 Welcome to Trading Strategies for December. I'm Scott Gamm and we're live over the next hour to give you an investing playbook. As we close out 2017 and head into 2018, and fear not, we are going to talk about Bitcoin, that's coming up as well. But let's bring in our panel right now. Jeff Marks is senior portfolio analyst for Jim Cramer's Charitable Trust right here at the Street Action Alerts Plus. Stephen Guilfoyle is the co-manager of the Street's stocks under 10 portfolio. George Rosnak is co-head of Global Fixed Income Strategy at Wells Fargo Investment Institute. And Alex Dryden is a global market strategist at JP Morgan Asset Management. And guys, thanks to everyone for joining us. You know, this week, tax reform really throwing a wrench into the markets causing this sector rotation. Alex, why don't you explain what we have been seeing in recent sessions? Well, what we've been seeing is corporate tax reform, as you said, throwing a bit of a wrench, a bit of a risk off move out of technology as people have been looking for more safety back into the value names. That has corrected a market trend that has been going on for most of the last year. So we've been seeing a bit of rotation. Asian markets being hit quite hard from that due to their heavy tech weight as people are moving back into value. George, what do you make of what we've been seeing, not only in the stock market, but also in fixed income, which of course you cover. Yeah, so we do like consumer discretionaries here. We do like the idea of cyclical sectors right now. We do like industrials and financials. And then from a fixed income perspective, we see a lot of volatility within the fixed income markets. But we expect the flattening yield curve to actually start to steep and into 2018. And I want to talk more about the yields curve in a moment. But Sarge, the Nasdaq actually recovering today, we're now in positive territory. How are you looking at tech stocks this week? Well, I'm trying to decide if this rotation is the real thing or not. Obviously, tax reform is forcing the issue of the corporate AMT onto these tech stocks. Obviously, the idea that for high income, middle to high income earners in the blue states, which are mostly highly populated, a lot of them might be looking at getting out of their profits this month rather than next month, just because they're going to pay more taxes next month. So there's a couple of reasons to get out of your winners right now. And let's face it, the analysts are probably going to have to raise earnings per share expectations for retail, maybe for the banks depending on the yield curve. Even for energy, although we're seeing energy come in a bit today, but there are places where you're going to see more benefit than you are in the tech names. And Jeff, Action Alerts Plus, do you guys own a lot of major tech players out there? Yeah, we own a lot of tech, but we still like them long term. I think what's going on right now is there's just not a lot of new money coming into the market. So people are taking some off of tech, which has been some of the best winners this year. And then they're putting it into their bets where they think will benefit the most from tax reform. That's actually a great point. These cash levels are low, so they have to pull the money from somewhere. And where are you going to take it? Do we all think we're going to get tax reform signed by the president this year? And if so, what does that mean for the markets, Alex? I think there's a very solid chance that it will get done by year end. So 80%, 90%? Yeah, putting a percentage on these things is pretty difficult to do, but we're feeling pretty confident that you're going to see this on the president's desk before year end, allowing them to start off the new year with a fresh agenda and the politicians get a clear headwind. If it doesn't get passed and the longer it goes on, the more chance that it has of falling to pieces. And that's where I think investors may be getting more and more jittery the longer you leave it. Yeah, George, do you agree that we would get a pullback if we don't get some sort of tax reform? We think there's some evaluation of the tax reform or expectations within the market itself. Not completely there. Valuations have kind of gotten a little bit ahead of themselves right now, but you would definitely see a pullback, we think, if the tax reform does not get passed by this year. Sarge, do you agree with that? I think it's a must. So yeah, they have a political imperative to get this done because the party's already in enough trouble as it is. And they need a major victory. They need to show that to the American public, say, look what we did for you. Although, as I mentioned in the blue states, they might not thank them all that much. But there's enough red states out there where they are support. They shouldn't lose support. So I think that they have to get it done. And I think that you'll see, you can see up to 1,000 points come off the Dow if it were to fail. Jeff, do you agree with that? 1,000 point trap? I mean, I don't want to put a specific number on it, but I think there is a lot of headline risk on there, which is why this week what we've done is we've been trimming a lot of our winners, the winners of tax reform, building up our cash reserves on there just to allow ourselves plenty of ammo in case there is that type of headline risk that occurs. Alex, you're telling clients to sort of go back to school when it comes to equity investing. What do you mean by that? A lot of that is going back to the very fundamentals of being diversified, keeping the risk spread across a wider set of shoulders. We've had a big run-up in the equity markets recently. We just want to make people aware that being diversified is important going into 2018, particularly with maybe the return of volatility. This year we've had a very low level of volatility. I think that has bred some complacency amongst some investors, and with the advent of the withdrawal of monetary policy both in the US and globally, that could see some volatility come back on the table. So going back to school, staying diversified, spreading the risk across a wider set of shoulders in your portfolios makes a lot of sense going into next year. George, would you endorse a strategy like that? I think that makes a lot of sense. We put out a piece moving ahead in the aging recovery for 2018 outlook, and that's one of the things we talked about is the idea of running scenario and sensitivity analysis. Obviously a lot easier within the fixed income markets, but in the equity markets, you can go back and see what happens within a 7-10% pullback in your portfolio. You can look at more extreme events and certainly take some of the benefit that you've had this year and look to rebalance your portfolio. We think that's a winning strategy right now. And you guys at Wells Fargo have a 2700 target on the S&P 500? Yeah, not that large from here, obviously. You know, 2.73% growth from here. But we do expect potentially a small pullback before, you know, either towards your end over the next three months, let's say, more likely probably in early 2018. So therefore, if you get that 5-7% pullback, you're talking about roughly a 10% gain if you add in sort of the 3% growth. Sarju and I were talking before we went on about S&P 500 targets. What do you make of something like 2700? Well, I don't see it. Right now I got about $146 for S&P earnings next year. If you give me 25% or 20% on the corporate tax rate, I see much higher numbers. I see as much as 165% if you give me 20% on the corporate tax rate. Not that everything falls in place. We don't even know exactly what's in the bill just yet. But if you give me that, I have really high numbers for the S&P 500 next year. Numbers that are almost too high to stay in public just yet. I'll probably write a note about it later in the month. But the potential is there for another blowout year. Well, stocks are said to post 10.8% earnings growth this year according to CFRA research. We're looking at 10.7% in 2018. I mean, Sarju, do you think... That's without tax