The transcript from this week’s, MiB: Adam Parker, Trivariate Research, is below.
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ANNOUNCER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
BARRY RITHOLTZ, HOST, MASTERS IN BUSINESS: This week on the podcast I have an extra special guest, Adam Parker, what a fascinating career, a top-ranked institutional analyst, semiconductor analyst, head of Research at Sanford Bernstein, head of U.S. Equities at Morgan Stanley, really a masterclass in how to think about creating frameworks for investing, for thinking about how to apply quantitative research along with macro and fundamental data in order to create a differentiated research product, just absolutely a masterclass in thinking about stocks and thinking about sectors, and thinking about where is the crowd wrong and how to come up with a very outlier perspective, many of which have been giant moneymakers and really fascinating market calls. I found this conversation to be brilliant and insightful, and I think you will also.
With no further ado, my conversation with Trivariate Research’s Adam Parker.
RITHOLTZ: My special guest this week is Adam Parker. He is the founder of Trivariate Research. Previously, he was global director of Research and U.S. Equity strategist at Sanford C. Bernstein. He was the number one institutional investor ranked analyst in semiconductors before he became Morgan Stanley’s chief U.S. Equity strategist and director of Global Quant Research. Adam Parker, welcome to Bloomberg.
ADAM PARKER. CEO & FOUNDER, TRIVARIATE RESEARCH LP: Thanks. Thanks for having me here.
RITHOLTZ: I’ve been looking forward to having this conversation for a while, and I have to start with your very interesting academic background. You have three degrees in Stats, not just undergraduate at Michigan, but a PhD from Boston University. And in the middle, you got a master’s in Biostatistics at UNC Chapel Hill. Tell us about that.
PARKER: Yeah. Well, back then, statistics wasn’t as cool as it is, Barry. So I didn’t know 30 years ago, it was going to turn into all the rage and that everyone wants to kind of major in Data Science and Analytics. I was always more of a math guy, and I liked having problem sets and then going and playing sports, and I didn’t want to have to read Chaucer or whatever all the other miserable people were doing. So it kind of motivated me to be a little bit more analytical.
RITHOLTZ: So — so — but the question that raises biostatistics is, were you always planning on a career in finance, or was that —
PARKER: You know, that was more of — the biostatistics department was in the School of Public Health at UNC. And it’s really, you know, Applied Statistics applied at that age to mostly medical data. But it was more about learning analytics and you know, programming and —
RITHOLTZ: And you can apply it to anything.
PARKER: You can apply it to anything. So like my PhD thesis was about missing data in a healthcare setting, but as you know, missing data exists everywhere, including in finance.
PARKER: So it turned out to be pretty applicable.
RITHOLTZ: So how frustrating is it to you to see either newspaper headlines or social media, where people just lack of rudimentary understanding of basic statistics and probability?
PARKER: You know, I think the big challenge, as you know, because you’re good at this, is taking things that are somewhat complicated and then making them sound like they’re simple, and explaining them to everybody. I think the average intellect of people watching and reading mainstream media is still in the junior high or only high school level, so that’s what you got to resonate with. And I romanticize the investment community is slightly above that, but it probably is less above that than you think.
RITHOLTZ: Right. So — so I love — we’ll talk about Trivariate a little later. I love the name.
RITHOLTZ: I wrote a Bloomberg column years ago, single variable analysis is for soccer, or something like that. And so I have to talk to you about the name.
PARKER: Sure. Of course.
RITHOLTZ: But — but let’s — with all that stat background, how did you get to Sanford C. Bernstein?
PARKER: You know, in those days, you know, I finished my PhD in the late ‘90s. I — you know, I had some buddies that seemed to be getting rich on Wall Street and then I didn’t really know what they were doing. And one of my best friends worked at Sanford Bernstein, and they were looking for somebody to write, you know, software and do analysis on called quant research on equities. And I interviewed there and I loved it. This bunch of crazy, you know, wild people who are brilliant, and kind of a little bit — a little bit on the edge of being unhinged as human beings, and it was just kind of my jam, you know. And so, what I —
RITHOLTZ: You’re so buttons up. You don’t sound like a crazy quant.
PARKER: But it was — it was effort and enthusiasm.
RITHOLTZ: Yeah, yeah.
PARKER: Just like getting the PhD, Barry, it’s basically 99% perseverance and 1% intelligence. And this was like, you get in there and there were just no rules. Like, find something interesting and write about it. And so, for me, you know, there’s this database of information on hundreds of stocks, and you could go in there and analyze it and reach conclusions all the way, along the top market cap name maturities against it, or do this, or you know, just kind of empirically test everything. And it was a bunch of incredibly brilliant people there. So I loved it. I loved the environment. And I didn’t even know what I was getting into to be honest with you.
RITHOLTZ: And then from quant work at Bernstein, were you — were you an analyst in semis there also?
PARKER: Yeah. So I switched to being semi. Look, at that time, big late ‘90s into the TMT bubble, what seemed cool to young Adam Parker was being an analyst, “Oh, man, these tech analysts, that seems like a great job.” And Bernstein in those days, you know, you were really an expert. You wrote 100 to 120-page black book, it was called, on an industry. And you could tear apart the P&Ls of the companies and you really understood. You know, we spent all our time on 6 to 10 stocks. So you really knew those companies, the management teams, the things that impacted the volatility of the P&L. You kind of became an expert.
And so, I really want to do that, and I just got lucky that it was semiconductors. I basically just kept going in saying, “I want to do this. I want to do this.” And the first sector they offered me, Barry, was European electric utilities.
RITHOLTZ: That sounds like so much fun.
PARKER: Yeah. And I — I really struggled with how I’m going to communicate to them. I’m really onboard with the fact that you’re allowing me to be an analyst, but I can’t move to London. Yeah, that’s it. I can’t move to London. I just — I just got engaged or whatever. So I — I enabled to sort of convince them, “Yes, thank you. I’m an analyst. But no, I’ll wait for the first U.S. one.” And it could have been anything. It could have been food. It could have been — I didn’t really care. And when semiconductor came out —
RITHOLTZ: So you didn’t have a tech background?
RITHOLTZ: You don’t have an engineering, because a lot of the analysts —
PARKER: All of them did.
RITHOLTZ: — covering semis, they’re electrical engineers.
PARKER: Yeah. Circuit designers. Yeah, exactly.
RITHOLTZ: You do software designs?
PARKER: I used to, you know — and Bernstein’s hiring model back then was basically get a McKinsey guy who was an expert on an industry or somebody who worked at one of those companies. I was one of the rare counter examples of, you know —
RITHOLTZ: Promote from within?
PARKER: Yeah. I think the PhD in Statistics probably helped me. I used to just say, “Look, I’m probably better at counting the chips than knowing what they are,” you know. And it turned out that in those days, what really mattered to get into stocks right was sort of a non-consensus and correct view of the gross margin six months forward. And so that didn’t really require the expertise on circuit design, and the like. In fact, you know this, but sometimes those — the people who work at the companies turned out to be not very good at calling the stock price of their own company they worked at, because you have all kinds of biases from —
PARKER: — from that people you like and you don’t like, and that kind of stuff. So it worked to my advantage, but I think probably it wouldn’t have happened if I didn’t labor through that PhD.
RITHOLTZ: So how do you get from Bernstein to Morgan Stanley?
PARKER: Yeah. So after I did semis for a few years, and you know, that’s a very competitive, you know, business. You get up every day. There’s a person at Merrill and a person that, you know —
RITHOLTZ: Everyone, UBS.
PARKER: You wake up and they’re your competitors. You want to like just — you want to make them look stupid on the conference calls and you want to ask the smartest question, and you want to be number one ranked, right? So you do that. And you know, Barry, you know, once you get number one a few times, all you think about is like, “Am I going to lose it?” There’s no joy in repeating as number one. There’s only the fear of losing it, right? Because then you’ve like, “Wait a minute, investors don’t like me as much as I used to.”
PARKER: So you know, I felt like I wasn’t really incrementally, you know, doing that again. It wasn’t going to drive me anymore. And you know, I was offered, you know, this position to run Research at Bernstein. And so I transitioned to be the director of Research for a while, which was attracting and retaining hiring, firing, that kind of stuff.
RITHOLTZ: The management position now at Research.
PARKER: Yeah. Yeah. It got me away from that for a year. But the beautiful part was I then was helping other analysts ramp. And so, I got to learn, “Okay, I’m going launch the household products guy. I’m going launch the capital equipment guy, industrial.” And so, in that year, I was helping kind of four or five analysts ramp. I started realizing like, “This kind of interesting. I can apply what I know in semis and help them.” And so, early in ‘08, at the very beginning of ‘08, the strategy and quant research job opened up at Bernstein and that’s how I transitioned to being a little bit more, quote-unquote, “macro.” So I did that for a couple years and then I transitioned to Morgan Stanley to be the strategist there.
RITHOLTZ: And for people who may not remember this, in the ‘90s, Bernstein’s bevy of analysts were top, top ranked.
