Tarek 00:00:00 The current value of the stock is pricing in 76 years of Nvidia’s earnings. It is unreal. Now, you know, intuitively, we know the incumbent politician wants the market to be doing well. They want to go into election season with everything, firing on all cylinders so they can win the market.

Mark 00:00:19 My guess is these stocks that have been on a tear are likely going to at least pause. If not, give it give back some of their ground.

Tarek 00:00:26 Hightower talk listeners. As you can see, we’ve got a great episode planned for you, and we’ll get back to it in just a minute. Now, if you’re not currently a tower client, but you have questions about your investment portfolio, or maybe you feel like you’re not receiving the best service at your current firm, please reach out for an information only, no pressure discussion. We would love to hear from you. The email address is in the episode description. Now, if you are a tower client and you have questions, we’d love to hear from you as well.

Tarek 00:00:53 I think you know how to get a hold of me, but if not, that email address in the episode description will work as well. All right, let’s get to today’s show.

Mark 00:01:02 Well, welcome back to another Tower Talk. We’ll try and use your time. Well, here we’ve got a couple of general market type talk topics and then one that comes close to applying to our own strategy. So our agenda looks like this. We’re going to talk a little bit about private equity. Number two election year results. And then number three we’re going to talk about concentration in the US markets and how it relates to our fundamental indexing okay here we go. Private equity A couple months ago we made the comment that it looks like there will be a liquidity crisis or a liquidity crisis in private equity. What have you seen lately? Tarek on that side? You know, it’s funny.

Tarek 00:01:38 We were just getting ready to record this, and Wall Street Journal just released an article describing some of the challenges a lot of large pension fund funds, endowments, are having with their private equity portfolios.

Tarek 00:01:50 Some of the challenges are they just haven’t been as many exits. And so private equity is in its nature illiquid, you know, your cash is tied up. And generally speaking you get your cash out when they can sell the portfolio companies. But they haven’t been able to do that because of high interest rates and whatever it is. Additionally, I think there is a concern that some of the valuations are a little bit higher. You don’t have valuations that are being done by, you know, at arm’s length market participants. It’s internally valued or, you know, closely valued. And so there’s some concern that the valuations aren’t there. And some of these pension funds are having to get big loans out to try and make sure they can pay their obligations to their pensioners, or take a substantial discount on the value of their private equity holdings to to get some liquidity. Right. So to get some liquidity, maybe 85% of the value.

Mark 00:02:42 Yeah. You remember this is what we made the case we made a couple of months ago was we were beginning to hear about some overvaluation in funds.

Mark 00:02:52 This came out. Very, very briefly with a Harvard, article. So the Harvard pension or the Harvard Endowment, was having some trouble with liquidity. They needed to borrow $2 billion because they couldn’t liquidate some of their investments. And immediately I was like, wait a minute. They have been overstating their returns for decades. No, for years, more than a decade. Number two, this is not just Harvard that has been doing this, but all of the the major funds and its internal managers who hire private, you know, nuns arm’s length for valuation, and then they end up overstating their returns when this compounds into something that’s a decade long or longer. Oh, yeah. Yeah, yeah. The haircut that’s coming, I think is still coming anyway. That’s it. Looks like our call on private equity is going to be the right one. It’s always nice to note the ones that are right, because we have a few that have been wrong. Okay. Election year, what happens in election.

Mark 00:03:52 Yeah. What happens in election years with the markets now US election this year. So that’s right. The the collateral of value or effect on Canada will be there. So what are the thoughts here Turk.

Tarek 00:04:05 Well and we’re specifically talking about the US election because the US is the biggest market in the world. and generally speaking, US elections are good for the market. Now, you know, intuitively, we know the incumbent politician wants the market to be doing well. They want to go into election season with everything, firing on all cylinders so they can win. And generally speaking, that’s the case. So I have a chart here that I can put in the show notes. That’s from, Morgan Stanley. It shows that during election years from 1928 to 2016, markets are up 11.3% in the states. Right. So generally speaking, you know, doesn’t matter if it’s Republican or Democrat when there’s a US election. Markets do well. Right. And we’ve seen that this year. That’s for sure. So far.

Mark 00:04:48 Yeah we’re so far the good year is in the bank. we’ll hope it holds out okay. Talk about this concentration. We’re changing subjects again. So now we’re on to item number three concentration in US equities. Tarek that you’ve been watching actually for quite a while. I think you’ve been talking about it for a year or longer.

Tarek 00:05:06 It’s true. I mean and it’s, it’s it’s quite interesting and it’s kind of related to the election year thing because it’s based on the US market. So currently, the US market actually represents 60, I think it’s 62, 63% of the world’s investable universe, according to the FTSE All World Index. Right. And so it’s substantial just to show you how substantial it is. The next largest country is Japan at 6.1%. Right. So 60 to the United States, 6.1 is the next largest. Canada’s at like 2.2, 2.3 or something like that. now, in addition to that concentration just in the US market, which has been on a tear this year, the, the S&P 500, where the, the primary returns are, where the biggest companies are, has significant concentration of its own.

