Host: Let's turn now to Bilal Little, goal BTF strategist with direction. Hi Bilal, good to see you. You're not allowed to, you're not allowed to leave again.
Bilal Little: I know that's what we've decided.
Host: I know. I didn't like it.
Bilal Little: I know. I'm sorry.
Host: I didn't like it. I, I prefer having you here at, at the desk. OK, so let's start off with the Fed hiked rates in September, um. That's actually the first time we've actually seen a hike in a couple of years. 16 out of 18 officials saw at least one more hike this year. We have the FOMC minutes coming out tomorrow. Tomorrow is Wednesday. What are you going to be looking for in some of those minutes?
Bilal Little: Yes, look, I think the first is the Fed is no longer moving in isolation. Right, it's all about data, but the markets are not even moving in isolation, right? So the core driver has still been energy that will continue to be, I would say, on their radar for the next and foreseeable future. But also I think it's going to be how does the data stack up as we go into the end of the year because right now you think about it, the The perception right now is that they're actually going to pause right because the jobs data that came in on Friday was a little weaker than expected. Now people are not paying attention to this because it's not communicated as much. The Fed only does about 8 meetings a year. They're not actually meeting in November, so they only have 2 more times to either possibly stay flat and or raise. What's off the table is, you know, they're not going to. Lower rates, right, so that's, yeah, but I, I would look at what is the data showing. So the ISM data came out yesterday, which is really about supplies, right? And how does, uh, how do businesses in the United States supply the needs or the demand that they have? And right now you actually see and you got to look at this, uh, Kristen. A lot of these businesses are now starting to pass off costs to these individuals, and the individuals are going to now either start to make very strategic decisions with their wallet.
Host: You mean you and me, they're passing it on to
Bilal Little: 100%. Well, holiday season, are you going to fly to go see your family? Like what Christmas gifts are you going to buy or not buy? What dinner are you going to go to or not go to? You're going to be much more selective. So right now for the Fed, what I'm looking at is what is the language coming out of that meeting of what they've seen obviously in September.
Host: OK, so I love that point that you brought up about essentially. These costs are being passed on to the consumer. The consumer now has a decision to make about essentially voting with their wallets, right, about where they're going to be placing their dollars. So to that point, I want to take a look at small caps because we have a chart about small caps. IWM, they had almost a 14% lead over the S&P 500, and this is something that we had chatted about for a while, how small caps essentially had been leading the market and there had been the rotation into those smaller companies away from the really large names that we saw. The S&P 500, that advantage has pretty much disappeared. However, so and you know as we've seen that 10 year Treasury yield continue to climb, you continue to say this over 5% in yields. Is that really like a sign for you right to see that advantage, that erosion in the small caps like a clear sign that those higher interest rates are really starting to bite because we know that those small businesses, they feel the effects of those interest rates more acutely than some of those larger companies that have that buffer.
Bilal Little: You make a great point. They actually have to tap the debt market to actually fund themselves and as rates go up higher, that eats away at their margin. So to your point, most people, if you look at small caps, you go back to August, that's when you saw them peak out effectively in the middle of August. And since then you've seen nothing but obviously the tenure continue to march higher. What that's done is you've seen a real pressure being put on the entire category. Just looked at this, looking at ETF data, about $150 million basically went out of small caps yesterday, right? And that's the tenure to your point peaking at 53. At some point, the rotation of capital from rate sensitive areas is really going to leave those areas. So I would be looking at home builders, I would be looking at small cap, I would be looking at the long end of the curve because that creates volatility in those asset classes that are rate sensitive. Right now again, investors are making the decision. Here's another interesting stat that I looked at. If you look at the last 5 categories of the top 5 categories in ETF flows over the last week, 4 out of those categories have been fixed income. The number one category was actually municipal bonds. At the end of the 3rd quarter. Some investors were also their advisors or themselves. They were actually making strategic trades around tax loss harvesting. Right, as well as thinking, well, I'm starting to get paid to be in bonds. That's a very important point, and small caps are obviously just one of the casualties in this particular scenario.
Host: You know, it's been such a long time since I've had to chat about Muni bonds. These are some of the least sexy, I mean, but not really, they're the least sexy parts of the market, and they've gotten sexy again because of what we are seeing with yields. OK, so let's talk about what's essentially driving all of this. You and I have chatted about this a lot. It's going to be oil. Brent is still up about 44%. Energy stocks, however, are only up about 11%.
Bilal Little: Yes.
Host: Why do you think, and this is something that I've actually consistently asked myself, why aren't energy equities and the energy ETFs keeping up with the spikes that we are seeing when it comes to oil?
Bilal Little: Yes, so that's got to do with some of the pass through and then obviously them starting to materialize and make some additional sort of Let's be honest, like revenues right at some point and then the market's going to either discount and or reward that. What you've seen is obviously the spike in oil because of the situation in the Middle East, but here's a very telling sign, I think that the market is really trying to digest is do we want to actually take on the risk of obviously some of those positions? So obviously everyone was watching Exxon and Chevron to look at those plays, but really down. The consumer, you're thinking about the refinery aspect of oil. So that's just oil pricing going up. When you start looking at these other aspects in the businesses, it takes time to work through the system for it to then be materialized to then try to figure out if we're going to obviously get paid or compensated to hold that asset class. So that is a big disconnect, but I think that was also one of the big question marks in the market, like how are these energy. The energy sector XLE not up as much as energy prices and then more recently you've seen with the G7 that obviously that just came out earlier this week that they're going to start to release some strategic reserves so that takes off some pressure. You see oil is down over the last couple of sessions and you're seeing some pressure being removed from basically the energy trade. I still don't think it goes away at this particular point and it still remains a hedge.