PARKER: So in ’07, when I was a director of Research at Bernstein, this is the data, Bernstein had 23 U.S. analysts that we’re publishing, 18 were ranked in the Top 3 and 11 were number one.
RITHOLTZ: That’s unbelievable.
PARKER: Yeah. So it was really a number one machine in terms of the analysts that work there. And you know, my job was to get the five that were in the Top 3 and hire a few more that will eventually be, you know, number one in the future. And then that was in the U.S., and we also we’re building a European business too. So —
RITHOLTZ: So obvious — obvious after the fact question, Bernstein was substantial in size, but they weren’t, you know, Goldman Sachs or Morgan Stanley, Merrill Lynch. What was the secret of success? Why were they punching so far outside of their weight class?
PARKER: Well, I think they’re — you know, it was the — it was multiple things. But I’d say, you know, you don’t have a prime brokerage business. You don’t have a banking business. So there was this perception of independence. You hire people who were, you know, generally experts in the industry. I was an exception. But there were generally people who were running the McKinsey practice consulting, the aerospace companies, and it would be hard to cover Boeing or those kinds of things, so kind of the industry knowledge. And I think the buy side, you know, relied on that as sort of an external voice.
When you interview the buy side, they tend to not care if the sell side are good stock pickers or not. They might blame them if they’re bad. But they’re never going say, “Oh, I rely on this sell side for their stock selection skills.” That’s what they’re supposed to be doing. So I think what helped Bernstein gain prominence was the fact that, all right, we don’t even try to do that at expert level, just trying to help people be smarter about the investment controversies and write detailed, you know, sensible issues on those investment controversies.
RITHOLTZ: So —
PARKER: So that was — that was the business model, and it really worked back through at least, you know, until maybe 10 years ago.
RITHOLTZ: So — so you raise such a fascinating question I want to ask you about and we’re recording this late April after Netflix, which had fallen 50% from its October peak. At their earnings call, they announced a decrease in subscribers. The stock falls another 27% overnight. The next day, there are all these downgrades from the major sell side shops, “Cut, cut to neutral, cut to hold, cut to.” And it raises the question and I’m sure lay people ask this question to themselves all the time, “Hey, the stock is now down 75% from what you told me to buy it. What’s the point of this downgrade? Thanks for nothing.”
PARKER: Yeah. I mean, the sell side —
RITHOLTZ: Defend the entire analyst community. Go.
PARKER: Okay. Yeah. You know, I — when I got to Morgan Stanley — and I’ll answer this. When I got to Morgan Stanley in the late fall of 2010, I wondered if the research department there generated any alpha with the recommendations. And so, I analyzed they had stored data from ’03 to 10. There’s about 3,500 stock recommendations that were kind of stored. So you know, I —
RITHOLTZ: You let the statistician loose on the data. So fun.
PARKER: About half were overweight rated, half were equal and underweight. So I thought, all right, did the overweights beat the equal and underweights? Your exact question I considered so I didn’t — stocks on 25% the aftermarket, and then they downgraded. You do not give them credit for that being a curveball.
RITHOLTZ: Right. Right.
PARKER: You lag it by 24 hours. You beta-adjusted, meaning, you know, adjusted how much the market moved. And it turned out, at least, for the 3,500 observations over seven years that they had about 4% average alpha between the overweights and equal, underweights. So I published that as a bar 4%.
RITHOLTZ: So in other words, the stocks they liked at 4% better than the stocks they didn’t like.
PARKER: Yeah. They didn’t like.
RITHOLTZ: And then how did it do versus basic indexing?
PARKER: Yeah. Well, that was kind of a new market neutral, right? So like you overweight longs and you’re short equal and underweights. And then — and then I had a quant model that, you know, the long top quintile beat the bottom by 9%. So I sort of said, look, I think quantitative stuff probably, you know, is a little bit better than fundamental stuff. But then when the last bar was 13%, which was, if you only bought the overweight rated stocks at the model light and you only sort of shorted the equal and underweight to the model you didn’t like, you get 13.
The whole point of this was a combination of something quantitative and maybe unemotional, combined with the fundamentals would be superior to either discipline alone. And actually, I’ve spent most of my life since then, you know, the last 12 years, in that sort of combination sphere. So I think I’m trying to defend it by saying, look, I think there’s some value in it, for sure. But there’s not value in changing the recommendation after it’s happened.
My own personal opinion on Netflix, and I’m not a fundamental analyst there, but I did write about it, Barry. It’s interesting. I’ve had to learning lessons that this one apply to. One, when things change, you have to admit it. And this one, I think, has both macro and micro changes. I think the macro would be, you know, everyone bought too many streaming services during COVID and maybe doesn’t need as much.
RITHOLTZ: Right. And now, they’re out of their house again.
PARKER: Right. And so, it’s reopening. And the micro is they’ve got to think about pricing, and maybe charging people to, or not charging, reimburse for advertisement. So that’s kind of a business model change. And the other thing, so maybe you have to save yourself. Well, it’s not exactly the same fundamentally. You know, sometimes — I guess I’d answer your question by saying sometimes the stock is down 25, but the fundamentals are worse than 25%.
PARKER: Right? And maybe not in this case, but I’m saying an aggregate. And the second learning lesson I’ve had from analyzing a lot of behavior on the short selling side and running my own fund is you would make more money shorting stocks down from highs than you do at highs.
PARKER: So it’s very tough to short stock at a high because you’re fighting positive price momentum.
RITHOLTZ: Don’t fight the tape.
PARKER: Right. So when the stock is down 20% and then you short it, I guarantee you’ll make more money shorting stocks down 20 from highs than you do at high. So it’s not necessarily true that Netflix is going short here. But I’m not a fundamental analyst. But let’s say, in that case, I’m not convinced that it isn’t worse. It still trades at a 100 times for free cash flow. It’s got a high correlation to low quality and work from home. It’s got a high correlation to — and negative correlation to inflation. So I know of growth, you know, stocks like that are going to work. So you know, I don’t — I don’t know the fundamentals.
RITHOLTZ: And one of — one of my favorite things about having you, who is an independent research shop, instead of a sell side analyst, I’m not getting a phone call tomorrow from the PR person begging me to take everything Adam said out about Netflix.
PARKER: No. Zero text.
RITHOLTZ: You can’t talk about that. You can talk — you’d go anywhere. You could talk about anything —
RITHOLTZ: That’s right.
PARKER: — without restriction. So that leads to another question, how freeing is that, that you can actually say what’s on your mind and you’re not thinking about what — obviously, legal is important, but sometimes compliance gets a little over enthusiastic and PR even more so.
PARKER: I would say, you know, I should look this up. So this is an exaggeration. But I would say —
RITHOLTZ: But you’re hedging.
PARKER: I would say maybe 10 years ago, when I worked at Morgan Stanley, I think there was 50,000 employees, and 10,000 in legal and compliance, and 10,000 in IT. So those are slightly —
RITHOLTZ: 40% —
PARKER: But something like that. So, look, these are amazing firms and Morgan Stanley is an incredible firm, with great people and a lot of whom I’m close with. But what I’d say is that there’s positive and negative. The big firms have bigness disease, and the taxes on your time become substantial, right? You know, you need a bunch of videos to money laundering and a bunch of — you know, every firm has this.
PARKER: You know, compliance stuff, you got a bunch of 360 feedback, MD and ED promotion, the ESG, diversity and inclusion. The number of things you have to do —
RITHOLTZ: Time tax is a great project.
PARKER: Time tax, yeah, it’s a huge tax. And so for me, you know, it’s very freeing. We’re not a broker dealer. Our whole job is to write, you know, interesting research that makes people think. We sell data. We create baskets. We do a lot of outsource sort of chief risk officer work where people — we sign nondisclosure agreements. People send us their portfolios and we kind of analyze them and try to give them some interesting thoughts about it that aren’t in, you know, Axioma or, you know, things they can get from ther vendors.
So, it’s really freeing. It’s really freeing, but you know, you don’t have the resources. You don’t get first class to you know, Beijing either. So there’s some positives and negatives.
RITHOLTZ: Wait. You’re flying commercial? Come on.
PARKER: I always, always buy commercial.
RITHOLTZ: So let’s talk semis. They’ve been driving everything from the shortage of automobiles to inflation. Give us the broad overview from your perspective.
PARKER: Yeah. Well, you know, one of the things that is tricky when you’re an investor, Barry, is you know, what is cyclical and what’s structural? And you know, you can confuse yourself when something is cyclical when you think it isn’t, and when the periodicity changes, and those kinds of things. So —
RITHOLTZ: I love — I love all this math you talked.
PARKER: Yeah, amplitude, periodicity.
RITHOLTZ: I’m so excited. I’m back — back in college.
PARKER: You know, I think what you said is right, though, that they’re kind of an important barometer for a lot of broader issues. The two things that I’m tracking right now really carefully are a concept called book-to-bill, which is sort of how much revenue did you ship out versus what does your order flow look like? And is the order flow higher than you shipped out? Book-to-bill ratio, generally, that’s still above 1 for most semiconductor companies, meaning future demand looks a little bit better than trailing demand. But that book-to-bill ratio has come down from maybe 1.15 to 1.08, to 1.06.