reform. But is that a high hurdle to achieve? I'll tell you what, a lot might depend on the deficit spending, the yield curve, the U.S. dollar valuations. There's a lot that really has to be worked out. And if you don't see some kind of reversal in the yield curve, because what we've written out about 0.50 on the two versus the 10 and three weeks ago we were complaining about 0.80, then the financials aren't going to perform. So a lot will depend on how the financials do. And it's still a long ball. I think 10% is the low end. Yeah, I think we'll get the 10% growth in earnings next year. But I think potential is there for as much as the mid to high 20s. Guys, what do you make of earnings growth for next year? We're not quite as optimistic as sort of double digit, with maybe high single digit growth going into this year. But again, that is without factoring in the corporate tax reform. It's going to take some time to work out how all the details of this bill will filter into the individual companies and who's going to be the winners and who's going to be the losers. That bill has gone from idea generation to completion or close to completion in quite a short space of time. And I think investors and politicians are still wrapping their head around all the intricate details of it. Yes, but we still don't have tax reform. Yes, it's not quite over the line, it's getting close. George, give us your outlook on the 10-year. I mean, at what point does the 10-year yield start to impact stocks as Sarge was sort of alluding to? We think it will, but that's not going to be for next year, we don't think. Because we think right now, to Sarge's point before, the yield curve is actually flattened pretty dramatically this year. So we started two to 10-year spreads at roughly 126 basis points. It's down to 50 to 55 basis points right now. So it's a flattening yield curve. We think that's going to back up a little bit. So the 10-year could move as high as two and three quarters by year-end next year, roughly two and a half by year-end this year. So that actually would be a steepening effect and would benefit net interest margins for financial stocks. And we think actually be a good thing for the economy overall. How does that cause the Fed to slow down on the short end? We think that they're going to slow down. So what's baked into the market right now is only one interest rate rise next year. The Fed's dot plot shows three interest rate rises. That's what they've been talking. We've actually split the two. We think they'll probably raise it twice next year. We do think that the Fed will pause and not do it three times next year. I think they're going to have to. Unless people stop buying at 10-year, end of 30-year. Well, again, if inflation starts picking up, they're clearly going to have to. That's the one key ingredient that's missing right now. But Alex, you've done some research on sort of what level in a 10-year would start to negatively impact stocks. So if you go back over the last, say, two to three decades, typically when the 10-year starts to go over the 5% mark, that's usually the sign that the economy's overheating. The equity markets sell off anticipating a recession down the line and that's where the challenge is. Well, this is the problem. That was done in a previous time and I think we can all agree that the fixed income markets of today are very different from the ones of yesteryear. Therefore, we think the new threshold, that 5% threshold I talked about, is probably closer to something like three and a half. I agree, 100%. That, I think, is where there is a more realistic threshold for when equity starts to draw down. And you think that could happen next year? Or is that more of a 2019 struggle? No, we've got a 10-year target of about 3% by the end of next year. Driven by changes in international investors' direction, changes on the global central bank landscape sees the 10-year drift towards 3%. Therefore, maybe in 2019, we'll start hitting that threshold. George, you're expecting the yield curve steepening, as you just mentioned, but there obviously was risk of an inverting yield curve that people were talking about not too long ago. Yeah, and actually, and the other point about that is so it's been flattening over the course of the year, but it's picked up since October, right? So, since October, you were looking at sort of a 75 basis point spread and so it's picked up pretty dramatically recently. So I think the direction, the directional change and the magnitude of it is what's concerning to the markets right now. And can you just go back to basics and define why an inverted yield curve is necessarily a bad thing, a signal of a recession? Sure. So if you look historically back, it's predicted, actually it's predicted more of the recessions than actually have occurred, but it's been a pretty decent predictor of actual recession coming on. So right now, our prediction for a recession coming on is pretty limited, around 25% next year, not very likely, but obviously, you start moving to an inverted yield curve, bets start changing around that. Sarge, you agree with that? I do agree. I don't see a recession anytime soon. I think we're still growing. I think we're still growing kind of nicely. And if the president succeeds in ramping up military spending, that'll also ramp up GDP, which is why you stay involved in some of these defense and aerospace names, by the way, but I do see growth for the coming year. Sarge, you alluded to the Federal Reserve earlier in our conversation. I want to talk about that now because Jerome Powell was approved by the Senate Banking Committee. The vote now goes to the broader Senate, assuming he gets the nod to succeed Janet Yellen in February. What will Powell mean for the markets? How different or similar will he be from Janet Yellen? Alex? I think he's going to be fairly similar. From all accounts, Powell is a consensus builder, a centurist, who's probably not going to rock the boat. For us, actually, where I think the changes could come in is around those vacancies that are currently on the FOMC. There's a lot of empty chairs that need to be filled. And with the transitions that we're seeing, we're seeing about maybe five doves coming off the committee, they're not being replaced, a lot of those are vacancies. And if we see a number of hawks coming to the committee, maybe we see a little bit, a few more interest rate hikes next year than what is currently being anticipated. Maybe further down the line, you see changes to the balance sheet policy. Things to be thinking about, but that's where I think the changes will be, rather than in the leadership, more in the composition. Do you think the dot-plot changes next week? I think the terminal rate may start to nose up. Maybe not next week, but I'll be looking at March and saying whether or not we'll see, as those new committee members come in, whether you'll see the terminal rate coming up slightly. George, weigh in on Jerome Powell, because we know he has a little bit more of a, let's say, optimistic view on the banks, a little bit less hawkish on bank regulation than Janet Yellen. Yeah, I think the important thing is that, so as a leader, he's going to set the tone of what the market should expect, and I think you're going to see a very similar tone to what you've seen with Yellen. And so for that perspective, there's going to be a fair amount of consistency. Completely agree with Alex that you're going to have four vacancies now with Yellen stepping off, and so that's going to change the composition of the FOMC, and we'll see how that actually impacts things going forward. Our view right now is that the Fed doesn't want, the Fed's going to be more reactive than proactive in this process. They've already moved rates up. They've already done a great job orchestrating interest rate rises over the course, and they're actually reducing their balance sheet. The important thing for them is to not move too fast, and so I don't think they're going to be moving ahead of anticipation with inflation, and so they'll be a little bit more passive. So that's why our view is