Host: Today's capital markets segment is brought to you by Alpaca. It is that day on Wall Street and at 2 p.m. Eastern, the Federal Reserve will deliver its latest interest rate decision widely expected to be a hawkish pause before chair Kevin Wars takes the podium, but with money markets still pricing in over a 70% chance of another rate hike in December and big tech earnings from Microsoft and Alphabet landing after the belt today. Investors are on high. And ahead of the market open on Wall Street, we are joined by Eddie Gaborra, co-founder and CEO of Key Advisors Wealth Management. Eddie, great to have you here. Thank you so much for joining me.
Eddie Gaborra: Thanks for having me.
Host: Well, today is Fed Day and all of us are anticipating Morsch's commentary, but I understand that depending on what happens, uh, you do expect the potential for Bah humbug in terms of the Santa Claus rally by year end for the S&P 500. Is that right?
Eddie Gaborra: My biggest concern is if they raise rates in December that's going to cause a major shift in this market. And the reason why we say that and why his commentary today is going to be so critical is you're already seeing a lot of tightening in the credit markets. We've heard about core weaves bonds in the secondary market. Oracle, uh, high yield spreads have widened, so credit is getting tight right now for corporate America. Especially small businesses, if you tighten into that scenario, that's when you break something and that's when you have big drawdowns in the market. So I do think the market short term is set up for a nice rally in November and then all bets are off on December relative to what the Fed does. If the Fed tightens in December, we are going to be aggressive sellers of our higher risk areas and put a full on defensive playbook for. 2027 because that will be a repeat of the same mistake that was done in the fourth quarter of 2018 where the Fed ignored signals. They raised rates in September and December and caused the NASDAQ to drop by 20% and the S&P 500 to drop by 10% during that scenario. So, uh, I'm cautiously optimistic that Worsch, understanding the, the credit markets, will make the right decision.
Host: Yes, so you gave us your take and your expectations on the rate outlook as well as policy, but tell us what you're seeing when it comes to the bond markets.
Eddie Gaborra: So right now with bonds, you know, one real positive here is the 10 year has kind of looks like it has topped short term, and that's really big because that affects mortgage rates. But the bigger problem we're seeing. In the bond market is high yield spreads are widening. When high yield spreads start to widening, that's a warning sign to pay attention that the cost of credit is really starting to increase, and that is something you don't want to see in the capital markets. This entire AI buildout is all financed. It's not being paid with cash, so. If the cost of capital goes up, the snowball effect is you're going to see a deceleration of capex spending. And the first time a hyperscaler comes out and says that they're going to have to lower their expectation for capex spending will be when we have a real problem in this market.
Host: And of course when we are taking a look at the cost of living here in the US, it goes without saying that energy prices are higher and we're concerned about inflation. But what do you think the Fed should be focusing on when it comes to inflation?
Eddie Gaborra: Well, here's the thing we do have an inflation problem. Of oil. If oil was right back into the 60s, we wouldn't even be having this conversation in my opinion because inflation would be trending down and this is our argument the oil prices are up because of the war. There's nothing that you can do from a monetary policy perspective by raising rates to get oil down. Matter of fact, you're going to make it even harder for consumers so the people they're trying to protect by getting inflation down. The medicine for that is not raising rates right now. The medicine for that is ending the war and having some type of resolution overseas to bring energy costs down.
Host: Yes, and Eddie, while we're talking about what's affecting the markets, as you mentioned off the top, we're paying attention to artificial intelligence as well as all of the financing deals that we continue to hear about on a seemingly daily. Basis, but I understand that you're focused on cybersecurity. So tell us why you think this is a tailwind.
Eddie Gaborra: So when you look at the tech space, you want to try to buffer yourself from areas that need a lot of debt and where there's a potential of reduction of capex spending. When you talk to CEOs with the adoption of AI as fast as it's being adopted, the biggest threat. That's keeping CEOs up at night is some type of cyber attack. So when you look at investing into 2027, if there's an area that a company is not gonna pull money back from, in our opinion, it's gonna be cybersecurity. As a matter of fact, I think you're gonna see double digit. Increases in expense spending towards cybersecurity and that's a real tailwind for that space.
Host: And finally, Eddie, we have about 60 seconds. We have Microsoft after the bell alongside Alphabet. So what are you watching for from the earnings?
Eddie Gaborra: The biggest thing we want to hear is what the CE numbers are as well as what the debt markets look like. I think those are going to be questions you're going to have to answer to shareholders to see if there's any problem. Problem with getting credit. If there is, that's going to be a major warning sign to start to get out of those names. I don't expect to hear that this early in the cycle, but it's going to be the biggest thing because again at the end of the day, the cost of credit is the biggest thing that's going to keep this thing going.
Host: Well, Eddie, a lot to keep our eyes on as we head into the afternoon. So appreciate your time this morning as well as all of your insights.
Eddie Gaborra: Thanks for having me.
Host: Thank you so much.