RITHOLTZ: Come down due to the supply?
PARKER: As we finally get, you know, supply catching up, you know, post COVID. So I think if you think about it, it’s a weird way to think about it, but there’s probably only one second where production equals consumption, and then you’re either about to start overproducing consumption, or you know, you’re about to start underproducing. So I think we’ll get to equilibrium in the second half of this year in —
PARKER: — most parts of semiconductors.
RITHOLTZ: Wow. That’s — that would be a huge, huge windfall for —
PARKER: The supply.
RITHOLTZ: — anybody who wants to buy cars.
PARKER: Yeah. I think that’s right. And I think the second thing that’s important related to that is backlog. So you know, one of the things that I think Bernstein was good about and is making you think like you’re the CEO as an analyst. So think like your CEO, you know, stepping — kind of stepping to the thought process if you’re running the company. So if you’re the CEO of any industrial company, auto, home appliance, any real business, you’ve had trouble selling product in the last 18 months because you couldn’t get the supplies you need.
So you go to your procurement officer, and you say, “Yo, how about stop bottlenecking my final revenue?” So what does that person do? Calls a semiconductor supply chain and says, “I want 200 million 18 months from now. I want 200 million 12 months from now. And by the way, I want 200 million 24 months from now.” And you start piling on the backlog so that they know, “Hey, I’m going to be there for a while. Ramp it up,” right? And so that has some interesting contagion in the economy, right, because these guys start planning their backlog — you know, their capacity, as if that backlog is going to be there.
One of the very weird parts about the semiconductor industry that I don’t think everyone understands is there’s zero penalty for backlog cancellation.
RITHOLTZ: I’m going to ask you that.
PARKER: Yeah. You and I can — if we want to go to Nobu for sushi, we’re going to pay 25 bucks if we cancel our reservation, but somehow I can order 200 million of silicon and have zero penalty. It’s very strange, right? So if you get any whiff that backlogs got air in it, meaning, you know, when we get production going consumption, probably you’re going call some of them like, “You know what, I’m probably only good for 100 million 18 months from now. I don’t need the 200 million.”
RITHOLTZ: And no – there’s zero consequences.
PARKER: Zero penalty. Right. And so, I think that’s a key. That’s why I think backlog and book-to-bill are really important to watch. And if you get any whiff that some of the backlog is not real, I think that causes fear. Now, we’ve seen semis come in a lot here, because I think people know they’re overearning and they can see, you know, where we are six months from now. It’s now — I think you’re at the point where you’re going pick winners and losers a little bit more.
As you can imagine, some of semiconductor business does not have perishable pricing. So the cancellation, yeah, they have inventory, but they don’t have to cut the prices. So the Texas Instruments and Analog Devices of the world, their products really aren’t perishable. Whereas, you know, some of the microprocessors that Intel and AMD make, or graphic processors that Nvidia and AMD make, or you know, obviously, Micron with memory, like that stuff is super perishable, right?
PARKER: So they make excess, the pricing comes down a lot. So you’ll start getting a little discriminating between winners and losers a little bit more in that sector. But I think the broad tone of your question, Barry, is backlog and book-to-bill are probably, you know, in the Top 10 interesting more macro barometers for people to focus on.
RITHOLTZ: So from a macro perspective, one of the most interesting questions that comes up over and over again is why does it seem to take so long to reopen a semiconductor fab after a prolonged shutdown?
PARKER: You know, there’s a number of issues. But you may have excess capacity in a factory, but it may take you several weeks to start building it and ramping it up. You know, you may have tools that are idle. You may have tools that are not assembled yet, right? So you can’t really turn on a dime your production as rapidly as people think. It is a lot more automated now than it used to be, though, in terms of, you know, how it works inside of wafer fabrication.
RITHOLTZ: Not people in bunny suits moving wafers around?
PARKER: Yeah, exactly. You now had the same vintage. So you know, I’ve been in the bunny suit in the old factories. And you know, if you think about — they used to talk a lot about yield. And some of the yield was just like people’s hair, getting into stuff, or you know, dropping — dropping these things on the floor. And so that’s —
RITHOLTZ: Triple ventilate, you go in through multiple clean rooms to get things up.
PARKER: Exactly. Now, it’s all, you know, Synopsys and Cadence, and software, and the stuff goes on the ceiling on tracks and comes down to the right machine. And I don’t know if people can mentally imagine a fab, a wafer fabrication facility, but they’re like the size of a football field.
PARKER: And there’s $10 million machines as far as you can see in every direction. So it’s multiple, multiple billions of dollars. You know, I think — I think when I went to — it’s been many years now since I covered semis. But when I went to one of their state of the art fabs in Intel in Oregon many years ago, they had a sign upfront saying they had more steel than two Eiffel Towers and enough cement to go to Portland — from Portland to Seattle.
PARKER: Like they’re a big facility. So I think it’s just not as easy to like quickly ramp up a bunch of the capacities people think.
RITHOLTZ: So — so that raises the question that a lot of people have been asking, which is how seriously can we reassure manufacturing facilities in the U.S.? Is that a real thing, or is that something that the politicians wave the hands about? But it’s so much money and it’s so much cheaper overseas, it’s not going to happen.
PARKER: I think there’s a lot of things that could change. That deglobalization theme, I think, is real. If I think about what’s kind of changed pre COVID. to now, probably the deglobalization thing we’re talking about is one of the bigger actual changes. You don’t need to package and test every chip in Taiwan. There’s some cheap areas here in the U.S. and I think that structurally changed. I know Intel has announced some massive — it was $100 billion CapEx plan over multiple years to build some stuff in Arizona and other places. So I think we’re going to onshore more the manufacturing, and I think that part is real.
RITHOLTZ: Right. There’s a national security issue.
PARKER: Yeah, security as well.
RITHOLTZ: China make the chips for our F-22 fighters potentially —
PARKER: Yeah. And I think there’s — yeah, I think there’s also — there’s been diminishing benefits to outsourcing it on the cost front as well. Now, maybe that doesn’t mean — I don’t know if that means Intel is going to be good stock, right?
PARKER: Just because they’re going to spend all that CapEx doesn’t mean it will be a good share, but yeah.
RITHOLTZ: So let’s talk about Intel, they’ve been criticized for lack of innovation, for not keeping up with the NVIDIAs of the world, or even with Apple and their M 1 chips. By the way, footnote, I got a new iMac in December, and the old machine is 2 years old. The new one is like six times faster. It’s insane the difference between the M1 chip and the solid state, you know, no spinning drives, nothing.
RITHOLTZ: So what happened to Intel? How did they seem to fall so far behind?
PARKER: Yeah, that’s a good question. I mean, we looked at — I did a research note recently on capital spending and R&D. It’s sort of R&D intensity and capital spending intensity, meaning relative to sales, changes in that and what it means for subsequent returns. And our work shows that Intel has been one of the biggest destroyers of shareholder value of any company in the last 20 years, because they spent, you know, tens and tens of billions on this stuff, and it hasn’t really made their stock go up.
PARKER: So if you think about it —
RITHOLTZ: Has it helped their sales, their revenues?
PARKER: Yes, but we don’t really care. Like, we’re stock guys, like I don’t like — you know, I want to buy a stock that goes up. I don’t really care if the revenue goes up and the stock doesn’t. And so, the stocks got cheaper.
PARKER: And they’ve lost share in major areas. So I think that, you know, it may be — I don’t want to say fruitless, but it may not be, you know, high return on investment, but maybe it’s just good for America. And there seems to be bipartisan support for that as well.
RITHOLTZ: So — so let’s talk about a stock whose price has gone up, probably the hottest semi for years now is Nvidia. Tell us why their graphics engine is just kicking everybody else’s butt.
PARKER: They did a lot of stuff, right? I mean, look, I dropped coverage of semiconductors. You know, it doesn’t — you know, more than 15 years ago actually, January of ‘07.
RITHOLTZ: So now you’re up-to-date?
PARKER: Yeah. You know, like the danger zone of thinking, I know stuff that’s no longer relevant.
RITHOLTZ: Today on Dunning-Kruger presents —
PARKER: Yeah, exactly.
RITHOLTZ: — Adam Parker on semiconductor.
PARKER: Yeah. So I could tell you about, you know, high school in 1987 also. But you know, I think that some of us who have been around the block, you know, probably missed at least the first half of the video because we didn’t trust the management team, you know.
PARKER: And I think, you know, combination of lucky and brilliant, you know, not all brilliant, but graphics and crypto, and they got into a bunch of other things that really were —
RITHOLTZ: Right space, right time, and you know —
PARKER: So it’s been it’s been a monster. Now, it’s been reset a lot because the valuation was high, you know. And so, I think people realized that these business is, back to my original comments, yeah, the slope has been upward, but they’re also overearning at the same time. And so, that’s why the stocks have come in so much. I think it’s probably still a little bit too early. But I think as we get closer to production line and consumption, and the stocks correct, you know, maybe it’s time to get in again. And the world needs semis, you can’t reproduce anything without them. So I’m not — we’re kind of a long term bull, but kind of short to medium term. I just feel like this correction needs to happen.
