Hennessy Large Cap Financial Fund Portfolio Manager David Ellison joins Yahoo Finance Live’s Julie Hyman and Brian Sozzi to discuss interest rate hikes, JPMorgan Chase, CitiGroup, and Wells Fargo’s fourth quarter earnings, what to expect from banks, and an outlook on fintech for 2022
BRIAN SOZZI: With the first round of bank earnings out, what is your first trade? David Ellison is a portfolio manager at the Hennessy Large Cap Financial Fund. David, Happy Friday to you here. So you just heard we talked about Jamie Dimon putting forward potentially seven interest rate hikes this year. As someone who’s invested in the financial space, does that make you more optimistic on bank stocks or less?
DAVID ELLISON: Well, I think– seven rate hikes would be what? This is not the Paul Volcker era. It would be what, almost 2%? Assuming it’s 25 basis points each. But I think if it’s that much, then the market’s going to have a lot of trouble across the board, just because the last time we did this, it got beat up. So we broke open the pinata today on earnings, and the operative word is “in line.” And I think that’s why the stocks are trading down.
There’s no surprises. There’s nothing special under the Christmas tree. Yeah, the business is good. Credit’s great. Loan demand is OK. Maybe a little better deposit flows. They’re still good. They’re making tons of money. But there’s nothing super exciting. We’ve had a good run in the space. And so now the question is, why do you own them? Well, you own them because they’re safer than a lot of these other companies trading at 10 times revenues.
So I can buy banks at 11, 12 times earnings, and the rest of the market can buy companies at 10 and 12 times revenues. I’d rather be at 10 or 12 times earnings.
JULIE HYMAN: Well, and David–
BRIAN SOZZI: You want to–
JULIE HYMAN: Go ahead, Sozz. Go ahead.
BRIAN SOZZI: I just wanted to follow up. There were some weakness in some of these reports, David, notably fixed income revenues, trading revenues. And the stocks, I think, are trading down on those results. But does that make the case for you to add more to your Apple position, which you also own?
DAVID ELLISON: Well, I think the first comment is that the Wall Street income, as I call it, it’s wonderful for the brokers, and it pays them a nice bonus. But it’s a low-P/E business, and it always has been, at least in my 40 years of work in this business. So if we’re going to focus on bond trading, we might as well own a hedge fund.
This business is about credit. It’s about spreads. It’s about expenses. It’s about planning for the future to compete against the Apples and the Blocks and the PayPals and whoever else decides to come along and go public with a fancy ticker symbol. So I think that’s the story of the future of these companies.
And I think, for example, JPMorgan today, they said, well, expenses are going to be higher. And that’s what’s driving a lot of the concern about the company– not in a big, big, way but in terms of why the stock is down today. It’s not some of the other fundamentals. And hopefully they’re making good investments in the future, and that will bear fruit longer term.
You see Citicorp divesting businesses, which hopefully will benefit them in the long term, Wells Fargo still trying to get out of the penalty box. And that’s a self-help story. So I think from that perspective, there’s a lot of good things to see here. The bad news is stocks have had a great run.
Now, when it comes to Apple and the other fintech stuff, I mean, the valuation– Apple is not a valuation problem, but a lot of these other guys are. And so the question is, if the market lives on earnings valuation and conviction– the banks have earnings. They have valuation to hold it up. But the question is, a lot of these other stocks, people are losing their conviction. And that’s going to create a correction.
We’ve seen a significant correction in these fintech financials across all of the other– including all of the other technology names that are out there that I can’t even begin to understand. So there’s a lot of damage going on out there, which I think is healthy for the market overall, especially if you’re looking at a fund manager who cares about valuation and price, which has been my story for many, many years. I buy value. And so it’s not been a value trade. And maybe we’ll get that going forward.
JULIE HYMAN: And maybe it’ll be nudged along by the increases in interest rates. David, I got to come back to that JPMorgan– to that Jamie Dimon comment, six or seven interest rate increases this year. I mean, what is he talking about? Does that headline not make you scratch your head a little bit?
DAVID ELLISON: To be completely honest– I know it’s a Friday, and maybe people won’t listen. But here’s a guy that everybody knows in the financial business. He’s been around a long time. He’s roughly my age. He’s made a ton of money, runs a great company. He says stuff like this which, to me, on the margin is irresponsible.
Why are you creating a situation where you’re telling the market, well, it could be rate increases? I mean, that tells everybody the market could be a disaster if rates go up eight times. And look what happened in 2018. They raised a little bit and then completely reversed because the market croaked. So I don’t understand why he’s doing this when he knows that everybody’s listening.
Very few people are going to listen to me. And I’m saying that that’s an irresponsible comment, but nobody’s going to care. But I think if I was him, it would be like, you got to take it back a little bit. I mean, let’s not go crazy with this stuff. Maybe you believe that, but sometimes it’s important to– you’re running a big company that people are listening to. You’ve got to be a little careful about what you say.
JULIE HYMAN: David, is there anything that you see in the data out there right now that would suggest there’s room for that many rate hikes this year?
DAVID ELLISON: Well, I think part of the problem with the market is rates– part of the problem with the stock market is rates are too low, and there’s no alternative. So I say the market’s got a name, and it’s Tina FOMO. And the problem is that if you sell your Apple stock or you sell your JPMorgan, you end up going into a money market fund at Fidelity or Vanguard or BlackRock that yields one basis point. That’s your alternative.
And if your alternative is one basis point– or if you buy the six-month T-bill, it’s 25 bips– that’s not an alternative. So that keeps the market where it is, and it keeps it relatively high relative to history. And to take rates up that much, like he’s suggesting, how far is the market going to have to fall/ If you drive the 10-year to 4% or 5%– I’m not suggesting that’s going to happen, but let’s make that as an assumption– how many people are going to sell the market and buy the five-year, 10-year?
A ton of people. Trillions of dollars are going to flow into a 5% 10-year. And it’s going to come out of the market where all these companies– you got tons of companies that aren’t making money trading at multiples or revenue that the banks are trading on earnings.
So you’ve seen the data where you’ve got a record number of companies that are trading north of 10 times revenues in the S&P. All that money is going to come out and flow into higher bond yields. So that’s the issue, is that you’ve got to prick the balloon slowly. But again, I don’t think the Fed is going to take the market down because they think inflation is too high.
I just don’t think they’re going to do that. The market, in a sense– to me, 2008 was the bonds. It was mortgages. It created a real recession. IT created real job loss. And now the market is the new bond market. The market is the new CMBS, RMBS no doc liar loan. That’s what the market– if you take the market down 20%, the economy is going to have a serious recession because there’s going to be massive wealth loss. And people are going to get scared.