Remy: Bond markets returned from the holiday. We are looking at yields slightly lower on the session, but they do remain elevated with cash yields compressing and stock market valuations close to record highs and more into investors do face a tough choice stay trapped in cash or take on equity volatility. Well one Wall Street veteran is making a bold move with his own money rotating out of CDs. Bills and short term units to build a portfolio of bank preferred stocks yielding over 6%. Well joining us live to explain his strategy is Tony Glea who is founder of working profit. Good morning Tony. Thank you so much for joining us. So first and foremost, given what we're seeing across the bond market, why would you say now is the right time to abandon short term cash safety for high yields bank preferred.
Anthony Gallea: So, one of the, one of the portfolios we run is the bank preferred portfolio. We have, we have a number we run, but uh in that particular case, I think yields have come to a point now where they're going to mean revert at some point. I think the economy is starting to be affected, housing clearly by higher mortgage rates. And I've learned over the decades I've been doing this, high interest rates cure high interest rates. So, as interest rates rise and we see the effects coming. In the economy. I don't think they can go much higher. Uh, if we get some settlement in the Iran crisis, I think everybody gets this, you know, oil prices come down, that inflation push from energy comes down, doesn't cost you as much to transport frozen foods. Uh, and so you can get a rally in fixed income. Uh, with certain bank preferred stocks, you're looking at the yields of 7%, uh, and for most investors, 80% of that, uh, will be tax-free. Uh, and they are very much tied, uh, to the long-term, uh, corporate BBB bond yield. And so, any uh move up, some of these things are depressed, uh, you know, issued at $25 trading at $16. If we get a drop in interest rates that can reverse. So not only do you pick up close to 6% after tax, you got the potential for 40% uh appreciation. And so it's really just a question of when that happens, I think, not if it will ever happen.
Remy: Yes, and Tony, while I have you here this morning, the equity markets just opened and we are all digesting the latest reports that have come out from the big banks. So what are your initial takes on the results so far from the big banks and what have you been paying attention to when it comes to the earnings calls?
Anthony Gallea: So I, I worked for one for. 45 years and I, I don't worry about the banks. I think they do just fine. Uh, the results that have come out, uh, there's a few things, you know, Wells Fargo did pretty well. JPMorgan's trading, I think was a bit of a surprise. Goldman looked great. Uh, and I think, uh, they are in a very good place right now. There's just a lot of activity. Markets are, are, uh, ebullient. Uh, so I think it's fine for them. I think earnings will be what they will be. Uh, I think one of the things I, I'm focused on really the stocks we own, and I think we have been focused on the AI trade, but in a, a weird way. I mean, we, what we've been looking at the stocks that have been hit by the AI trade. So, a lot of these, uh, software service stocks, for instance, uh, CCC intelligence Solutions, uh, things. Uh, just a number of them were really hit very hard recently. That's where we position our capital. We think as the AI trade uh begins to be more measured, and people are better aware of where capital should go, I think some of the concerns about those stocks are misplaced. So, we have been looking at the areas that have been hit by the AI trade. I think there's just a lot of value there and a much lower risk profile.
Remy: And of course we all know the big banks as well as global central banks are all monitoring inflation and overall volatility, and I do want to expand on what you said about bank preferred stocks right now instead of common stocks or high yield corporate bonds. So if longer term interest rates eventually do pull back, how much capital appreciation could investors see?
Anthony Gallea: Well, you have a bank preferred stock say issued at 4% uh at $25. Uh, now, it may be trading at $16 because that same dividend, say the $1 dividend, uh, you know, price has to drop, uh, just as it would in a bond. Well, uh, that went from $25 to $16 so the holder has lost $8 a share, that's your opportunity. If you believe that at some point, interest rates can drop 200 basis points, whether it's through recession or whatever, uh, those, uh, preferred reverse and go up. So, again, I say, you know, 6% after uh the tax benefit, uh, and potential for 40% gain. And, you know, your worst case is you're sitting there earning 6% while you wait for this to happen. There is credit risk, of course. You, you're at uh basically at the low end of the credit scale on banks, but you know, they're issued by the big banks, JPMorgan, Wells Fargo, Bank of America, uh, and then others, Allstate, for instance. So I think they're all worth a look. Now, to be clear, this is not all we do. We have a fully invested activist and large cap uh portfolio. We work in biotech. So this is one of the things, but I think it's a timely opportunity.