RITHOLTZ: So let’s start talking about you sitting on the Investment Committee at Morgan Stanley, which is about $2 trillion in client assets. I don’t know if it was that when you were there.
PARKER: Yeah. I think when I was there, it was 2, who knows with this e-trade thing? It might be 3. I have no idea what it’d be at.
RITHOLTZ: That’s a lot of wood. Tell us what it’s like to be responsible for that much money.
PARKER: Look, it was a seven-person committee. Everyone on there was —
RITHOLTZ: Hey, one-seventh of $2 trillion is still a lot of money.
RITHOLTZ: A lot of cut of them.
PARKER: Yeah. I don’t know how much of that, you know, I felt responsible for. I was the — I was the equity guy. There were bond experts. There were, you know, international experts and alternatives expert. But, you know, fortunately, I was there during a period where, you know —
RITHOLTZ: Straight up.
PARKER: Yeah. I just sort of said, “Look, you know, you guys can own whatever you think makes sense. But I’ll take 20 U.S. growth stocks and I’ll meet you in five years.” And basically, that works. So I don’t — I can look back and say I generally gave good investment advice because I just felt like we were in by the dip mode. You know, it was pretty clear that U.S. equities look better than other asset classes.
Look, I generally think that still, Barry, which is that, you know, I’m getting a 2%, 2.5% net buyback plus dividend. I get, you know, some organic earnings growth of a few percent. So I think the U.S. equity market looks like a 68% total return algorithm.
PARKER: That looked normal, and that looks a lot better than most of these other things. And I never really understood the case for owning. I mean, it got a little bit in trouble back in the day when Morgan Stanley — when I would say stuff like Europe is great for vacation, but not for stocks because, you know —
RITHOLTZ: Which has, by the way, turned out to be exactly true —
RITHOLTZ: — over a decade plus.
PARKER: Yeah. We had a two-year period where it hasn’t been good for vacation, but I think it will be again this summer. But I think, generally, that’s been right. And so I don’t, you know — I felt like it’s important to hit on the importance of U.S. equities. But I don’t really know — you know, today, I think the problem would be different, more complex. I think you’ve recently seen the news, Fidelity said they’re going to offer crypto for retirement plans, and there’s other —
RITHOLTZ: Yeah. That’s a —
PARKER: There’s other kind of diversifying things happening. And I think alternatives, people have a different view now than they did five, six years ago, meaning, you know, maybe people now realize that some of private equity was a levered rates call. And so the private markets have been a little bit more richly valued before they come public. And there’s been somewhat of an evolution in the last five, six years since I’ve been doing that.
PARKER: But you know, generally, I think I felt responsible for making clear that U.S. equities had a pretty important and big place in the portfolio. And I think, as you know better than me, much better than me, how rich you are to start out is what really impacts the proper allocation.
RITHOLTZ: Of course. The question is, are you trying to create wealth or preserve wealth? And that makes it a bit different.
RITHOLTZ: So I want to get a sense of what it’s like to be on a committee responsible, not for $2 billion or $3 billion, but for $7 trillion. Is it all 30,000-foot macro view, or does it get more granular to dig into sector stocks? How specific does that committee get?
PARKER: I think, for me, I’ve always been more about the industries, the sectors, the microstructure of the market, and it was hard for me because they had to get — had to get higher level because, as you’re pointing out correctly, people are just trying to get the mix of equities and bonds, correct their mix of, you know, U.S. versus non-U.S. correct. I don’t remember how much of that money is qualified for alternatives. But you know that stuff obviously has a bit of a different flavor to it. So it was pretty high level stuff.
I’m not an economist, so I didn’t really get into, you know, that. There are definitely some other fixed income people focused on that. So I think generally, you know, at least in the last decade, most people thought rates were going to back up and they’d been wrong until the last six or nine months. So they were sort of pretty easy to like equities over bonds.
RITHOLTZ: Yeah, to say the very least. So let’s talk a little bit about Trivariate —
RITHOLTZ: — starting with, I love the name, tell us what it means and how you came about it.
PARKER: Yeah. It’s totally a self-serving name. So, look, I was a number one ranked analyst. I have a PhD in statistics, and then I did strategy. So I feel like the three buckets of investing, the three variables investing; quant, fundamental and macro. So when I started a hedge fund, I called it Trivariate Capital, just thinking that, you know, go tell allocators that I’m kind of considering quantitative things, and macro things, and fundamental things as part of my investment discipline.
And we ran money at Trivariate Capital for a while. We closed it down and converted it to a research firm in the middle of 2020-2021 and just kept the name. I had a fancy logo that looks amazing, so I didn’t want to repay for a new logo. But, yeah, I think we’re approaching equities from the lens of, you know, systematic or quantitative, some fundamental work and then — and then macro. Macro is more about where are we and what to do about it, meaning where should we — where do we think we can pick stocks better or worse? Where should we be able to generate more alpha, which parts of the market? You know, should we be able to do that right now based on the conditions that exist?
So we’re not doing macro from the standpoint of forecasting rates or dollar or oil, but more recognizing where we are and saying, “Okay, in this regime, we ought to be able to pick winners and losers very well within the industrial sector, but maybe not so well in durables or things like that.” So we’re looking at those three lenses to try to help, you know, people who care about equities.
RITHOLTZ: So — so let’s talk about the concept of outsourced chief risk officer. Tell us a little bit about what you do in helping him manage their risk profiles.
PARKER: So when I left Morgan Stanley, I left the sell side. I went to work at a large hedge fund, and part of my role there was to be much more analytically rigorous around risk management, and then also diagnose traits, to look for patterns of behavior and the like. So I brought that sort of risk framework into running my own hedge fund, and we have used that infrastructure now in the research role to help firms. So I think we signed, I don’t know, 20 something nondisclosure agreements.
The firms, they send us their portfolio. We put it through our framework. And I think they view me as sort of like an outsourced chief risk officer, where we’ll talk to them through things or not things you can get from the standard risk vendors. So things like, you know, idiosyncratic risk, so maybe they differ for your longs versus your shorts. You know, so you’re a bottom stock picker, but your longs are pretty macro and your shorts are pretty company-specific.
As you know, Barry, like risk didn’t change. Anyone could do risk management. So most people know their growth value than a large, small. So we have like, you know, in the last two or three years, think about what has changed. And we created a work-from-home basket and reopening basket, and we looked at every stocks correlation to low quality work-from-home like Netflix, or high quality reopening, or whatever. And we kind of see are you off-sizing your long/short book on those things? Or even on the long versus the index, so you’re long —
RITHOLTZ: Short Netflix, long airlines, is that sort of —
PARKER: Yeah, stuff like that. Yeah, yeah. Or you can see if they’re off-size because they may not realize they have that bet on as much as they do.
RITHOLTZ: Meaning they’re unaware of the correlations? They’re unaware —
PARKER: Yeah, maybe unaware of the correlations, maybe unaware that they’ve got where the real risks are. So what happens when you run a fund is let’s say you decide, all right, I’m a little bit nervous about my tech exposure a few months ago. Yeah, they’re expensive. I’m more worried rates are going rise, so I’m going to sell it. So I think, in practice, what happens is the CIO goes to some of the analysts or PMs to say, “Yo, give me your least two or three favorite tech names. I’m going — I’m going trim those out, right?” You trim them out. You sell 500 or 600 bps of tech. And okay, great, practically, I got the call right. But it may not be that those names you trimmed were the risky ones, right?
PARKER: So we think about it more from the risk standpoint as much as the exposure. And there’s a lot or — so you know, a lot of that goes in there. So when we do our work, it’s a lot of, you know, every single names, exposure to size, substance, style, dollar, rates, spreads, oil, momentum, beta —
RITHOLTZ: So it’s a lot more than just beta. This is —
PARKER: — quality, reopening, ownership. You know, we look at filing data from 60 hedge funds that we track to do deep fundamental research, and we say, “Does anybody here have high conviction to name? Do they own 3% or more of their assets in the name? How does it differ from the broader population of funds? Is there good and bad crowd going there? I mean, it’s a very, you know, kind of differentiated system to try to really help people understand, you know, what their true risk of their portfolio.
We take the portfolio and we say, “How did this act in the last 10 downturns of 10% or more? Where is it different today versus, you know, that?” So maybe you have names that you think are defensive. You own Oracle and you own Walmart, and you think they’re defensive, but they get much more correlated and downturns, and they look like in a steady state, all those kinds of things to try to help people think through the risks of the portfolio.
So you know, I think we’re good at that. We do a lot of like hedge baskets. So you got a big long position, you want to take out some of the, you know, kind of macro risk of it. So we can create a basket to help you hedge it. So we do a lot of that kind of risk work to help funds think through. And I think, for us, it’s great because I think people say, “All right, well, I can — you know, I can hire Trivariate and they can, you know, help me want to think through this stuff for a big inflection. And I don’t need to, you know, build a team here to do that same thing.”