two-radix versus three. Sarge, what about the balance sheet? It was obviously a big topic earlier in the year than they started the unwinding process in October, and since then we haven't really heard much about it. I guess to the Fed's liking. Their plan is that we would not notice the unwind, and let's hope that continues. I think that that's also another tool they can use if they need to, if there is some kind of mini-crisis that they want to give the impression of taking a dovish route, they can just stop that unwind of the balance sheet. And also, I mean, obviously, they'll probably have to stop raising the Fed funds rate at that point as well, but they can do it in increments. Instead of making the one swoop, taking all the headlines, they can say, look, we're doing this for you. We're not going to tighten conditions right now. Stop reducing liquidity. And I think Powell is probably a pragmatic enough guy, and as you said, a patient enough guy where he'll probably take the right route, where I think I might disagree with you. I think the president will choose dovish people and rather than hawkish people. He likes to tweet about the stock market? That is one reason, yes. He likes to claim victories. He likes to claim growth. He likes to claim the stock markets at all-time highs for the 81st time since I won the election. I think the challenge is going to be getting some of those nominees through a slightly more hawkish Senate. That's where I think the challenge has come in. So it's that balance. I agree with you. But once they get one to three more rates under their belt, we'll be in a different atmosphere at that point, and we may be threatening to invert the yield curve. But it's really hard for Jerome Powell to mimic Janet Yellen's record as Fed chair. I mean, the S&P 500 is up well over 50% since she took over in early 2014. Will there be an easy transition of power at the Fed, at least from a market point of view? I think the baton being passed from Janet Yellen to Jerome Powell is always a difficult transition as the market starts to get used to listening to a slightly different person. You get used to the communications that come out of that. I think this transition so far has been relatively seamless. I've not seen too many investors concerned that there's going to be a dramatic shift in Fed policy. And Jerome Powell has done a pretty good job of sort of talking to markets and talking to the politicians about will be probably staying the course, not changing dynamic too much. And the reality is they've had a good market to deal with, right? They've had good growth. They've had low inflation. They've had good consumer sentiment to deal with. They've had great demand for fixed income assets so they can roll off assets and allow the market to pick that up. So if those conditions persist, we would think that they would take more of a passive approach. And there's no reason to think that those won't persist now going forward. Jeff, at Action Alerts Plus, you guys have Citi and Key Bank for the trust. Obviously, you're watching the Fed developments closely. Those are the two banks? Yeah, those are the two banks. They're great banks. I mean, we're not changing our financials strategy heading into the new year. We did take some off the top last week when they were both up, but that was just part of our disciplined approach of not being too greedy, booking profits. Those are the two names we like because they're not as heavily tied to trading revenue, which you just saw in the Wall Street Journal the other day that there's some of the other larger banks that are having declining trading revenue due to the lack of volatility that we're in. So, yep, same approach going into next year. Citi, Key Corp, those are our two names there. A lot of international value of Citi, too. Sorry, do you obviously agree with that strategy? And I also add the ETFKBE to my banking holdings as well as the European Fund, EUFN, which, in case the ECB ever gets off their tail and actually starts raising rates, that's my play there, but that one really hasn't gone anywhere since I bought it, but it's in the portfolio for that reason. Yeah, and Citi trades at a cheaper relative value from a tangible book value perspective. So their tangible book right now is about $68. We've been saying to our members at our club, whenever it's near that level, we think it's a buy because it's just too cheap relative to its peers. Alex, what do you tell clients right now about the financial sector heading into 2018? It's one of the areas that we like. There's a little bit of cautiousness going into it. Two areas that we do like, we think the yield curve will steep in going into next year. Bigger in their interest margins may be slightly helpful for some of the big financial names. The other thing that we're looking for is also a pickup in volatility going into next year. This year has been eerily quiet. Biggest drawdown we've had is just 3%. We've not had a 5% drawdown since Brexit, and we've gone nearly two years now we've had a 10% drawdown. That volatility we think will change, mainly as central banks begin to change direction, withdraw some of the liquidity which has been suppressing that volatility. Who wins in a slightly higher volatility world? Some of the financial names. I think that's where we'll be looking at. We've had the last seven days, right? I think it's the most violent seven days we've had, and the markets almost ended up in the same place. So maybe that volatility could reverse some of those fixed income currency and commodities headwinds that the major banks are facing. I mean, it could, you know, but I would stick more focus, yes, stick to the thesis, stick to the valuations. I think those are the most important. Look at what the bank could return in an event, you know, not in an event, but from a tangible book value perspective, what the company's balance sheets were. And you guys have had some fantastic bulletins on Citigroup that said Action Alerts Plus. Yeah, so anytime it's in the news, headlines like that, we talk about Action Alerts Plus. We actually just had our club member conference call today where we detailed all of our core holdings going into 2018. Citigroup is one of them, and, you know, we like that long term. And you also like NVIDIA long term. Can you explain the calculus behind that name? Well, I mean, it starts with their management and CEO Jensen Wang is an innovator. He's brilliant. He was Fortune's 2017 Business Person of the Year. He had his vision where he knew that there was going to be a growing demand for the need of superior processors in artificial intelligence. And even in gaming too, he's built NVIDIA. They have the best processors at the cheapest cost. And, you know, they're just involved in everything in the future of tech. You just came in number 10 on the top 250 well-managed companies. Yeah. It's a nice little feather in the cap. I like NVIDIA also. I recently sold some of it. I'm long about 40% of what I consider a full deployment to the name. I did that when I sold lamb research last week. I sold the two of them. I already bought back most of the lamb. I'm still looking for a place to buy back to NVIDIA. I'm thinking 171 is a pretty good spot for it. It's trading a little above that right now. If it giddies up the wrong way, though, I'll chase it and get back in. It's a high multiple and it's volatile and it got hit pretty hard in the rotation. But I think staying disciplined, I think that's a good price level to get back in. It's definitely a best in class semiconductor name. And I think the competition is an intel. Which is also a great semiconductor name, but it's more of a value name. For a tech name, it's a value name. So I do think you want to be involved. NVIDIA just has... Their processors just have more speed compared to their peers. And it's like taking two cars, one that goes 0 to 100 in six seconds and 0 to 100 in four. And which one would you rather have? And they're at a cheaper price. So I think there are no brainer in that space. They're in every pretty much pertinent technological industry out