Remy: Yes, and before we move away from this, tell us about the importance of dollar cost averaging and why it's critical when we're talking about rate sensitive areas.
Anthony Gallea: So I'm glad you brought that up. One of the strategies within the strategy is that as the dividends begin to come in, you take those dividends, you buy more shares of the preferred. So, what you're doing is averaging down. If interest rates keep, keep going up, you're gonna have a, a loss on your preferred. You buy more shares uh with the dividends, and so when it does eventually turn, you, you own more shares. I think dollar cost averaging also is extremely important for areas like gold and silver. You know, people tend to want to have these uh Armageddon kind of forecasts and you should load up and it's, you know, price of silver is gonna explode and so forth. The only way I've been able to, to invest in gold and silver over the years, and I, I still do, is dollar cost averaging. You know, every time they drop, you buy a little bit more, buy a little bit more, cause you really can't forecast, you know, when they bottom out, when the move will start, how far the move will go. So, I think really, if you have conviction in what you're doing, whatever it is, and the market disagrees with you, if you have conviction, your answer should be, well, then you should buy some more. So, I think dollar cost averaging is very important.
Remy: Yes, and Tony, after decades of managing billions for institutions, how are you weighing bank credit risk when it comes to portfolios?
Anthony Gallea: I don't think there's really any functional risk in, in the big banks. I think they're just so well-run, so regulated, so visible. Uh, I think that, that those, those days of 2008, thankfully are behind us. I don't worry too much about the credit risk there. I, I'm more much more concerned about the longer-term trajectory of the federal. Deficit and the fact that Social Security is coming onto the horizon within 3 or 4 years, it will be truly out of money. They're gonna have to do something about it. No, as you know, Remy, nobody's talking about that. Uh, the deficit I saw the journal said the other day, $2 trillion or something, incredible. And I think that there's gonna be a day of reckoning that that's gonna have to be taken care of. And I think as you were talking about the elections coming up, people being elected to the Senate this year, in a six-year term, they are gonna have to deal with this problem. So, it really, it's going to start to come to the forefront of consciousness. So, I worry much less about the banks. Uh, I do have concerns about the trajectory of the long-term federal deficit.
Remy: Yes, and Tony, before I let you go, you brought up an important point, and many of us are indeed concerned about Social Security. So when it comes to some of these blind spots when we're talking about retirement investors, what do you think is key not only as we head into your end but also beyond?
Anthony Gallea: I don't worry too much about the Social Security benefit. That is such a hot button politically. You're, you're just not gonna take our elderly and, and, and push them out. If your investment thesis perhaps runs to big defense space, uh, I'm not sure the money is going to be there when shove comes to push, if it's gonna be a choice between our elderly and spend. Money on things like that. I think there's going to have to be some adjustment. I think retired investors need to have a balanced point of view, above all else, by quality. Whatever they're buying, I think a very simple question they need to ask themselves. If the economy goes into recession, if things get really tough economically for a while. Look at what you own and ask yourself, is it going to come through? I don't personally own Johnson and Johnson, but that's an example of a stock where I think you can buy it and uh hold for the long term, it's always had a good return. And know that if things go bad, you're gonna come through it. I think if you own things that may not, I think you really wanna reconsider all of that.
Remy: And before I let you go, we have about 60 seconds here. You brought up the R word, and that is recession. You've been through many monetary policy cycles, fiscal cycles, as well as economic and political cycles. So what is the reality here when it comes to the risk of recession?
Anthony Gallea: I think that people have not maybe experienced it fully yet. Uh, as you point, I've been through so many, I mean, but I think that the recession will revalue assets. That's what they always do. And then I think that one of the things you need to do is have, have some powder dry. So, thinking about that bank preferred idea. If we go into recession, you assume interest rates drop, yes. Interest rates drop, you have profits, you take it out of that, and then you put it at risk again. So, I think you have to think a little bit strategically about what you're doing now and how you would handle that, a what if recession and play with that.
Remy: Well, Tony, we will have to leave it there for today, but thank you so much for your time this morning and thank you so much for sharing all of your insights as well as your perspective.
Anthony Gallea: Thank you, Romy. Great to see you.