RITHOLTZ: Really interesting. So —
PARKER: That’s fun work too.
RITHOLTZ: I was going to ask, you know, I know back in the days when you were in Morgan Stanley, you were traveling more than half the year. And I was away for two days and I’m completely disoriented, and it takes a while to get my feet under me again. I’m curious if you feel now that you’re not doing that sort of traveling, do you have the time to step back and think deep thoughts and really organize how you’re looking at the world not from airports and hotels? How does that affect how you think?
PARKER: So, yeah, probably the smartest person I’ve ever worked with was a guy named Martin Leibowitz who — Marty is an amazing human being in his early to mid-80s. He’s the most published person in the history of financial journals, you know, worked, I think, with Mr. Bloomberg at Salomon back in the day, and so just very connected and brilliant guy. And I think his wife is a brain scientist. And we went to dinner together with our wives and I told his wife at dinner that I spend 5 to 10 minutes a day thinking. This is when I worked at Morgan Stanley. And she almost started crying about how depressed of a level of thinking I was able to do.
And so all the things you had to do at 5:30 in the morning to 7:00 in the morning, and then 7:00 at night and on the weekends, which was fine, but it wasn’t, you know, a system. It’s an amazing firm. But I was traveling everywhere and getting fat, and just all that stuff. So I think it’s freeing from the standpoint of, you know, a lot of that was just, you know, you’re flying to conferences all around the world and it’s a lot of airplane time.
I’m traveling still now, but it’s definitely more like one week a month, you know, five, six days a year to see, you know, clients or potential clients. And I find that great because you want the human connection. I’m glad that world is reopening such that people are doing in-person meetings. So you want to — you want to do meetings to talk to investors. What you don’t want to do is, you know, fly to Jakarta for a one-hour speech on U.S. equities, if I turn off my back or whatever. Yeah.
So I think — I think the answer to your question is, you know, I’m thinking more. I’m talking to investors more often, and I’m doing less, you know, kind of push meeting presentation of my — you know, my material. So a lot of those conferences, Barry, where sector conferences. We got a TMT conference in San Francisco. The first thing at the conference will be — I’ll talk about U.S. equities, my view of tech, and the analysts will pitch their ideas, and then I move on, right? So there’s no push like that now.
I’ll write about tech because there’s a big sell off, and I want to evaluate what signals and stocks work after the sell-off or you know, its margin expansion and cash flow, or I’ll look at FANGM as a risk factor and say, you know, “Should you really deviate from that, or where should you?” So we’ll do it where it’s timely and relevant, not just because there’s a conference every March in Timbuk2 or whatever.
RITHOLTZ: But it’s fascinating that your job essentially is to think at both places. But you could be the smartest guy in the world, if you’re constantly running, you don’t have a moment to —
PARKER: Yeah. But they — look, in fairness, I had like nine people in New York and five people in India on my team when I was at Morgan Stanley, and we do not — you know, we’re not doing that now.
RITHOLTZ: It’s not — it’s not for lack of brainpower, it’s you as the guy.
PARKER: My own personal time.
PARKER: It’s my own personal segmentation. But the team, I had a lot of smart people working hard at Morgan Stanley. And you know, we’ve got — we’ve got, you know, five total people at Trivariate, so we’re keeping it tight. And — and that’s because the gating factor is my time, and I want to be, you know, involved in what we’re writing and doing.
RITHOLTZ: So let’s talk a little bit about what’s going on in the market today, everything more or less seem to have peaked back in October of 2021. And people are freaking out about how this market is a bear and how terrible it is. What are we, 8%, 9%, 10% from the peak? That’s barely a drawdown. What’s going on in U.S. equities today?
PARKER: Yeah. I think that the sentiment feels worse because a lot of people overindex toward growth in the previous few years, and a lot of the growth stocks are down 40%, 50%, 60%, 70% if you’re in biotech, or software. So I think the headline number is probably less painful than some of the underlying carnage. And I think that explains that disconnect between your high level point and sentiment.
Generally, I think I would describe the last six months as huge change in the perception about interest rates into a growth scare, and then we got a war. So that’s probably the cocktail that sort of caused the reset. My own personal opinion is that the perception about rates has gotten too hawkish, and that they’re unlikely to raise rates as much as is now in the price. But you know, I don’t — I don’t know that for sure. But I only say that because as we talk about semiconductors and other parts of the market, it’s unclear to me that raising rates will expedite any of the supply-demand imbalances and costs.
You know, if you have a wheat shortage, I don’t think you want to crush demand for wheat to the point you get equilibrium. I think you’re just going have to live with wheat pricing, gaining share from something else, right? So I’m not sure the Fed — I’ve taken the view that the Fed are the smart ones. And so, therefore, they’re not going to purposely create a recession.
RITHOLTZ: That seems to be coming more and more of a consensus, and I thought it was an outlier view, hey, the Fed wants to get off zero and sort of normalize rates. But do we really think they’re going to tighten until there’s a recession in order to fight inflation that is not interest rate based? And I know you’re not an economist —
RITHOLTZ: — neither am I.
PARKER: It seems illogical that they’ll do that. So I —
RITHOLTZ: I mean, how is raising rates going to affect wheat shortages, semiconductor shortages?
PARKER: Temporary — temporary labor problems —
PARKER: — that you can’t clean hotels, all those things. So I don’t think it will, and I think they’ll realize that and move a little bit more gingerly on the path. And so the longer — maybe the path will, you know, last longer, which is — which is fine. I think the U.S. consumers are in good shape. We did a lot of research on that this year. I think the earnings season —
RITHOLTZ: Households are strong, right?
PARKER: Yeah. The earnings season in April, if you really look at bank earnings and the comments from them, master trust credit card data, 30-day delinquencies went down, 90-day delinquencies are at an all-time low. Retail sales, consumer confidence, wages, jobs, everything looks fairly good for the consumer. So I’m not saying it couldn’t slow materially in six months with higher, you know, oil at the pump and the like. But I still see the U.S. consumer in pretty good shape. And so underneath that, for me, like what I focus on is what’s like in long and what’s in short. Wow. Like, growth staples are incredibly expensive, and you know, yet the value discretionary stocks look cheap. And so maybe I can long some and short the others, you know.
So I think there’s a lot — like I’m excited about the long/short opportunity within the equity market, independent of what the Fed does here. But I just — if you ask me like what I think is like — where there’s the most excess capacity in the financial industry, in an industry with massive excess capacity in every single area of it? I would say the number of people who watch the Fed and memorize everything they do and have no idea what they’re actually going to do and are never right. It’s that — that’s where the excess capacity exists.
RITHOLTZ: Short Fed watchers.
PARKER: Oh, my God, I would short — I would short hockey rinks of Fed — hockey rinks of Fed watchers.
RITHOLTZ: I’m with you on that. So — so let’s talk about a couple of sectors.
RITHOLTZ: Oil and gas been a huge outperformer.
RITHOLTZ: Does this continue? Where do you look at — how do you evaluate oil and gas when you have the wildcard of the war and the big booming reopening?
PARKER: Fortunately for us, you know, and I’m not — you know, I’m not like trying to break my own arm patting myself on the back. But we had — that’s been our biggest, you know, call since we started the firm a year ago is to be overweight LNG.
RITHOLTZ: It’s been a great call.
RITHOLTZ: That’s why I asked you that.
PARKER: Thanks, man. I mean, I can — I can only hit the eephus pitch, starts spinning it with me and I’ll be in trouble. Now, you know, for me, look, I think it’s really hard to forecast oil. So I would back up and say what attracted me to it was what I call the triple crown of quant; upward earnings revisions, positive price momentum, cheap valuation versus history. So I have those three, you start digging in, and you say, “Okay, well, let’s go talk about it with investors, right?”
And investors gave me two sources of pushback, right? One is, hey — and they don’t say it this way but “Hey, Adam, like the specter of us gathering assets on this thing called ESG is far too great for us to, you know, risk whatever alpha.”
RITHOLTZ: Even on the buy side? Really?
PARKER: Yeah. The bigger firms, I think that’s the case. And then — and there’s a few of those that might be the case for. And then the second group, you know, I’m going say is more in the “Hey, Adam, the terminal value of oil was zero.” And that’s the part where I really start getting on, you know, kind of —
RITHOLTZ: So they’re unfamiliar with material science and plastics. There’s an old joke about the Saudi Prince who said to the American oil company, “I can’t believe you guys burn this stuff.”
PARKER: Yeah, totally. So I’m smiling because, you know, as I push the thesis, I think a lot of people just say, look — look, I don’t disagree that as you get — I think peak oil demand from the experts, it looks like 20, 30 to something, plus or minus, right? 16% of new vehicle sales are either electric or hybrid. The install base is 8%. Cars are born and then they die. There’s no in between states. So you can’t — it’s a lot of new car sales. You need to get the install base.
RITHOLTZ: And they last a decade.