there. Alex, I'm sure you get calls from clients about the semiconductor stocks as a part of the broader tech sector. What do you tell them? Well, I leave semiconductor stockpicking to the experts, but from a sort of broader point of view, this is a sector that is moving very, very quickly. And there's the dynamics in terms of being active, being flexible and being quick off the mark mean that this is very much a stock picker's market rather than something that as a sort of macro strategist I can provide a lot of detailed insight on when it's moving so quickly on the ground. George, anything to say about these sort of credit quality of the tech sector overall? Anything you're looking at? No, I would say overall we're even way on technology. We're just feel like from a valuation perspective things are moving very quickly right now. And from our perspective, it's good to be even way, but you don't want to get too aggressive in here with sort of the view of risk being taken on in this marketplace pretty heavily right now. Is it correct for the markets to discount the impacts of tax reform on the tech sector? Because we know a lot of these big tech companies are holding hundreds of billions of dollars overseas. And they'll be a positive. I mean, you'll probably see even at 14%, some kind of repatriation, that'll probably end up only in research and development if they still get the deduction for it, which right now that's a big question mark, but it'll end up in dividends or buybacks, something like that, which will boost the stocks when they're not seeing the boost in their projected earnings per share that some of the other sectors are. I still think the best businesses in the market are the businesses. So I wouldn't abandon the space completely, but you trade around your position, which is what we've been doing. Yeah, guys, do you agree? Well, I agree, but also tech's a great plan in the global economy. And we've talked a lot about the U.S. aspect, but globally you're also seeing that pickup and about 60% of tech revenue comes from outside of the United States. It's a great global play. Obviously, it's a slightly selective market and where you're getting involved in. But with the global economic backdrop improving, we think you can play that through the tech market very nicely. Yeah, let's talk a little bit about overseas stocks because 2017 was the year that overseas really started to deliver. And I'm curious on your thoughts about that. Yes, a lot of that after a number of years in the doldrums. Finally, you started to see a bit of performance coming in. For us, I think there's three reasons why we're looking at the international game again. One, the relative valuations between what we see in the international space versus what we can see in the U.S. That relatively attractive valuations is what's getting us quite excited. You shouldn't just buy something just because it's cheap. However, I think also the growth dynamic is why we're thinking about getting into it now. And the third and final thing is the direction of the dollar. We're still in quite a strong dollar environment, but we believe that we've started to enter into a dollar weakening cycle. Now, when the dollar tends to change direction, it can do that for quite a prolonged period of time. So that dollar has suddenly gone from being a problem for international investors, your foe, if you will, to being your friend. And that's one of the aspects that we'll be looking at over the next year. George. We would agree with that. The one area that we'd say is the growth component in the emerging market space just we think offers tremendous opportunity. Again, you have to be active. You have to be selective within those markets, but we actually do think, although it's had a great 2017, we think there's more opportunity of room for growth in 2018. And Jeff, at Action Alerts Plus, do you guys have an ETF that tracks Europe stocks? Yeah, so we keep an unhedged EZU ETF that allows us to give us exposure to the European markets. It shies away from some of the ones that'd be affecting more from Brexit because we don't want that volatility in there. But we keep it unhedged though, so we get that depreciating dollar. We get the benefit of the Euro currency appreciating. Sarge, how do you incorporate stocks from overseas into your portfolio? As I mentioned with the EUFN before, I normally go through ETFs because I'm either not expert on these things or just don't understand the individual names or have access to them. But one thing that's caught my attention here is the goods and services tax in India. I'm not sure how this is going to play out, but I know I probably want to try to play some money in the space. So this is an area, I'll tell the folks listening right now, I'm not invested there, but it's something I'm trying to learn more about so I can get invested there. So if anyone knows about it, email Sarge. I think you probably know about it. The Union economy has gone for a very exciting year. It's been trying to conduct reforms on the tax side. It's also been trying to change the currency in circulation. There's some exciting stuff there. It's also a very interesting play on some very strong demographic trends coming from the India economy. One of the fastest moving this year. The jewelry companies, they're going to have the most benefit. There's some interesting stuff happening in India. We'll have a second look if people fancy some bedtime reading. Obviously, when we talk about the global economy, geopolitical concerns are a big issue. And I know that's one reason why you guys are playing the defense sector. Talk a little bit about your thesis behind defense stocks. Well, aside from the geopolitical tensions that seem to be throughout the most of Asia and the Middle East, we got this fat kid that seems to be throwing missiles in the ocean every once in a while, okay? And he's a problem. He's a problem, and our president is not really a friendly guy when these things happen. So you may have noticed there's probably an issue here, all right? Probably. And I really don't... Right now, I'm Long Raytheon. I'm Long Kratos Defense. I'm Long Lockheed Martin, again, after getting back out of it. I think you could be Long General Dynamics. You could be Long Northrop Grumman, even Boeing. You want to be in these names going forward, even if the valuations are high, because we're only going to put more money into defense, at least for the next three years or so. So I really think that you're gambling with your own money if you were to have money, too much money outside of the space. You don't want to be under-deployed towards aerospace and defense. Yeah. And we're watching Raytheon. We're watching Lockheed Martin, too. We're just trying to find that, you know, the most disciplined level to find an entry point there. But it also plays as a great hedge to any of that volatility that we get from geopolitical risk. The worst thing I did this year, one of the worst things I did was stick to my discipline in Lockheed Martin and take a profit, because it cost me 10 bucks when I had to buy it back. Right. You know what I mean? So it's something... Although I did the same thing with Kratos and I bought him back cheaper. So I kind of made it back, but Lockheed's a different animal than Kratos, which is a highly indebted drone maker that the biggest customer is the U.S. Navy. But that's been a theme this year of some of the names that go higher. You know, we try and stay so disciplined and they keep going higher and we miss them and now we have to see if we can buy it back. My view on that is overall your discipline is going to save you more times than it hurts you, like with the LAM research last week. My technical level broke and I made the sale, even though I've loved LAM research since I met it. You know what I mean? And I also sold the NVIDIA at the same time because the level of LAM research broke. So that saved me some money. I'm still looking to buy back the NVIDIA. I already bought back most of the LAM research, but your discipline is going to save you, I think, more times than that. You always have to have