Speaker 1: As This is the seventy seven WABC Mini cast.
Speaker 2: It's the Larrycudlow Show. Free Market Prosperity starts here now
Speaker 2: Here's Larrycudlow our three.
Speaker 3: Welcome back everybody. By the way, if it works for you,
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Speaker 3: had a DVR the show. No problems anyway. We're going
Speaker 3: to talk stocks and we've got some headlines. Your active
Speaker 3: ETF manager lost again and eighty seven percent of them
Speaker 3: have been losing for a decade. Passive versus active. Okay,
Speaker 3: it's a very interesting debate. We've got my pal David Bonson,
Speaker 3: head of the Bonson Group, founder, managing partner, the author
Speaker 3: of the Dividendcafe dot com, his new book Profit from
Speaker 3: the Profit, The Past, Present and Future of dividend growth Investing. Yes,
Speaker 3: Sir okay, and Jim Lecant Morgan Stanley, executive director and
Speaker 3: Senior Portfolio management Director. Well, some heavy duty stuff, all right, fellas,
Speaker 3: let me put this out. The spiders Spy delivered two
Speaker 3: hundred and fifty two percent over ten years with a
Speaker 3: charge of nine bases points GUARD charges just three basis points.
Speaker 3: Only twenty seven percent of actively managed US large cap
Speaker 3: equity funds beat their benchmark over the past twelve months,
Speaker 3: and over the decade through June. The decade of June,
Speaker 3: just thirteen percent of active managers beat their benchmark. All right,
Speaker 3: we've talked about it on the TV show briefly, we
Speaker 3: want to raise it again with you guys. Let me
Speaker 3: start with David Bohnson, David, active versus passive? What do
Speaker 3: you make of it?
Speaker 4: Well, you know, Larry, you mentioned my book and the
Speaker 4: profit from the profit book coming out Tuesday deals with
Speaker 4: what I've devoted my adult life to, which is dividend
Speaker 4: growth investing. And I'll love this conversation about active versus
Speaker 4: passive because, on one hand, I really believe if the
Speaker 4: whole market is going higher, if beta is rallying, if
Speaker 4: all you're getting is multiple expansion and rowing earnings, and
Speaker 4: basically from two thousand and nine to twenty twenty six,
Speaker 4: seventeen years, the SMP compounds at fifteen percent and has
Speaker 4: lower than historical standard deviation, with a grand total of
Speaker 4: two negative years out of seventeen, only one of them
Speaker 4: at twenty twenty two, where the SMP was down eighteen
Speaker 4: point nine, being really substantial. If you are going to
Speaker 4: get a market like that, passive sounds like a very
Speaker 4: good deal.
Speaker 5: And yet somehow divid in.
Speaker 4: Growth actively managed has outperformed the market. How is that possible? Well,
Speaker 4: over the twenty five years I've been doing it, we
Speaker 4: got a really nice head start because guess what that
Speaker 4: SMP did in the ten years before that period, very
Speaker 4: zero percent because of the bookends of the dot com
Speaker 4: crash and the financial crisis. The SMP was up zero
Speaker 4: percent for ten years, where given in growth compound and
Speaker 4: did it seven percent per year.
Speaker 5: So it just depends.
Speaker 4: If you're in a screaming bowl market, passive is pretty
Speaker 4: hard to not do.
Speaker 5: Well, and the only way to outperform.
Speaker 4: Is to lever that thing going up higher. But I
Speaker 4: think that our argument is not about what the market
Speaker 4: will do or has done. It's in generating the cash flow.
Speaker 4: A lot of investors need.
Speaker 5: The SMP's yield.
Speaker 4: Right now is the lowest it's ever been in history,
Speaker 4: one percent, and yet with a multiple of twenty three
Speaker 4: times price return has been pretty good. So my long
Speaker 4: answer to your short question is that I think passive
Speaker 4: can do very well for bull markets, but we do.
Speaker 5: Not live in a bull market all the time.
Speaker 4: And our twenty five years shows us beating the SMP
Speaker 4: by four percent per year over that period, but we
Speaker 4: got a pretty nice head start.
Speaker 2: All right.