Tarek 00:05:57 So the top six names in the S&P 500 are names we’ve all heard of Microsoft, Apple, Nvidia, Alphabet or Google, Amazon and Meta which is Facebook and Instagram. those six names hold 31.5% of the market. So what we’re seeing is.

Mark 00:06:17 The US.

Tarek 00:06:18 Market of the US. Yeah, Sp500, so we’ve got 62%, 63% of the world in the US and then 32%, let’s say in just six names, you know, with, you know, a third of the returns and the S&P 500 year to date being just because of Nvidia one one stock so far. So the concentration is significant. Now it’s interesting because right now everybody’s you know we’re kind of talking about it. It’s something that’s interesting. But markets are going up. So it’s not a huge concern. Right. And so when things are going up into the right people aren’t as worried about it. But you know, where are your portfolio managers. And we’re looking at this concentration and we’re kind of like, whoa, this is you know, a good portfolio management theory says we need some diversification here.

Tarek 00:07:08 This is not good. In fact, I was on a call last week, a talk from this, the chief investment officer from CPP. And they, he was discussing some of his concerns around that concentration and how they manage the CP and they’re like, we just can’t we just can’t in good conscience put all of our, you know, to try and match the the world’s equity markets. Right. Especially because as you’ve seen, Apple, Microsoft and these are all very related companies. They’re all in sort of overlapping or similar sectors. Right. So we’re not even seeing diversification.

Mark 00:07:37 There’s not even multiple name risk. There’s single name risk in those six names.

Tarek 00:07:41 Exactly. Because exactly.

Mark 00:07:43 Now you said the seventh one is Berkshire Hathaway. That’s right.

Tarek 00:07:46 Yeah. Which is kind of a conglomerate. Yep.

Mark 00:07:48 Yep. So that’s a more of a value type story. Interesting okay. I remember a time when, we as analysts were talking about Walmart, and it had a trajectory that looked like that. And we were we were joking among ourselves about when Walmart would become larger than the US and would end up taking over the world.

Mark 00:08:09 And of course, that didn’t happen. Now, what we were saying is analysts was, maybe we should be diversifying away from Walmart. Now, Walmart is still a great company and it still should be in, in, major portfolios all over the world. So this is not a knock on Walmart. It’s just the trajectory is unsustainable. And that is the point that we would make here. Okay. Talk about those six names or seven names, whatever you want to choose. They’re in a fundamental index of the US.

Tarek 00:08:38 Your question. So as many of you who listen to this podcast regularly would know, at tower we use a fundamental index. So it’s a different weighting than the S&P 500 would be. So for comparison I looked at what the top what those top six names are in terms of their weight in the fundamental index. Right. So that’s Apple, Microsoft Amazon, Google meta and Nvidia. And they’re 31.5% in the S&P 500. They are just 8.35% in the index we use to represent the US market in our portfolios.

Mark 00:09:12 So what what that means is those companies. Are. Creating fundamental value of 8% of the S&P 500, not 32% of the S&P 500 as they are in market cap value. what are the multiples like? PS I think you said this yesterday.

Tarek 00:09:33 That’s exactly what I was going to bring up next, actually. you know, I quickly looked at Nvidia. Right now Nvidia’s price to earnings multiple. It was was, you know June 17th it was 7676. times earnings for the price.

Mark 00:09:48 Which what does that mean. Tell me. Unpack that.

Tarek 00:09:51 It means the current value of the stock is pricing in 76 years of Nvidia’s earnings. It is unreal. Absolutely the highest I you know, I guess if you don’t have a frame of reference to know whether or not that CI, it is outrageously high to price in 76, nearly 77 years of a company’s earnings in today’s price. That’s not to say that Nvidia is not making a lot of money, but that is that is concerning. That is very, very high.

Tarek 00:10:20 Therefore.

Mark 00:10:22 Here’s here’s our confession. Our fundamental index has underperformed the US market.

Tarek 00:10:28 Yes.

Mark 00:10:29 Over the last I think two years actually. I was looking at the numbers last night just preparing for this call, and I think it was, for the last two years, we have underperformed in the fundamental index. That’s because these momentum stocks have been on a run. I think it’s getting time for the momentum to reassert itself. I think there will be a rotation in the market. My guess is these stocks that have had been on a tear are likely going to at least pause if not given, give back some of their ground. So if you own private equity, we would still say head for the doors, get out if you can. Number two, if you own, these stocks that have been such a great success in your portfolio, please consider taking off at least the money that you put into it. For example your video. Yeah Nvidia 130 US recently or 132 yesterday I think it was was $45 six months ago.

Mark 00:11:30 So if you put $100,000 into Nvidia at 45 and it’s now 130, which is a triple approximately, take out a third, get your capital back, park your money, and then all you’ve got at risk is the game, that kind of thing. So these are some of the ideas. The other is I think it’s time for the fundamental indexes to perform. And that’s, you know, one of our two main strategies I think we’re done. Yeah.

Tarek 00:11:55 Thanks for tuning into Tower Talk. We appreciate it. If you want us to talk about anything specific. Send us an email. If you have any questions about your own portfolio with tower or at a different, asset manager, please let us know. We’d be happy to chat.