a price target, maybe a secondary price target, and a panic point. You have to know where you want to go and where you don't want to go. And if it hits either one of them, you've got to act. I'm sure discipline is a word you guys use on client calls all the time. Especially in this sort of environment, I think there has been a lot of exuberance bubbling up across the course of this year. A lot of people, especially considering how many people have been sitting on the sidelines of this bull run for the last now almost nine years, there's been a lot of exuberance to get back in and trying to just instill some discipline into market participants going into 2018. I don't think it's the worst idea in the world. George. I think there's just a fair amount of regret from a lot of clients, right? Yeah, that they were not fully invested in this market, and therefore they haven't participated as much as they can. I think the biggest fear is that they turn into the market right now, you know, go all in at that point versus evaluating their risk and their long-term perspective and just reallocating their assets appropriately. How are the cash levels at your shop? They're actually pretty low right now. So some of them have jumped in here. Yeah, they have. They have. And that's one of the reasons why we're trying to talk to them about sort of adding risk into this particular market at this point in time and keeping sort of their long-term goal perspective. Yeah, after the markets have 20% so far this year. And you think about all the shareholder wealth that will be created too from tax reform through dividends, through buybacks, things like that. I think buybacks are going to be a big theme from all this repatriated cash, all this lower tax bill, and that goes straight to the bottom line. Yeah, I mean financial engineering clearly has slowed down a little bit in 2017 so our means of that picks up in 2018 through repatriation. That's something that we're evaluating. We're not as quite a strong believer in that. This next year in 2018, it will happen a little bit, but we don't necessarily think it'll pick up as dramatically as most people are expecting. I want to talk a little bit about diversification. That's obviously, you know, a investing theme we've heard about for decades, but I think it'll be particularly important in 2018 if we do get that return of volatility. Jeff, you guys talk a lot about fang stocks and people ask you, well, why don't you own all fang stocks? And you own a lot of them, but you don't want to be too levered to fang. Explain that line of thinking. So I think when you have a group that just trades very similarly, you know, and it's all in one sector, and it's very similar, they're going to grow together and they're going to fall together. And a group like fang, it's just too much tech where from our perspective, we prefer to also have some of that fang exposure, but go out in the market and find some other tech names that we think are good from a cheaper valuation or apply to a different market. That's why we have an Activision Blizzard. That's why we have a DXC technology. Other areas of technology, because it's more than just mobile search, data center, there's other things out there. And we think that strategy plays well, especially on a day where the NASDAQ gets crushed and all of a sudden your fang holdings are down, you know, hit pretty hard. So we try and stay diversified. Now, if there is a point in time where we do see those other fang names as too compelling of an entry point, we'll jump on that opportunity as well. But for now, I don't think it's there. I think you have to see... I think you have to let this rotation play its course and see what else is coming, especially when you're already levered to the other two... We hold Facebook and Alphabet, the other fang names. I sold the Alphabet last week, by the way. But you have Activision Blizzard. I have Activision Blizzard. I do have some Amazon. I do have some Alibaba, although it's not really a fang stock. It's in the same category. Yeah, I like the Activision Blizzard. Although it hasn't really performed, it's kind of underperformed in my opinion. The Overwatch League is... I mean, I'm an old guy. But if you listen to young guys, they're interested in this Overwatch League, right? Pre-season starts today. But one of the teams couldn't make it or something. Another team had to replace them. I don't really know what's going on there, and I don't really care as long as it turns into a moneymaker. Well, Jeff, what do you say to a comment like that? You've got to watch Overwatch. Well, yeah. I mean, we think that eSports is going to be big. I don't think it's talked about enough. I mean, you see eSports getting attention from colleges. You see it even was a discussion for the Olympics. It's going to be bigger than what I think, than what people are anticipating right now. Now, Activision is the first major eSports league. They have representation in many different cities. Their sports owners are owners who have teams in the NFL. NBA franchises like that. They're smart guys. They're going to want a return on their investment, so we think this league is going to be big. When it comes to diversification, guys, George, what percentage of your portfolio obviously depends on your age should be in fixed income, especially in this bull market? Yeah, so it depends on your age or your investment horizon. It depends on your risk spectrum. You're able to take more or less risk, and it depends upon any kind of restrictions that you would have. So it could be anywhere from, let's say, a third of your portfolio to two thirds, or maybe even 70% of your portfolio, depending upon where you're on the age spectrum. But the important thing is, even within fixed income, you want to be diversifying your assets, right? So one of the things we talked about, sort of, risk on in the equity markets, in high yield, you've seen tremendous risk being taken on in the fixed income markets, where spreads are actually only 20 basis points around above 10-year lows. So right now, spreads have really compressed in high yield, and that's how you're seeing risk played on in that market. For us, we want to take a little bit off the table. We want to look into more investment grade, into more investment grade corporate names, and actually even into the muni market right now. Given sort of this tax reform, we're actually going to help the market in the long run through less supply, and through just from our tax benefits from individuals' perspective. I was actually thinking about that. Less supply, I think. And so what you've seen actually is supply pickup here, right? So a lot of these private activity bonds, and just the uncertainty of whether that's going to be in tax reform or not, you're seeing a fair amount of new issuance coming into the marketplace. It's down 59 basis points last month. You're going to see tremendous amount of supply in this marketplace, probably a pullback. For long-term investors, that's the opportunity because you're going to have less supply next year. What are you telling people about asset allocation for 2018? I think going into 2018, the difficult discussion when we're talking to clients is trying to keep them invested in things like their core bond funds. We're saying, look, there's quite a challenging outlook. Central banks are raising interest rates. We think inflation is starting to pick up slightly. That's causing bond prices to fall, yields starting to rise, and that's after a 35-year bull run in bond prices. So investors have got very comfortable seeing nice little green numbers coming out of their core bond holdings. That dynamic is changing into 2018, and we're just trying to remind investors having those core bonds in your portfolio provides you a little bit of a cushion should equity markets take a little bit of a drawdown. It makes for an easier ride in the long run, even though next year may not be a sort of rosy picture for that. That's definitely where the challenge is. Do you think there's a chance for diversification beyond equities? Well, first off, diversification