Speaker 3: Well, I love divid investing too. I agree with that,
Speaker 3: but Jen Lecamp, really if you go back one hundred years,
Speaker 3: you look at the Jeremy Siegel argument. I've always been
Speaker 3: a disciple of Jeremy Siegel. The stock market outperforms all
Speaker 3: other asset classes. Okay, and he goes you can go
Speaker 3: back two hundred years. Actually he's even done that work.
Speaker 3: But it beats everything else, beats bonds, beats gold, I
Speaker 3: don't know whatever else is out there, commodities too. So
Speaker 3: if you just own the spiders, you're going to do
Speaker 3: very well. I mean, David is right, you can, you know,
Speaker 3: look at different time horizons, but you know, people want
Speaker 3: to fifty. I always say, buy the index and hold
Speaker 3: it for fifty years. Okay, long long, but that's the
Speaker 3: horizon for individuals. And I think these numbers really show
Speaker 3: the expenses of active management is very difficult, the tax
Speaker 3: situation is very difficult. You're better off with the owning
Speaker 3: this index. So how do you come out. I'm going
Speaker 3: to guess you're an active manager, but I think the
Speaker 3: numbers are against you.
Speaker 6: Okay, this is an absolutely fantastic topic, and David, I'm
Speaker 6: going to agree with both of you. For most people,
Speaker 6: particularly if they're doing yourselfers, you're going to be better
Speaker 6: off in an index and maybe adding a sub index
Speaker 6: onto it, seventy five percent s and B twenty five
Speaker 6: percent queues, something like that. But there's a recency bias
Speaker 6: that always throws these numbers off. For instance, we had
Speaker 6: almost complete correlation in the markets starting with the late
Speaker 6: tail end of the green Span years and going all
Speaker 6: the way through the Bernanki years, where it was really
Speaker 6: just an asset allocation to sit FED was cutting rates.
Speaker 6: People would put money in the market just by the
Speaker 6: indicies and that absolutely made sense, and it almost wiped
Speaker 6: out a whole industry. It almost wiped out the hedge
Speaker 6: fund industry because those that were long and short that
Speaker 6: were trying to provide differentiation that we're trying to say
Speaker 6: this stock is better than that stock. They got killed
Speaker 6: because it was really just about whether you're in stocks
Speaker 6: or not. That started to change a couple of years
Speaker 6: ago when the market started becoming less correlated and we
Speaker 6: started to see real outperformance. And when I say recency bias,
Speaker 6: last year, technology killed, It's slayed. In the last few years.
Speaker 6: It has slayed the magnificent seven, et cetera. So differentiation
Speaker 6: mattered again, and the one year numbers were so much
Speaker 6: better than the index that it dragged up the three
Speaker 6: year numbers, and it dragged up the five for year numbers.
Speaker 6: And the active managers were pumping their tests and see
Speaker 6: see the active management is better. And the reality is
Speaker 6: David is right. The market goes in and out of
Speaker 6: these styles, but generally, for the most part, people would
Speaker 6: be most people would be better off in the indices
Speaker 6: because most people cannot get past human emotions, and human
Speaker 6: emotions will destroy returns. I will say this, though I've
Speaker 6: been doing this for forty one years. I've been dealing
Speaker 6: with clients for forty one years. The people that made
Speaker 6: the most money in the stock market were concentrated in
Speaker 6: a smaller amount of names, and they held onto their
Speaker 6: winners and they got rid of their losers.
Speaker 3: And interesting, David, your dividend play, though, how active are you?
Speaker 4: Well, when we see a name that we think has
Speaker 4: an opportunity cost to keep polding because the stock has
Speaker 4: gone up so much and the yield has dropped, and
Speaker 4: we think there's a better thing to.
Speaker 5: Buy, then we'll sell a name.
Speaker 4: But Larry, you're talking about out of a thirty five
Speaker 4: stock portfolio, which is high conviction. It's exactly what Jim
Speaker 4: just said about high concentration. To me, the activity comes
Speaker 4: when you make the decision that you can do better
Speaker 4: in something else, and it's one to two names a year.
Speaker 4: But I've devoted this effort to never having a diviting cut.
