP morgan’s of the cities, Wells Fargo, they can tell us how their consumers doing.

Mark Malek: And I think all of us and I’ll tell you, I’ve been wrong on that. Right. Because every quarter I think, oh, this is going to be the quarter. They’re telling us that their their default rates are going up. They’re going, but they’re not going up. People continue to spend. We continue to hear from Jamie Dimon and all these they’re consumer they’re lower and consumer still healthy, still spending money.

Caroline Woods: We see any signs of cracks in the consumer from Jamie Dimon commentary. Yeah. Your first change would be what in your portfolio.

Mark Malek: You know for me I’ve I have been staying away from consumer discretionary. I’m a little concerned about consumer discretion. I’ve always been I’ve always been concerned about the health of the consumer. I’ve been wrong. So but I’m not buying.

Caroline Woods: Some would look at some of the consumer discretionary stocks and say you did just fine staying away from correct?

Mark Malek: Correct. Correct. But you know I’m talking about a bigger repricing in those areas. You know. So for me I you know, I’m more of a sort of a stick, you know, a hold. I’m not necessarily selling my discretionary. I don’t have a lot of discretion areas. But, you know, again every quarter I go through this process, interestingly, this quarter will be slightly different.

Mark Malek: And I’ll get into that if you want to know.

Caroline Woods: Well, I think that, you know, we’re just about out of time. I want to get to rapid fire. But I want to bring one question, sure, that I’ve been asking a lot of my guests lately, especially you’re bullish. I sense your bullishness with maybe some.

Mark Malek: Pensive.

Caroline Woods: Yeah. Pennsylvania. Okay good.

Mark Malek: Delta’s tight. Delta’s tight.

Caroline Woods: And given how far the areas of the market that you like have already run. Yeah. Why take the risk of owning stocks at all right now. Other than what you already have.

Mark Malek: Yeah.

Caroline Woods: And why not just buy bonds at 5%?

Mark Malek: Fabulous question. It it depends on the stocks. Again, most people, most people on the way home from work, average investors, they hear that the stock market went up whether they own stocks or not. They hear that they went up. It’s a good thing. Maybe we could buy that dishwasher. Okay. But they’re just hearing about the S&P 500.

Mark Malek: They’re not seeing what’s underneath the surface. And so you know we’re talking about stocks the ones that we like the individual stocks. They have fantastic growth growth prospects. If you look at just the expected earnings growth of let’s say the S&P this next quarter, it’s in the mid to high 20s. It’s going up. People are are tweaking it up slightly.

Mark Malek: If you look at forward earnings growth, if you just look at what the forward earnings are expected for the S&P 500 and we look at earnings yield right now. The earnings yield of the S&P 500, the broad index is is probably less than a 5.3% Treasury. So you pointed exactly at the right thing. Why would I do that.

Mark Malek: Right. Why wouldn’t I just go for the risk the risk free at 5.3%. Well, if you want to lock in for five point, if you want to reckon for ten years on that and you know you don’t need that money for ten years and you’re happy with 5.3%, great. But I haven’t met anybody in this building that is happy with 5.3%, knowing that next year we might get 27%.

Mark Malek: Yeah, we’ve gotten pretty used to those lofty returns. Not only do they say scale back, but every.

Mark Malek: Year last forever. But these companies, as long as they continue to have solid fundamentals, a solid thesis, we can continue to do it. Look, I learned a long time ago on Wall Street. Look, we’re paid to invest money here, and we invest in opportunities until those opportunities close to haven’t closed yet. We’re watching the doors carefully. You know, you know, when you play musical chairs.

Mark Malek: Yeah. And it’s getting to the end of the song. You keep a hand on the back of every chair you pass over. That’s kind of what I’m. I’m ready to jump into the first chair that I can go.

Caroline Woods: All right. I think it’s a great time to pivot to a rapid fire game of this or that. This is quick questions. Quick answer is no hedging if you can help it. Are you ready? Yes. All right. First time playing. Here we go. S&P 500 near records by hold or trim by ten. Year at 5.3%. Stocks or treasuries.

Caroline Woods: Stocks energy with back above 90 by or avoid.

Mark Malek: Avoid like the plague.

Caroline Woods: Equal weight S&P or Nasdaq for the next 12 months. Nasdaq tech on a pullback, buying opportunity or warning sign.

Mark Malek: By every.

Caroline Woods: Day AI stocks bigger risk right now. Valuations or interest rates.

Mark Malek: Interest rates.

Caroline Woods: Micron up nearly 300% year to date by hold or take profits.

Mark Malek: By.

Caroline Woods: Nvidia records fairly valued or more room to run.

Mark Malek: More room to run and fairly valued.

Caroline Woods: If you could only buy one Meg seven stock right here. That’s not in video. Which is it?

Caroline Woods: Microsoft financials at these yields opportunity or avoid. Avoid consumer discretionary by the weakness are stay away.

Mark Malek: Avoid like a plague.

Caroline Woods: International stocks or U.S. stocks for the next 12 months. U.S. gold at 4000 bargain or stay away.

Mark Malek: Stay away.

Caroline Woods: Interesting. Fed’s next move. Hike. Hold or cut?

Mark Malek: Hold.

Caroline Woods: Finish this sentence. If the ten year stays above 5%, investors should.

Mark Malek: Be really, really careful.

Caroline Woods: Stocks by year end. High or lower?

Mark Malek: Higher.

Caroline Woods: How much higher?

Mark Malek: A little bit.

Caroline Woods: All right. Mark Malek, chief investment officer, Siebert Financial definitely played by the rules. Thank you for that. We really appreciate your picks and your insights.

Mark Malek: Thanks so much.

Caroline Woods: All right. If you enjoyed this street talk, check out our full interview with NickLlumpp. He says market risks are building and lays out how to prepare for a potential correction in 2027.