is part of the discipline we were all talking about. If you're not diversified, you're setting yourself up for problems. Across the broad spectrum, obviously I'm an equities guy, I've always been an equities guy, so my allocation towards fixed income has never been higher than 17.5%. Towards the precious metals goal, largely, I've always had somewhere between 5% and 10% right now at 7.5%. That's the point in this allocation model. I have no idea. I went higher in cash recently, much higher in cash. I'm currently at a scary 48%, which is really incredibly high for a Wall Street guy. I consider that temporary. I've been floating around the 30s and the 40s now for a few weeks, but typically I would say only about 20% in cash because for the home gamer, which is who we're probably addressing here on this show, someday your boiler is going to blow and your car is going to break, but I wouldn't follow me into this 48% model. It's just because I have some feelings here. You mentioned Bitcoin, it only took 37 minutes, but we now need to address it because a couple of months ago, it was like, wow, look at this Bitcoin and now, just speechless. It started at $1,000 earlier this year, at the start of the year, now it's closing in on $13,000. Let's just go around and get everyone's view on Bitcoin. I can't buy it until I have more faith in the product itself and the regulation in the way it's traded. I'll probably wait until there is a derivatives product because I know if I buy Bitcoin tomorrow it'll go to $2,000 and if I don't buy it it'll go to $25,000. I think it's going to attract a certain cryptocurrency. I don't know who the winner will be right now. It looks like the winner will be Bitcoin, but I think it will attract the same kind of guy that gold used to attract. The alternative currency value of gold is going to be drawn because he's a younger guy in a different generation to Bitcoin. Now, if the internet goes out, you still have gold. I think gold needs a higher valuation than Bitcoin. It's just my own feeling and I really think they have to remove the criminal element from cryptocurrency because that's huge. How do you do that? Well, that will be the provocation for the central banks to crack down on this because they have to defend their reserve currencies. They all have a stake in this and they have an enemy now. They have a common enemy and that's going to be cryptocurrency because that draws the power away from them. That draws the wealth away from them and when it gets to a point where it's too much you heard William Dudley, they're going to go after it. Yes, actually he did say that that's something they should think about. So what happens to Bitcoin if the Fed creates their own cryptocurrency? Is it game over for Bitcoin, guys? It could very well be if the other institutions decide to lock down and guard their reserve currency status, then yes, Bitcoin could be an issue. For us, I think for Bitcoin to really take the next step it needs to start performing more like a currency and less like an investment. What do you mean by that? Why do we have currencies? They're a store of value and they're a medium of exchange. They're the two reasons that you have a currency. For it to be a store of value Bitcoin's volatility needs to come down significantly. It's about ten times more volatile on a day-by-day basis than the dollar is right now which damages that first fundamental of being a currency. The second aspect is it needs to become more of an accepted medium of exchange. If anyone has ever tried to live on a Bitcoin in New York you'll find you're not going to go very far for very long. A lot of places don't accept it. A lot of people aren't really aware of how it works yet and therefore it sort of fails on that second assessment of being a medium of exchange. The transition it needs to take we'll see if it happens in 2018 but this year it's behaved more like a speculative investment vehicle than a currency. I think that's true. You heard it, you called it the product and it's not really a currency or trading certainly like a currency right now I think there's a fair amount of exuberance around the idea of blockchain technology and that's sort of become a pseudonym for Bitcoin and sort of maybe has moved those flows into Bitcoin has caused some of this exacerbation and move up. Sorry, blockchain technology is phenomenal but that's not necessarily the only surrogate and the only way to do that blockchain technology will be coming out in other ways in the future. I do want to add to Bitcoin, I think one thing that people need to really pay close attention to is the next pullback. I think that there's a lot of sentiment out there of people who are saying I'm waiting for a pullback I'm waiting for a pullback. Let's see if a lot of people pony up and actually aren't scared away from investing and then let's see what it does to the price. Do any of you know how you get your money out of Bitcoin? What's the exit process like if you have a hundred thousand dollars or even more in Bitcoin I can't imagine you can get your money out so easily, right? If only. I don't own any Bitcoin so I don't really know but as you mentioned I think the medium of exchange is the most important thing here and I did write an article doubting its value as a medium of exchange last week and I have never in my career as a writer had an article generated so much hate mail. There's a liquidity aspect to this right now in any efficient market you have price consistency if someone trades at $1 for one tick it's going to trade close to that on the second tick the problem with Bitcoin at the moment is is it goes from $11,000 up to maybe $11,100 then somebody tries to trigger it and it flashes back down to $9,000 there's pockets of liquidity in the market which makes it quite difficult to unwind big positions You may have just bought a pizza for $15 or you may have just bought a pizza for $500 You don't know That's why we're not going to be paying with things with Bitcoin for things Not at this point, no. I think you need a lot more development you need to see how this plays out It used to be easily exchangeable with the other currencies Maybe the central banks will turn it into what the SDR was supposed to be Maybe it ends up having a value there But there's clearly risk of a bank run kind of situation with Bitcoin Shouldn't people be factoring that in? We've tried figuring out a value for Bitcoin and we've been unsuccessful Yes, exactly I think that's for us and it starts equating to more gambling and that's one of the challenges that we have So you can't put a fundamental value on it and you can't put a technical value on it But you might be able to value Bitcoin futures contracts We know the NASDAQ, the CBOE the CME are all filing paperwork to put forth Bitcoin futures contracts and with that you could conceivably get a Bitcoin exchange traded fund You'll be able to sell it if you don't own it which would be a big change Wouldn't that be a big boost to Bitcoin prices on the futures? But then you could have regulatory concerns coming into that I wonder if that would be a concern for Bitcoin Is the whole point of Bitcoin to stick it to the government like I'm buying a currency asset that has no regulation from the government? I'm not sure if that's the main goal I think there's some disenfranchised folks out there and they might be drawn to something like this Because while Bill Dudley said maybe the Fed gets into a cryptocurrency Jerome Powell actually said back in June that he'd be very cautious about something like that and we should point out that Bill Dudley is on his way out I'd say that if I was Jerome Powell too regardless of what I thought But is he going to have to act on this? Is the Bitcoin cryptocurrency getting so out of hand that the Fed is going to have to comment on this? I think for the time being it is contained to a relatively small group of individuals and certain markets Venezuela and China for example are going to have to work and vent difficult currency currency legislations that are impacted there so it's contained to that market if it were to