Speaker 4: And we went through financial crisis, who went through nine
Speaker 4: to eleven, went through COVID, We've gone through a lot
Speaker 4: of periods and never had a dibting cut. That can't
Speaker 4: be done passively. Every passive index has to deal with
Speaker 4: the general electrics and the at and ts and the
Speaker 4: intels and the three m's that shock you by cutting
Speaker 4: the dividend. Where I think active management can help avoid that,
Speaker 4: but I agree with you that it needs to be
Speaker 4: tax efficient. And I just want to point out how
Speaker 4: can somebody, it's great Larry to buy the SMP for
Speaker 4: fifty years and accumulate a massive compounded return. But most
Speaker 4: people are saving and investing for some objective. They need cash,
Speaker 4: a periodic stream of cash flow into something.
Speaker 5: Like a retirement, and so then they.
Speaker 4: Have to sell off some of the S and P
Speaker 4: and they're going to be paying the same taxes anyways.
Speaker 4: In terms of long term capital gains, the thanks to
Speaker 4: the wonderful supply side tax cut of bush W two
Speaker 4: thousand and three, gave us the same rate on dividends
Speaker 4: as it does capital gains, and you and I believe
Speaker 4: both of those rates should be lower, not higher. They're
Speaker 4: double taxes. They're taxing capital that's already been tax But
Speaker 4: I think that what given and growth does is take
Speaker 4: the focus off of what other people are doing and
Speaker 4: onto what the company is doing, which is generate profits,
Speaker 4: profits of the mother's milk.
Speaker 3: Yes they are. Okay, let's take a break. We're going
Speaker 3: to come back on and talk about bonds and interest
Speaker 3: rates as well as David Bonson Jim mcamp Cudlow will
Speaker 3: be right back, folks.
Speaker 2: This is the Larry Cudlow Show. Now back to the
Speaker 2: Larry Cudlow Show, and.
Speaker 3: We're talking stocks. David Bonson and the Boston Group his
Speaker 3: book new book, Profit from the Prophet, The Past Present
Speaker 3: Future of Dividend Growth Investing, and Jim mccamp Morgan Stanley
Speaker 3: Executive Director and Senior Portfolio Managing Director. Jim mcamp My
Speaker 3: love forty one years. I love that. So during the
Speaker 3: break I did some arithmetic. I went from the New
Speaker 3: York Fed to Payne Weffer, Jackson and Curtis, which doesn't
Speaker 3: exist anymore. That was in nineteen seventy six. Nineteen seventy six.
Speaker 3: Now you could say I've been out of the market
Speaker 3: for I've been out of Wall Street for a long time.
Speaker 3: But that's fifty that's fifty years. And you were on
Speaker 3: the CNBC show many times, weren't you with you?
Speaker 6: Yes, many times? Still. I was just on Friday as well.
Speaker 6: I was on yesterday, David Bunson.
Speaker 3: You weren't on my CNBC show, were you?
Speaker 5: No?
Speaker 4: I was on it a couple a couple of times
Speaker 4: at the very end, but you know the timing you,
Speaker 4: of course got the return to the White House, so.
Speaker 3: I know I have to take that out anyway, profits
Speaker 3: of the mother's milk of stocks, David, this is a
Speaker 3: very high profit environment, is it not.
Speaker 4: Well, it is so of course we also look at
Speaker 4: free cash flow and what's interesting is it's a high
Speaker 4: profit environment, and yet it is becoming a declining free
Speaker 4: cash flow environment because a lot of the profits are
Speaker 4: coming with a lot of cap X and that gets
Speaker 4: capitalized over time. Are simple in that censilary They're like
Speaker 4: a lemonade stand investment. You cash in, cash out. What's
Speaker 4: available to give to investors, what isn't. When you start
Speaker 4: talking about the complexity of amortization and capital expenditures, it
Speaker 4: gets more complicated. Now, look, these NVIDIAs and Google's are
Speaker 4: some of the most profitable companies in human history. But
Speaker 4: they even when they had huge cash flow, they weren't
Speaker 4: returning into shareholders much. They were reinvesting in the company.
Speaker 4: That worked out real well for them. But now the
Speaker 4: Googles and Metas and Amazons and even Microsoft's these don't
Speaker 4: have the cash flow they had. And that's where a
Speaker 4: lot of this AI stuff is becoming a very interesting
Speaker 4: story from a risk reward standpoint.
Speaker 3: Jim mcamp we were talking about the Magnificent seven and
Speaker 3: their performance. Edy Ardenni calls it the impressive what was it,
Speaker 3: the impressive four hundred and ninety three? So is there
Speaker 3: anything out there that really looks bad for stocks? Performance
Speaker 3: has been awfully good. Is there anything out there that
Speaker 3: threatens this bull market?