Host: So speaking about disconnect. Energy, oil prices up 44%. Massive inflation as a result. What's happening in Iran has not gone away. It's been about 6 months now, right, since that started. The market, however, still up 12%. The disconnect is the market is extremely narrow. Do you think there's at all some complacency though in what we're seeing in the market right now between what is very clearly happening geopolitically, which you know the market tends to look back, look past. Excuse me, a lot of those tensions, but I don't think we can look past it anymore. It's been going on, as I mentioned, half a year. Inflation is now forcing the Fed to hike rates, as you mentioned. They're definitely not going to cut, and cutting rates was the base case scenario not that long ago. And yet the market still keeps, I mean, looking at the big board right now, we've got a nice green day.
Bilal Little: Kristen, the truth of the matter is the market has climbed the wall of worry all year, right? I mean it's done so in valiant fashion and more importantly, you have a handful of names that continue to drive. If you actually look at the S&P, the broader S&P in totality, you actually have the average stock down 7% or so over the last several weeks. It's actually not a great great sign obviously Nvidia, obviously the tech sensitive areas continue to catch a bid here, but that's still not the long term opportunity I think. I think right now investors should not be complacent. They should go into the 4th quarter thinking about the volatility, barbelling their approach when it comes to fixed income, and then looking at other asset classes like we've talked about over the last couple of weeks. Gold is starting to catch a bid here right now because when rates top out and the dollar is extremely. Strong historically you would see the gold gold sell off. What you're seeing now is a little bit of stability at this level of 4200 or so, and I think you're going to see investors really start to rotate capital back into gold as well as some areas of fixed income.
Host: OK, stop jumping the gun because we're going to be chatting about that before we go to break, however, I want to ask you one more question about oil and what happens if it stays at these. Let's just, let's just kind of put, I don't know if I want to call it a worst case scenario, but let's just say what's happening in oil and energy prices is here to stay. We're about to go into these winter months, so we obviously see an elevation in oil prices or when we see an elevation in energy prices anyway. So how much does that change the inflation story? What do you think that does to the Fed and therefore fixed income? Into 2027 because we're looking at the end of the year now.
Bilal Little: Well, one, I think the story for the Fed is going to be diesel, right? What does that look like because the businesses, every truck in this country runs on diesel and because of that price, if that doesn't come down, you're going to see those businesses pass off costs to who you and I. At that point they're going to realize that look, inflation is too sticky now we're Obviously have to raise rates and bring that down. The challenge becomes how long can the consumer stay healthy and strong enough to propel the market for them to have that conversation, because now you're looking at December, I think right now December hike is priced in about 85% or so. So if they pause here and they raise in December, I think that's your story for oil. You're talking about maybe here. Or even a slight leg lower, that's actually a bullish sign for equities, right, because this is an entirely different economy and I think the consumer is a very different consumer than they were for sure back in 2023 100% when we saw hiking rates again, but the consumer was strong, you know, they've been saving money for a couple of years thanks to COVID and we've got a couple of minutes to get through a few things.
Host: So let's first start with the consumer. Yes, we've got earnings. We've got Pepsi, Constellation Brands, McCormick, and Levi's. What are you looking for in the consumer when it comes to the consumer in terms of these earnings reports?
Bilal Little: The number one thing for all of these businesses to communicate is volume. If you see a material drop in volume and you actually got some of that data with McCormick, where obviously people are paying more for seasons, so they passed off costs, although margins have been maintained. You're going to see everyone pay attention to volume. How are these businesses growing or not growing, or are they just actually passing off costs? That's going to be the tell and that's also going to be the lead into Delta going into this holiday season.
Host: OK, so talk to me about Delta really quickly because that's both consumer demand, higher fuel costs all in one.
Bilal Little: That's the best story. So will their premium seats continue to be filled by the investors that are calling it the middle class plus higher and they're doing well. Or do you see, obviously the economy classes, are they still filled up as well, and you see the demand around those consumers like you and I who are flying.
Host: Listen, I usually fly Delta One in case Delta is watching. If you want to give me Delta Diamond. Well, I already have Diamond, but I'm just saying it was $11,000 to go to Paris, and I was like I might have to be flying in the back. OK, so let's quickly chat. Gold, about 22% below its January. High gold is supposed to be a safe haven asset though, and the gold story has been fairly interesting because we have inflation, we have geopolitical uncertainty. Why have we seen gold?
Bilal Little: Still a fair gauge, I think. Obviously investors were taking profits around 5300 or so earlier this year. Right now there was other places in the market where you could actually take risk. I think now that trade comes back and investors are really putting a price tag on gold at 40%. 500 probably or so from where we are today.
Host: All right, let's, let's end this with your call of the week. Let's go. I think we're gonna have a graphic for this going forward, but we want to call this, you like calling it little by little.
Bilal Little: Yeah, I'm gonna give you a little bit by little, you know what I mean?
Host: So give us the little by little. What's some of your calls for the week?
Bilal Little: All right, the call is I would be watching energy, whether that's XLE and or Exxon. If you want to trade energy. Can do so around other positions. That's one. The second trade I will be watching is regional banks because obviously with a higher tenure Treasury investors are going to be watching. Can those banks actually have better margins? Regional banks will be an interesting one. Obviously the financials are going to be reporting here in the next couple of weeks and then obviously you want to start thinking about, in my opinion, dividend equities. That is the number one opportunity. Investors to be thinking about buying dividend stocks and or positions that will allow you to trade around options that will give you income as premium.
Host: I'm glad you mentioned income because we will be chatting about that with Simplify a little bit later on in the episode below a little strategist that direction as always. We'll see you next week at the desk because you're not allowed to go anywhere.