spread out then maybe you'll start seeing use your $12,000 valuation and that's where I think maybe you'll start seeing the spread coming out of it as it spreads out into more market participants maybe then you'll see the regulator stepping in for the time being I think they're fine to let it keep to this sort of contained group of individuals who are participating in it Is anyone around the table actually held a Bitcoin or had a bit? You can't even hold a bit This is my point There's a lot of fascination but actually I've been talking to people for the last six months about Bitcoin and I've yet to meet someone who's actually transacted in it Will you be able to accept delivery? Yeah, there you go Or would you even want to? I don't know What does that delivery even look like? Maybe Amazon can deliver it I actually bought half of Bitcoin back in 2013 the end of 2013 but I sold it two weeks later I mean I actually I took it for a loss I'm probably the only person in the country to take it for a loss but you know what I didn't have an investment thesis to it I didn't have a full understanding of what the product was and I reflected and I said to myself I don't think I can own it so I took those funds and put it elsewhere I know where I have visibility into earnings management things like that real tangible goods but that's my one not good on Bitcoin Speaking of the equity case for Bitcoin I mean Nvidia we were talking about that earlier they have a small exposure to cryptocurrencies just in the chips needed to mine Bitcoin, right? Yeah and people want to make Nvidia into a cryptocurrency story and it's not their revenue from crypto related processors it's less than 10% if you go back to the conference call management told you that their crypto related revenue is actually decelerating again it's more the processors, the GPUs gaming data center, artificial intelligence that's really the story behind Nvidia Alright so to everyone watching I hope that clears up a lot of your questions about Bitcoin I mean it's certainly something we'll continue to watch we have to watch it but I do want to transition and talk a little bit about M&A activity for next year because we've had a lot of high profile deal announcements in recent months CBS, Etna, Broadcom, Qualcomm Qualcomm, NXP, Semiconductors and Jeff Action Alerts Plus obviously you guys own Broadcom and NXP can you kind of give us the dynamic of what we should watch for? Yeah where to begin here so Qualcomm has a bid out for NXPI and they're waiting for regulators in Europe to approve it that bids out for about ten dollars NXPI right now trades at 115 and also to make for the deal to be approved they need 80% of the shares tender they're at about 3% so our thesis behind NXPI is that Qualcomm is going to have to raise their bid now this could happen through a couple of dynamics well first we have to wait for Europe to approve it then that's when we'll look to for a raise bid but Broadcom has a bid out for Qualcomm as well now what we think what could happen is that because Qualcomm their hostile to Broadcom's bid they don't want to be taken over they could end up raising their bid for NXPI as like a poison pill type scenario to make their company less attractive to Broadcom to sort of shift away from that getting taken over so I mean it's one thing we're monitoring every day Broadcom reports after the bell today so we'll look for commentary there but yeah I mean it's going to be interesting it's going to play out into next March that's Qualcomm's next investor meeting that's where the proxy vote is going to happen so we're watching it the orientation isn't helping them at all yeah sorry do you have anything to add how about Disney and Fox right that might be on the tape pretty soon partial when M&A activity picks up like this it's always cause for me at least for concern although it helps the I guess the investors who are in those names at least the the acquiree to some degree I think that's although I don't see signs of a top in the market that sometimes can be taken as okay we can't grow on our own so we got to do something about this and in the health care space we're seeing all types of firms that don't really belong together getting involved CVS etna and DeVita today with the United Health Care right I mean so that's a little although I don't really trade health care that's a concern to me that that you might see firms that don't really belong together health care conglomerates I mean that's right but there was also an analyst who said that Walmart should buy Humana to defend I think Google and Walmart should get together whoa that's my that's my that's my fantasy thesis so I do think Walmart might be involved here I mean so I don't and that is a acquiree but I think I think they've been aggressive I remember off the beaten path here but I think Walmart has been very aggressive towards Amazon Walmart has been in cahoots with Google they obviously have a common enemy you saw the article today probably between Google and Amazon not playing nice in the sandbox I think that Amazon I said so I think that in order to take on Darth Amazon there's going to be some alliances made but then again I got off the beaten path I think that this is a chance that maybe we're getting towards the top but I don't think that overall I just think that this little spate has me on edge guys what do you think about sort of all these companies wanting to get into everyone's business right I mean there's no barriers anymore at least for right now and with the repatriation of money coming back from overseas and for S&P 500 we think it's about 2.7 trillion locked up in overseas bank accounts that's a lot of money that could trigger further M&A and add dividends and share buybacks for us however we saw some encouraging trends as we were going through this earning season where those companies who actually said hey we're actually going to put some money into investment and try and build for rather than deliver results tomorrow we're going to try and build for next year in the year after finally investors seem to be rewarding that sort of longer term thinking which is a slight change in this bull market I'd actually quite like that to be more of the focus bit of R&D bit of productivity growth it's good for the economy puts a bit more legs under this equity bull run yeah exactly investing in your company and investing for growth is the right way to go but M&A activity I think I agree with Sarge it's a little bit more indicative of sort of late cycle behavior the idea that margins are not necessarily where they need to be and they can't grow organically to the point that they need to so they need to start looking towards mergers and mergers in areas that we haven't seen before right so some different areas coming together like we were talking about so maybe more than just Amazon right if it's a sign that we're late in the cycle well that was actually a specific that would be in response to competition but what I was talking about with healthcare is more indicative of what we're speaking here where they're having trouble growing organically and they need to get involved in parts of healthcare where they really have no business I mean pharmacies and drug and benefits companies really shouldn't healthcare insurance companies really shouldn't be playing ball together I mean not in my opinion anyway what do the strategists say that this could this CVS et in it could actually be good for consumers you know we'll watch I'm not speaking as a consumer once again I'm speaking as an investor and a guy who previously in this program said he sees possibly much higher valuations for the S&P 500 so while this is possibly late cycle it's just one item that is on my radar Any final thoughts on how M&A activity will affect the market in 2018 he's going to be a big factor going into the first quarter but going back to what I was saying before I'd rather see a bit more productivity growth and investment than going running off down the aisle with someone who may not be the perfect match for you that's where I think some focus and discipline around this