Speaker 6: Two things. First of all, I think the market has
Speaker 6: completely underestimated what's going on in the energy markets. The
Speaker 6: energy stocks are doing well, by the way, but they're
Speaker 6: counting on the US to be the marginal producer and
Speaker 6: the low hanging fruit has really been picked. If you
Speaker 6: look at where they're drilling right now, it's not as
Speaker 6: robust in terms of what they're getting. The recounts up,
Speaker 6: but the barrel count is not. And it's going to
Speaker 6: take two years in the Middle East to whenever they
Speaker 6: stop whenever that is, to rebuild and get production flowing
Speaker 6: the way it was. And there's a lot of militias
Speaker 6: still controlling areas in Venezuela, so that's something to watch.
Speaker 6: I think the market still looks fine, by the way,
Speaker 6: that's something to watch. But the other thing is interest rates.
Speaker 6: I mean, we've got this new operation Chubby Checker. Twist,
Speaker 6: Let's twist again, going But the reality is if we
Speaker 6: didn't have forty one trillion dollars of debt, then that
Speaker 6: wouldn't be as big of an issue. And it's not
Speaker 6: just the government that has debt. Now. All these AI
Speaker 6: CAPEX bonds that are being issued are coming at really widespreads,
Speaker 6: so that that could change that narrative as well. And
Speaker 6: if the spread stay high, that could affect everything from
Speaker 6: the housing market to private equity funding to commercial real estate.
Speaker 6: I'm still bullish, but these are the things that These
Speaker 6: are the dark clouds that may or may not metastasize
Speaker 6: into a storm, but they're out there.
Speaker 3: David Benson, our interest rates going up or down.
Speaker 4: Well, the main thing is that they've been that the
Speaker 4: yield curve itself has steepened, and so you saw the
Speaker 4: longer end go up more than the shorter end. I
Speaker 4: don't know what the Fed is going to do on
Speaker 4: the short end, and I have a lot of thoughts
Speaker 4: on the pros and cons the different things they could do,
Speaker 4: should do do. I'm a huge Kevin Warsh fan and supporter,
Speaker 4: but they have a tough job, Larry.
Speaker 6: But the long end.
Speaker 4: I think markets have to control. I don't think two
Speaker 4: billion or four billion of a twist here and a
Speaker 4: chubby chetter there. I don't think.
Speaker 5: I think that when we were talking about thirty two
Speaker 5: and a half.
Speaker 4: Trillion dollars of treasury debt, I'm not sure that that
Speaker 4: intervention is really all that great of an idea. But
Speaker 4: but well, you know, they're trying to get mortgage rates lower.
Speaker 4: I understand, but you know, I'm a market skuy I'd
Speaker 4: rather not market sort this stuff out.
Speaker 3: Well, you can that the President is on the horn
Speaker 3: to Scott Pssant constantly, get race down, get raced down.
Speaker 3: I don't know that Besson loves this operation twist repurchasing.
Speaker 3: It's kind of like off the run, on the run.
Speaker 3: I was talking to John Carney about that. So they're
Speaker 3: trying to retire the off the run stuff so they
Speaker 3: can get back to the on the run stuff. There's
Speaker 3: not gonna be any interest rate impact of that, I
Speaker 3: don't think anyway, Jim mccamp, it's not going to affect
Speaker 3: rates anyway.
Speaker 6: Well, at the end of the day, the US rates
Speaker 6: are still going to be mostly impacted by what's going
Speaker 6: on in the economy. And there can be a growth,
Speaker 6: a story out there to be made that part of
Speaker 6: the fact that the economy is still growing and doing
Speaker 6: well has an impact on interest rates. But I got
Speaker 6: to tell you, with the central banks, you're looking at gold,
Speaker 6: you're looking at bitcoin, you're looking at commodities. All of
Speaker 6: them are doing well because there are concerns about the
Speaker 6: dollar and what the FED is doing there.
Speaker 3: All right, gentlemen, we'll close it down. David Bunsen, thank you.
Speaker 3: Jim Mcamp, thank you very much. Folks, We'll take a
Speaker 3: quick break and do some money and politics with Steve
Speaker 3: Moore and Liz Peak. I'm cudlo. Please stick around.