PARKER: 12 years or whatever, right? So I don’t see any way peak oil demand isn’t in — you know, in the next 10 years, okay? And remember, you know, we live in our cozy lives here, but 500 million Indians still defecate in the street and 3 billion people don’t have air conditioning. And it’s not like when it’s hot out, you’ve had experienced air conditioning, you decide, “Yeah, for the sake of humankind, I’m not going to AC my place.” So the demand is going to be longer tale than people think as you know toilets are good and AC is good, and Wi-Fi is good, electricity is good.
And so, like oil consumption, like the people who have been the most protesting, you know, the terminal value zero argument, or people will like fly private and have 19 houses, like their own oil footprint is massive. So I just — I don’t understand where that disconnect is. Sure, maybe there’s like a pharmaceutical like patent cliff where I pay lower multiples for oil as I get five years away from that peak, or whatever. I get out stocks worth, but it seems awfully early if there’s an E&Ps with 25% free cash flow yield to get to a negative. So I started getting aware of sentiments negative on, you know —
RITHOLTZ: Which is bullish as hell.
PARKER: Bullish, really bullish. And if you look at how a lot of funds work, we did a note last year in June of ‘21 called ESG ETFs 49% QQQ, 49% XPS — SPX, 2% ESG. So the idea was these things are (clause) QQQs. Now, that energy has beaten the Qs by 50% plus in the last six months, we’ve heard a lot of firms say, “Well, we’re thinking about switching from a sustainability level to buy a stock to a change in sustainability score,” meaning if they’re improving on the sustainability program, you can buy it because you can’t handle — everyone is cool to buy ESG stocks when they’re outperforming because they’re on the Qs. But when they lag by 50, it’s less cool, right?
So I think you could have a flows thing that’s positive for this group also. And I know a lot of smart people directly investing in resources and the like, you throw this Ukraine thing on, I’d say the one — the one thing and you mentioned it earlier and I agree with it, I can’t help but say, you know, I don’t — I’m talking about markets when there’s massive and horrible human implications and it’s almost like you feel awful doing that.
PARKER: But you have to —
RITHOLTZ: That’s your job.
PARKER: You have to mentally separate for this and just say, “Okay, well, sure, if we get any announcement of a ceasefire or that Ukraine is winning, oil stocks will go down 10%, 15% in a minute, right?
PARKER: We get that. But I think I’m more in the buy the dip mode, believing that demand growth will seed supply growth sentiments negative. They’re cheap, upward revisions, positive momentum than I am. It’s the end of the — it’s the end of the day. So I think it’s a pretty bullish setup for a couple year view and it’s not just a short-term trade.
RITHOLTZ: So — so you mentioned something that I’m kind of fascinated about. There’s been a lot of pushback on ESG and there’s certainly been a lot of pushback on low carbon. Here’s my beef with the low carbon portfolio, where you’re going to take the S&P 500 and you’re going to remove all the carbon producers, but you’re going to still invest in all the carbon consumers. It’s the demand that’s leading to these people producing carbon. How does it make rational sense? Well, we’re not going to buy oil, or natural gas, or coal companies, but we will buy all the companies that consume those products.
PARKER: Yes, even more than that, I hear you. And it’s even more than that, which is the solar and wind companies consume more energy than anything else, right? I mean, just the plastics —
RITHOLTZ: Either way.
PARKER: The plastics required to make the wind turbines and move them around, and then, you know, produce them.
RITHOLTZ: Yeah. But that’s true for any new factory you get.
PARKER: Right. Right.
RITHOLTZ: Coal — even a coal-fired, you know, it takes X number of years before they’re net energy neutral.
PARKER: Right. I don’t know if, you know, it makes sense from the planets perspective to long solar and wind then short energy as a, you know —
RITHOLTZ: Investment strategy.
PARKER: Yeah, investment strategy. I don’t think that makes any sense to be honest with you.
RITHOLTZ: So there’s a fascinating article in this week’s Business Week about the rise of wind generation throughout all these supposedly red states, because when you live in Oklahoma, in Texas, in the Midwest where there’s a ton of natural and fairly consistent geothermal movement, the wind — on all this farmland, the wind farms are giant moneymakers for these landowners.
RITHOLTZ: It’s just — you know, just out of left.
PARKER: I don’t know if it is for the people who produce the actual turbines and move in there, though.
RITHOLTZ: You would think GE Capital who was funding these and GE Wind Power, that should be a giant home-run business, and yet it doesn’t seem to be.
PARKER: Yeah. Well, I don’t — I don’t — I think the tone of your question I agree with which is, you know — and it’s kind of my point too, which is I just don’t think you can destroy demand.
PARKER: Like, you know, like my point about air conditioning or you know —
RITHOLTZ: Yeah. Look at the entire movement to the Sunbelt, that’s because of air conditioning. No air conditioning, it’s hard.
PARKER: And there’s hundreds of millions of people on earth like this.
PARKER: You know, it turns out that like toilet is better than non-toilet.
RITHOLTZ: It’s your plumbing.
PARKER: It turns out that BMW is better than a rickshaw. And I mean, just go down the line, so like I don’t — I don’t — so it’s going to take a long time to destroy demand for oil. And —
RITHOLTZ: So peak oil, you think this —
PARKER: It’s at least 10 years from now.
RITHOLTZ: At the very least?
RITHOLTZ: And maybe 20 years?
PARKER: Yeah. And like maybe longer than Facebook exists or late, you know, whatever, because there’ll be something else cool. I’m not — you know, I’m not making a fundamental short thesis on Facebook. I’m just saying like, you know, two people talking about the terminal value for oil, so I won’t own the stocks. And like the terminal value for Facebook is probably oil will last longer than Facebook, I would bet.
RITHOLTZ: Interesting, really interesting. Last question before we get to our favorite questions, we are about to ramp up earnings season, how does earnings season play into those sort of research you do? How do your clients look at it? And how do you incorporate new data from, you know, the key companies into your model?
PARKER: Look, it’s massive. So what we do is every day for the Top 3,000 U.S. equities, we download about 500 pieces of information and compute about 500 more, and then we store that everyday back for 25-plus years. So anytime somebody asks us a question, we can empirically test the distribution of subsequent returns. So “Hey, what happens when this happens?” We go look and study it.
So earnings is huge for us because we’re getting the balance sheet, income statement, cash flow, ratings changes, the analyst downgrades, you know, insider buying and selling transactions, holding. There’s tons of stuff that’s happening every day. And so it changes, you know, relative valuations and growth expectations and the like. So, for us, that’s huge. And also, we have quantitative models that predict subsequent stock performance, and the quant models use and ingest a lot of this data to inform the forecasts.
So you know, my view of systematic stuff has always been that I romanticize something about the reported P&L of the company matters to its ultimate value. For the listeners, I think 30% of all money traded is two to five-day holding period on price and liquidity.
RITHOLTZ: Really? Wow.
PARKER: Yeah. So it’s not, you know, a 10-Ks and Qs being processed. For us, that’s a big part of what we do, you know, income statement, cash flow, balance sheet, et cetera.
RITHOLTZ: That sounds like in an efficiency, that a third of the market isn’t paying attention to the fundamentals.
PARKER: Well, yeah, I think it’s even more than that. That’s just two to five-day holding period. I think the guys were doing microsecond stuff for a decent chunk of volume too.
PARKER: So I’m not saying there aren’t plenty of really successful people. I just personally never been intellectually interested in that. And I think what I’ve learned, so far, is that you’re like going probably be better at something you like doing than you don’t. And so it doesn’t really appeal to me to do that. I think you can only compete when you have the tech. You know, you need billions of dollars of tech to be able to compete in the microsecond space. And I think, two to five-day holding is just price liquidity, right access to borrow, access to risk, anonymity, other stuff that really isn’t about what we do.
What we do is try to find big dislocations and opportunities like energy or metals, or you know, when we go into each sector or industry, where do we see interesting long/short opportunity. So that has to come from earnings season and the updates there. And I think one of the things I’ve learned is like you don’t anchor, right? Like, we talked about Netflix, yeah, they told you the business model is changing. Like, that’s not nothing. And maybe the stock is down too much, maybe it isn’t, I don’t know. The fundamental analysts, you know, can decide. But what I know is that it changed.
RITHOLTZ: So let’s deal with that again and let’s look at technology where there are some dislocations. We’re recording this before Apple reports, before Microsoft reports. So how do you look at the entire sector? Is it uniformed, or can you really segment it, winners, losers, riskier, valuation? What’s the spectrum like in that space which has been clearly driving the market for the past decade?
PARKER: So look, we’re more in the — you know, kind of maybe bucketing too much. But when you think about earnings season, a lot of things happen. Okay. Did they beat their earnings? Did they beat their margins? Did they beat their revenue? Did they guide to a change in earnings, margins and revenue? Did the stock T plus 1, T plus 3 go up or down relative to the market, relative to the peer group? Did the implied guidance change, because maybe they beat the quarter, didn’t change the annual guidance, but the implied guidance is different, right? So like, there’s like 38 things that happen in their report, whether you realize it or not.
