The day after Memorial Day I had a chance to talk with my longtime friend, Otis Bradley, who is Managing Director of Research and Chief Market Strategist at NY-based ICM Capital Markets. Otis has always had his eye on longterm trendlines, and he has now been able to do that for several decades on Wall Street, which can give a certain perspective to short-term phenomena. I have always associated him with technology companies since I first met him when he was with Alex. Brown & Sons, and he has always been right on the lip of the next breaking wave.
SCW: Otis, the market has been on a see-saw for the past couple of weeks. What do you think that’s about?
OTB: One of the biggest negatives in the market is that there is such a huge trading element. By my count, between hedge funds and trading desks nearly 80% of the volume on the market comes from traders. And what they want is something that can create a transaction right now, all the time. They want a piece of news that will move the market. I have thought for a long time that was very short-sighted, and in fact the bad news tends to move the market down, and when there is good news, the traders tend to “sell into it.” It takes a fair bit of time for good news, favorable news to take hold.
SCW: It would be safe to say, then, that short-term trading is not the lens through which you see the world?
OTB: I have always tried to find the macros, and to work from the top down. One of my first coups in this business was with color TVs. I had interviewed all the color TV companies back in the 60s and asked them for their outlooks, at a time when the sales outlook for televisions was about 5 million sets per year, going to a potential 7 million. When I interviewed these companies – Motorola, Zenith, RCA and the rest – their projections came to a total of 10 million sets, which was more than the total of ALL sets that were projected to be sold. I queried them again and they each said that their competitors were overestimating their manufacturing capacity. As it turned out, the next year TV sales retrenched back toward 4 million sets instead of going to 7 million, and they all ended up selling off. That was a negative macro that was based on big over-capacity, and I made a big score with that.
I much prefer finding positive macros. Once you find those and get comfortable with them, then short-term trading swings are big buying opportunities.
SCW: You’re a bull now.
OTB: I turned bullish on high-tech in the fall of 2008, right at what I thought was the bottom, November 21, 2008. I still think it was the “real” bottom. IBM was in the mid-70s at ten times trailing earnings and Intel about 12 and yielding 4.5%. GE was at 5 and Ford was at 1; in general pricing was absurd. With pricing like that, I decided the longterm trend was positive and would stay that way for a very long time. We had had a bear market, at least in high-techs for 6 or 7 years. The crash was March-April 2001, and the bottom was in 2002. Stocks that had been trading at 20 to 40 times earnings came down to very low multiples.
One of my mottoes is “Armageddon is a bad bet.”
I decided that the drivers for a great bull market starting in the fall of 2008 would be (1) Growth, (2) Emerging Markets, (3) High Tech, (4) Commodities, and (5) Small Caps.
SCW: Interesting that you picked Growth as your first driver, rather than, say, Value.
OTB: I have always been a growth-stock person, rather than relative performance or value per se. You grow and prosper or you atrophy and die. And I think you make a lot more money over time in small caps than in bigger stocks, even though I only mentioned bigger stocks when I was describing the bottom. There is just more leverage in small caps. And I truly think we have entered the Golden Age of high-tech stocks. There are all sorts of unbelievable things being developed and actually brought to market. We forget how unimaginable some of these things actually are. Look back 10 years ago when the Internet was still a novelty and people wondered whether it would have an effect on sales. Now we have this enormous dynamic coming up from the bottom: smart phones, which will be a complete game-changer.
When I was a lot younger I went to a briefing at Cray Computers, which at the time made the biggest and most powerful computers in the world, back in the Age of Mainframes. Their target for the year was 6 computers. They were expensive, of course, but they only expected to sell 6. Now there will be 6-1/2 BILLION smart phones and mobile computers. Apple sold 2 million iPads in the first 2 months. That is pushing up from the bottom in a big way. Pushing down from the top is the Cloud, along with Smart Grids, Smart Cities, etc. This combination of mobility from the bottom and virtuality from the top will play for years, and I honestly believe it will change the world.
These trends are far more important than whatever is happening in North Korea or off the shore of Israel. They are more important than the oil spill in the Gulf, although the oil spill may well be the defining moment of the Obama presidency. I think he has been disappointing so far, should have pushed through an energy policy before healthcare. This oil spill needs to be a Manhattan Project or a Man on the Moon project in terms of its priority and urgency. If he has the guts to do that, he will be a great president. If he doesn’t he will get thrown out.
SCW: You haven’t mentioned renewable energy.
OTB: When I say high-tech, I mean everything that moves. High refers to something important, and tech refers to something scientific. That, for me, includes environmental and medical companies. High tech is driving the markets – especially the emerging markets – more than anything else. High tech will eventually solve the terrorism problem. I believe that solar energy and wind turbines are good places to be.
Commodities are there because high-tech will drive them especially in emerging markets. In commodities and oil, the market is fairly simple: supply and demand. In the case of oil and metals, demand is one word: China, followed by India and Brazil. Commodities are going to be a good market.
In a bear market companies not only don’t build new capacity, they shut down old capacity, so when demand comes back, it far exceeds supply. High tech in good times can grow 15 to 30 percent annually.
The fast money wants to fixate on quarterly earnings. When a company like IBM says their revenues will double over the next five years and the market doesn’t react at all, it simply says a lot about the short-term trading market.
SCW: How about new companies?
OTB: There was a headline in INVESTORS BUSINESS DAILY last week: “Out of Recession Comes Innovation.” Companies like HP and Apple and Intel were created in periods of recession. What we are seeing now is the confluence of companies like Apple, Google, and Research in Motion. Motorola and Nokia are old hat. This is Alvin Toffler’s “distributed dynamic,” that was described in his brilliant book, THE THIRD WAVE. Make your product so small and easy to use that eventually it becomes a handheld mobile device.
Remember that with these brilliant personal information devices pushing up from the bottom and the cloud, virtualization and new storage technologies coming down from the top, we are in a remarkable period. And every single one of these huge innovations is occurring through or because of the Internet.
I believe that high tech will change the world for the good more than bad things will change the world for the bad.
My prediction was that the first leg of this bull market would take us to 11,200. In leg 2 we will prove that 10,000 is a real solid support area. I believe we will break 14,000 some time in 2011, and then everyone will be convinced that we are in a real bull market, and not a bear rally, as people tend to say sometimes now. I think, however, that we may trade in a fairly narrow range until the election in November.
But when we start to build toward what I think will be the greatest bull market ever — that’s when you want to be up to your eyeballs in small caps. That’s when you will make 5-fold and 10-fold returns in small caps.
SCW: Thanks, Otis.