would be helpful agreed for 2018 probably more of a first half of the year event and maybe tailing off towards the end of the second half of the year alright we have about 7 minutes left I want to end talking about tail risk we had David Rubenstein the executive chairman of the Carlisle Group tell CNBC that the main thing we might have to worry about in the coming years is a black swan type event he actually told me the same thing we had him here back in October that we should be watching tail risk do you guys agree with that commentary very easy to say always difficult to pull out exactly what those tail risks are we're always on the lookout for those things but it catches you off guard pretty easily but Alex you actually think that a sudden rise in inflation there's two things that we're watching going into this year one is politics particularly focused back in the Eurozone Italy are due to go to polls the polls in the first half of next year the Italian economy has been in a tough spot and there has been support rising for parties that would like to take Italy out of the Eurozone and if you thought the UK leaving the EU was a bit like a divorce if Italy were to leave the EU it's like divorce but with children involved it's a lot more complicated one thing we're watching the second aspect as you mentioned Scott is inflation if and it's not our base case we think inflation should remain benign but if inflation were to pick up that changes the dynamic in a lot of different areas fixed income and equity markets suddenly we start changing our views a little bit so that's something that we'll be watching but certainly not our base case that it goes George before we get your tail risk example what do you think of a sudden rise in inflation is that possible next year? it's definitely possible and it's actually one of the risks that we have out there inflation forecasts are sort of benign right now roughly 2.4% so pick up yes but not significant but if you start seeing it getting ahead of where the fed can raise interest rates to kind of bring that down it could be pretty problematic and I think the idea of can the central banks control that is going to be a big question going forward so a fed misstep could be a big problem they'd be combating they'd be forced into it suddenly rose and they had to now combat that that's the point here is that the fed would have to be too aggressive and that would be where you'd get your recession from that sudden realization that they're behind the curve would change a lot of the dynamics I think if you were here last year at this point the fed didn't raise at this point by last year you'd be saying maybe potentially they were behind the curve after they were raised in December and March and June and now it looks very likely next week we're saying they're almost running the risk of getting ahead of the curve but the question is are they ahead of the curve or not and that's the big question out there we're 60-40 for March I think right we're almost 50-50 for June I think that's correct there's a chance here in about 7 months you get 3 rate hikes tell risk for you that you're watching nuclear war without a doubt that would crash everything except gold I mean if North Korea or someone else would to launch or explode in a way a terrorist might and a nuclear weapon somewhere I think that would be the that would change the entire ballgame your priority at that point might not be investing your priority might be other things like clean water or shelter or ammunition your priority is going to change but that's the tail risk that changes everything and we right now have probably not to the degree most people probably have it under the rug right now but I think it's something you have to be aware of right now Jeff do you agree? yeah I think so that's one but you know we're just focusing more on understanding your risk horizon how much risk to take on whether you need income value growth we provide indices for our holdings to help members know that you know sometimes it never hurts to be a little bit more heavier weighted in income if you think there's these types of events get that cash flows back in but none specific no one here mentioned the Mueller investigation we saw stocks react to that now incorrect ABC news report a few days ago the market dropped 300 points and then recovered how do you piece that together in 2018 it's such an unknown it's very difficult at this stage it's still very early in trying to work out there are various sort of end case scenarios in how this plays out so from an investment point of view it's very difficult to factor that into investing here and now when there are so many possible outcomes for where this ends up some of the interesting things about that is just sort of the environment is just very risk on right now and so you could potentially see some small event cause a huge risk off scenario and then cause potentially a spiral with that hopefully it would be short lived and the markets live through a lot of these already and come out pretty successfully but that's the concern is that it kind of feeds on itself and gets a little bit more negative I don't think people believe it anymore the baller investigation they don't believe that it will impact them anymore whether president or his people did anything how the heck would I know but the whole cry from the right has been fake news and then you have reporter clearly with a left bias come out with fake news and his firm has to debunk that news almost immediately and it's a huge embarrassment for almost everyone involved and people lost money very fast if there was indeed a case where it looked like there would be a constitutional crisis yeah we would have to take a lot of money out of the market but I don't think people are buying a scenario right now but we had North Korea worries heat up and the markets kind of shrugged that off cause I don't believe that either so there's reason to believe that stocks would dismiss any Muller fallout they are dismissing it right now now if we got to a point where it looks like oh man it looks like this is going down well that's a different ballgame but by that point it wouldn't be a black swan guys where do you traditionally hide in these exogenous type events obviously gold but where else yeah we look at alternative investments right so hedge funds that kind of play both the long and short end of the markets is a good place to go obviously kind of looking to diversify your assets you know fixed income is one of the areas but it's somewhat still challenging given sort of low rates right now but definitely looking at alternatives Alex you can also play it from the currency angle you tend to look for safety in the Japanese yen Swiss franc that's the areas that you go to when you're looking for a risk off move Sarge would you hide in real estate investment trust maybe you might hide in real estate not real estate investment trust and you're going to have to hide a little bit in gold and your best defense there is going to be diversification you're going to take a hit but you'll have to ride it out and the best way is not to have all your eggs in one basket in fact to have very few eggs in any one basket but still whether there are geopolitical risks that come to fruition the underlying story of the economy is intact and we have to keep that in mind yes I think that was the a point I was going to make is that if these events happen there will be a sudden risk off move and then I think investors find their footing again and say actually hang on the fundamentals of the economy have not changed the fundamentals of the global economy haven't changed let's go back to the latest period of volatility which was Brexit 5% draw down a lot of chaos on the day then markets and investors take a breath realize that actually the fundamental pitch is still the same and the market continues the opening of Brexit and the presidential election were both fantastic opportunities and we will leave it there guys thanks very much to all of you for joining us over this hour and thanks for watching we'll see you in the new year