But, you know, Bloomberg is great at “Here’s what happened on revenue versus what the consensus they beat or not. But like there’s 18 things underneath that that happened. What about the cash flow versus the earnings? Was there a disconnect? Was there an accrual? Was it CapEx? Was it inventory? Was it intangible? You know, like, it’s like an orgasmic amount of data that’s coming in, and you’re just trying to figure out what’s discounted and what isn’t.
So like, to me, you know, I think that that’s where the data will differentiate between, you know, all the big tech companies. And then you also pick up all the trends that are happening, like, “Wait a second. So when I looked recently, like transportation data is really rolled over, but industrial activity looks high.” That’s interesting, right? Like, I’m not paying as much now for truckloads and vanloads. Okay, so that’s new.
The bank earnings come in. The master trust data comes in. You know, the consumer behavior comes in. Consumer demand commentary comes in. Then you get the tech, well, there’s a lot of M&A happening. It seems like a lot of kind of 5, 10, 15 billion market cap software companies now look attractive to the private markets. And what’s Thoma Bravo doing, or what’s these guys? Who are they buying? And wait a minute, now a bunch of companies are below — come down a lot.
What about biotech? Was there anything coming out of the pipeline there? Because those are at an all-time low in price to sales, and maybe there’s innovation on there. Like, there’s a lot of trends that happen in every sector during earnings that I think are interesting. Healthcare services, the costs are going up. What’s going on there? Because all I know is, you know, I pay UnitedHealth like 7% more every single year no matter what happens, right?
RITHOLTZ: Every year.
PARKER: So like you —
RITHOLTZ: That’s seven.
RITHOLTZ: Then 11.
PARKER: Yeah, exactly. So yeah, the single most gangster company I interact with is UnitedHealth.
RITHOLTZ: What people don’t realize is it’s one of the biggest companies in the country.
PARKER: Plot UNH equity GP on your Bloomberg terminal and —
RITHOLTZ: It’s shocking, right?
PARKER: Yeah, bottom left to upper right. And one of my goals in life is to own enough UNH stock that it can offset the price increases they take on me and my employees each year, to get the perfect hedge. Because like door number 1 is, “Hey, Adam, we’re going raise. You pay us 20 grand now and then we won’t raise everyone and your employees for a year.” And door number 2 is “We’re just going to raise all your employees.” That’s it. There’s no three of like, “You get a car.”
PARKER: But my point is that, you know, kind of joking aside, like, you want to look for pricing power. Like one of the biggest investment debates right now is which companies are going have gross margin expansion six months from now and which aren’t? And is the gross margin expectation achievable or not? So you get a lot of data points on where are we with logistics, labor, and you know, wages? Where are we with, you know, input costs, oil, commodities, et cetera? Who’s got the pricing power? Who doesn’t?
You know, I think another interesting trend in earnings, Barry, is like you’re employee-based in U.S. or non-U.S. because most of the companies are telling you, and it’s been subtle and not written about enough, that all the wages are just in the U.S.
PARKER: Right? So maybe that U.S. non-U.S. labor mix is going matter for your margin profile. And so, to me, there’s just, you know, so many things during earnings that are kind of trends that you can pick up on and there’ll be at least 10 or 12 things that happened, you know, kind of mid-April through mid-May that update you on and increase or decrease your confidence on SME achievability broadly and then within each industry going forward. So like, when I give investment advice, a lot of it is about relative estimate achievability six months from now.
So I think energy, you know, okay, that’s somewhat easier, like the correlation between the change in oil price and the change in the earnings or the net income of the energy sector is 0.8. So like, if it well goes higher, like they going make more money. But there’s more subtle things like we’ve been a little bit cautious on industrial, machinery and capital goods because the estimate is hockey stick in the second half of the year. We saw the most down revisions of any sector in the market in industrials in Q1, but the stocks didn’t really underperform that much. So there seems to be this disconnect.
You know, transportation is rolling over. So I’m trying to figure out like why do I have really high incremental margin expectations embedded in the industrial sector stocks yet, you know, there’s a bit of a slowdown and margins have already recovered? So, to me, those are the kinds of dislocations that you get. You should if you being intellectually honest, can increase or decrease conviction on during earnings.
RITHOLTZ: So you mentioned intangibles, your old shop, Morgan Stanley has division called Counterpoint. Michael Mauboussin is the head of Research there. He did a really interesting piece on intangibles and essentially technology holdings and how much — much of the investment community has undervalued intangibles like software, algorithms, brands go down the list, copyright, patents, whatever, and that everybody has been looking at tech as overvalued for a decade. The market seems to have disagreed with that assessment. How do you view intangibles in that space?
PARKER: Yeah. So that’s — that’s an interesting question. I’ll answer it purely quantitatively, which is identifying longs and identifying shorts use different signals. If I think about what people have been asking me the most in the last year, people will often say, “Hey,” you know, Barry, they’ll say, “I want to buy compounders. I want a business that compounds.”
So we did a lot of research and we do a lot of kind of frameworks like this at Trivariate where we’ll say, “Okay, well, what is a compounder?” Let’s look at businesses with consistent gross margin expansion, consistent net income expansion, consistent earnings growth, consistent upward revisions, consistent price momentum. We’ll take a bunch of signals and say which is associated with the best subsequent stock performance. And the answer was gross margin expansion. Okay. So we offer a screen and people can buy a basket of compounders that have consistent gross margin expansion and forecasted gross margin expansion going forward. It seems really important in this regime because of inflation and what we talked about.
But on the short side, it isn’t margin contraction. The question people were asking me last year was the inverse of compound was “I want to short a melting ice cube.” That seems to be the cool Wall Street phrase or short melting ice cubes, right? I want to long compounders or short melting ice cubes. So we didn’t know, what the heck is a melting ice cube? And what’s interesting is the thing that mattered the most, the two things that matter the most were accruals, which would be disconnects binaries and cash flow which were driven by CapEx inventory or intangibles, so we’re getting to your intangible question, or bad price momentum, meaning actually the stock was just simply bad versus its industry peers.
So the short ideas were businesses with the biggest intangible accruals in the last three quarters that also relatively underperformed their peers, that if you plotted that line versus the S&P materially lagged, and if you added on share loss and margin contraction, it didn’t even help. So I think the fundamental analysts need to focus on the issue of whether the intangibles, CapEx and inventory are obviously big, but the intangibles are positive or not. My suspicion from Maubboussin’s work is that there’s some alpha spread in that group.
RITHOLTZ: For sure.
PARKER: Yeah. And I haven’t seen — I haven’t seen that work, but I know he’s an incredibly smart guy. So — but I’d say, I think when I’m looking for short ideas, I would start with, do they have a high accrual and has the stock acted bad?
RITHOLTZ: So you’re describing hot stocks that have rolled over?
PARKER: Yeah, in some ways. In some ways, either hot that have rolled over or they had a business model change where they had to increase their CapEx. They built inventory in advance of recovery. They did a deal and it’s uncertain about what the intangibles they acquired are, something like that.
RITHOLTZ: Really fascinating.
RITHOLTZ: All right. So let’s jump to our favorite questions that we ask all of our guests —
RITHOLTZ: — starting with and we talked about Netflix before, hey, we’re past two years, everybody has been streaming all sorts of stuff. Tell us what’s been keeping you entertained.
PARKER: Oh, boy. Yeah. I’m probably, you know, in the bottom decile of culturally savvy people that you’ll interview. I actually watched “The David Rubenstein Show” on Bloomberg. I like that show.
RITHOLTZ: That counts.
PARKER: I think it’s amazing. I think he’s – I think he’s amazing. I think that show is incredible. We leave — we leave our TV on Bloomberg TV in our office. And you know, when that comes —
RITHOLTZ: He gets unbelievable guests.
PARKER: Yeah, smart queries, and questions are incredible.
RITHOLTZ: And his perspective is so unique —
PARKER: He’s awesome.
PARKER: — because he’s walked in their shoes. He’s run a multi-billion-dollar company. Not a lot of interviewers bring that to the table.
PARKER: Yeah. He asks great question. So I like that. In terms of podcast, you know, obviously, yours is incredible. But I think the truth is I’m not — I’m more of a hodgepodge and people refer me stuff. You know, I interviewed the Freakonomics guys before. I liked them. So once in a while something that they said, I think is interesting.
PARKER: Dubner and Levitt. Yeah. Interesting guy. So it makes — but I’m not really a consistent guy, and I’m definitely not a streamer. But I am — if I look at the Parker House, though, we probably paid 12 different streaming services. So I’m a revenue source, but a high return on revenue for those —
RITHOLTZ: That’s research, though. You can — you can rent that all.
PARKER: Yeah. We got to start cutting something. Yeah, exactly.
RITHOLTZ: So apparently, lots of other folks have thought the same thing, and we’ve seen that reflected in quite a few.
PARKER: Yeah. Yeah, exactly.
RITHOLTZ: To say the least. Tell us about your mentors who helped shape your career?
PARKER: Yeah. So at Bernstein again, I think all of them came from Bernstein originally, honestly. So some of the original analysts there. So people who followed Bernstein in the ‘90s and early 2000s would know some of the minds there. But there’s — there’s so many of them. But you know, people that I keep in touch with still, some of whom are still working, you know, on the street. So you know, so I’d say probably Martin Liebowitz in Morgan Stanley, and then Lisa Shallet and Mart Mayer, and Jonathan Gray who’s deceased, but was probably the greatest analyst of all time.
PARKER: Yeah. And existing analysts there as well. So there’s just so many mentors. I have people who taught me that it’s effort, it’s enthusiasm, it’s creativity, you know, and it’s a combination of analytics and communication. And you know, I can’t imagine a more interesting job than — you know, somebody told me once, you always want to be talking to people in their 30s because they’re not — they’re not so young that they’re annoying to talk to and they’re not so old that technology and cool stuff has passed them by.
And I think about the job I have now. I’m in my early 50s and I think, yeah, I want to do this for next 25 or 30 years. Like, I want to write interesting research and I want to talk to smart, cool people about it. And a lot of them are in their 30s and 40s, and that will be — that will be amazing place to spend the rest of my life doing. So it’s —
RITHOLTZ: Can I tell you it’s a 100% true. You know my shop.
RITHOLTZ: You know the guys in my office. Like, I am sort of between the Gen X and the boomers. I have a foot in each camp. And the millennials and the generation, the Gen Ys, they’re absolutely cutting-edge hip. They know everything that’s going on. And I just want to avoid that whole okay boomer sort of thing.
RITHOLTZ: And it’s absolutely true.
PARKER: You know, sometimes experience is anti-correlated with success, right? Like you sit there, like I mentioned Nvidia before, like I admit, like I would have missed the first half of Nvidia’s appreciation because I was — I was encumbered by irrelevant knowledge.
RITHOLTZ: Right. Experts are experts in the way the world used to be.
PARKER: Right. And so I think, you know, I see that all the time because a lot of people who were negative on the stock market are using Shiller P/E, or some Grantham view, or stuff, you know, something that would have made sense —
RITHOLTZ: What CAPE doing.
PARKER: The CAPE. And that made sense in the ‘80s, right, when 8 of the 10 biggest equities were energy, and you know, capital intensity was higher. And now, you look at it, you’re like, wait a minute, 45% of all companies don’t even have any inventory dollars. Capital intensity is at an all-time low for small and micro-cap like FANGM matters, not mobile, or whatever. So it’s like a totally different business. So like to say we’re going to mean revert back to something from 40 years ago is just — you’re encumbered by knowledge that’s not relevant. And I think the 30s and 40s crew has kind of right optimization on the curve. And so, I want to be like hanging out with those people, and what better job than it would be to do what I’m doing.
RITHOLTZ: I’m trying to remember was it an Adam Smith book talking about — the new Adam Smith, not the original one, about all these funds that would hire young guns as traders, because the guys who had the capital and the experience knew they couldn’t buy the stuff the young guns were buying, and would have missed the opportunity, but you need some adult supervision overseeing them. I don’t remember if it was “The Money Game” or one of the books like that.
PARKER: But that’s why risk management and alpha generation are different, right? Like the CIO’s job and often is just some risk management like —
PARKER: — you know, what can I tolerate? What have I experienced before? Maybe some of these guys don’t — haven’t seen a cycle. You know, maybe they haven’t seen rates go up or something like that. So I need to have, you know, some — maybe they don’t realize that, you know, following a financial crisis, you don’t short highly shorted stocks because they can get squeezed or whatever. Like stuff that, you know, some of us were writing about way before January of ’21 because we knew that that was a risk.
RITHOLTZ: And you saw that?
PARKER: We saw that after the financial crisis, right? So I think that — but you don’t want to be, you know, the intractable guy who doesn’t adapt, and I think these guys help you.
RITHOLTZ: Yeah. A 100% you’re absolutely — absolutely right on that.
RITHOLTZ: Let’s talk about books. What are some of your favorites? What are you reading right now?
PARKER: Right now, I’ve got two books on the nightstand. I’ve got a Marie Yovanovitch’s book, you know, “Lessons from the Edge.” So she was the U.S. ambassador of the Ukraine, had an incredibly interesting career. Her books, I’m only about halfway through it, but it’s crazy. Her life is crazy. And obviously, I haven’t gotten to the part of the book where the Trump-induced exit happens yet, but incredible experience. You know, I was wondering what these foreign policy people do. So —
PARKER: Yeah, she’s incredible. And then somebody gave me the “All In” book by Billie Jean King, and I’m definitely going to read it.
PARKER: You know, she’s had an incredibly interesting life also. So I’ve got a stack and I roll through it. I am one of those people who, you know, probably needs to sleep a little bit more. And so, I try to read to, you know —
RITHOLTZ: Get drowsy, go to sleep.
PARKER: — the melatonin — yeah, kind of.
RITHOLTZ: By the way, if you — if you like the Billie Jean King book, someone recommended the Andre Agassi book called “Open,” and it’s absolutely fascinating.
PARKER: Yeah. Yeah, I read one of his originally years ago, but I didn’t even know he had another one out.
RITHOLTZ: Yeah. It’s really his life story, so biography.
PARKER: Okay. Yeah.
RITHOLTZ: What sort of advice would you give to a recent college grad who is interested in a career in investment finance, becoming an analyst? What advice would you give them?
PARKER: Yeah. I guess the two things would be — you know, assuming that they weren’t born on third base, or they had to like organically earn it, I’d say one would be you need to differentiate your skill base. And the best way to do this is through computer science. So you need a program. All of the work we do, Barry, is in Python, all of it. You know, you mentioned that you have some cool iMac that works. But I don’t care because we only use dummy terminals. All the competent storage is on Azure. Like, we don’t really care. Your ability, like the days of like, you know, reading Ks and like writing up a paragraph, I don’t want to say they’re over, but like you can process information much more quickly with code.
PARKER: So like, I think you need to have computer science skills now, and I would encourage people to, you know, get some skills in Python or R or you know, kind of database work, because that’s, I think, a growth industry. And you know, analytics and data are being important considerations in every major industry and I think in Wall Street in particular. So, one, computer science.
And two, like, I’ve always been — and people ask me all the time, what should I do with my career? What advice do you have? And you know, look, I always encourage people to get more education because I think you can prove demographically that the distribution of people who get more education have more wealth, right, over time. And I think it’s probably more differentiate. I know that if I didn’t have a PhD in statistics, I wouldn’t have gotten the jobs that I had at Bernstein, the promotion in Morgan Stanley, et cetera.
And so for me, it’s been huge. And my dad has a PhD from MIT and he kind of told me, “Adam, like you get a PhD, and then in bear cases, you’re — you know, you’re one of the most popular professors at the University of Michigan or something.” Like, you know, so like that’s the bear case and that’s a pretty darn good bear case.
PARKER: So I encourage the young guys every time, get more education. Statistics, data science, computer science, something that is a differentiating skill because, you know, just being like a basic MBA who’s like, “I like to pick stocks, and I can read Ks and Qs.” Like, I don’t think that’s just a differentiating of skill. And so, I think if you can process information, and then you’ll — there’s a bit of a, you know — and I should look it up, but how many people get a PhD in Statistics every year in the country? It’s a couple hundred, few hundreds. So it’s not like —
RITHOLTZ: That’s all it is. That’s amazing. I can’t imagine it’s much more.
PARKER: I mean, every major department has a few each year, right? So I don’t like do the math if there’s a hundred real departments. There’s a few each year, 500.
RITHOLTZ: If only I had access to a (status).
PARKER: Yeah, you do. So you’re going research it. No problem.
RITHOLTZ: And our final question, what do you know about the world of investing today that you wish you knew 30 or so years ago when you were first getting started?
PARKER: Yeah, oh, man, so much, right, because I published two pieces of research for 18 years. And we’ve started studying and learned a lot. But I guess, holistically, I’d say it’s a very competitive business with a lot of incredibly smart people. And it’s very humbling. So this idea that, you know, you’re used to being smarter than people because you got an A in math in high school and you’re the smartest kid in your class. Like, everybody is smart and everybody works hard. And so, you have to have, you know, a differentiated way of thinking about the world, I think. So you know, I could have picked an easier industry to compete in, for sure.
RITHOLTZ: To say the very least.
RITHOLTZ: Adam, thank you for being so generous with your time. This really has been a lot of fun.
PARKER: Thanks for having me.
RITHOLTZ: We have been speaking with Adam Parker. He is the founder and CEO of Trivariate Research. If you enjoy this conversation, well, be sure to check out any of the previous 400 or so we’ve done over the past eight years. You can find them wherever you get your podcasts.
We love your feedback and suggestions. Write to us at email@example.com. You can follow me on Twitter @ritholtz. Sign up for my daily reads at ritholtz.com. I would be remiss if I did not thank the crack staff that helps put these conversations together each week. Mohamad Rimawi is my audio engineer. Paris Wald is my producer. Sean Russo is my director of Research.
I’m Barry Ritholtz. You’ve been listening to Masters in Business on Bloomberg Radio.