December 5, 2022

Chapwood Investments Managing Partner Ed Butowsky shares his views on Friday’s market selloff, asserting an “overvalued” market and providing areas that investors should avoid.

Video Transcript

AKIKO FUJITA: Jared, let’s talk more strategy with our first guest for the hour. We’ve got Ed Butowsky, Chapwood Investments managing partner. Ed, you heard Jared kind of pose the question for us here. Is this– what we’re seeing today, is this a repricing of risk or is this, kind of, a buying opportunity as you see it?

ED BUTOWSKY: I’ll tell you, I don’t see it as a buying opportunity. I see this as the first leg of a multi-step downward move in the S&P. I’ll tell you, the market has been 31% overvalued for a number of months and I believe that this is the first leg of, you know– call it repricing, whatever you want to call it, but it’s definitely going to be a downward move going into 2022.

And then, sir, how are you reassessing growth projection going forward and equity valuation? What are you advising investors to do?

ED BUTOWSKY: Well, we’ve been buying a lot of senior rate floating notes, and business development companies, and preferreds in anticipation of this. We’ve been writing a bunch of cover calls, which, you know, just gives us a lower access or entry point on stocks. And we’ve stayed away from a lot of the growth stocks just because you just cannot support and justify, for a long period of time, this kind of overvaluation.

You have to remember, in October 1987, the stock market was 40.2% overvalued. Up until recently, the market was 32% overvalued and it was only in a very few number of companies that you were seeing this, you know, kind of, growth rate that could be supported– you know, Facebook, and Google, and so on. You could support them. But the overall market was definitely overvalued and you had to be very careful about it.

AKIKO FUJITA: Ed, you talk about reassessing the risk now, but if you look at some of the outliers in the session today, the stay-at-home trades coming back. You look at a name like Zoom, up more than 7% in the session. Does that kind of trade make sense to you, given that we don’t really have a whole lot to take away from on this new strain? We’re still waiting for a broader assessment from the WHO. Is there a bit of an overreaction or you think this is, kind of, the time to move back into a lot of those trades that saw huge gains on the back of last year?

ED BUTOWSKY: Right. And if you look at Zoom, you’re looking at a company that is still incredibly overvalued. And this new variant is an excuse, I believe, to sell off the market because I think it’s because the market is so overpriced. I think these, you know, these stay-at-home stocks were, you know, properly priced at one point but– before the pandemic– they just skyrocketed to unsupported levels. And I think that they’ve come down and they should stay down. I don’t mean to be a bear, but I just don’t believe any of these stocks are worth what they’re selling for.

And I want to turn your attention. So before Thanksgiving, the whole story was inflation– that’s all we were talking about– and supply chain issues, and the rest of it. Now oil is crashing down, down 10% at one point, slightly off that low now. Does this in any way reset the inflation expectation going forward?

ED BUTOWSKY: Well, I’ll tell you. You know, the inflation story has been a big one for quite some time. And I believe that lower prices on oil is going to have a positive ripple effect in terms of pricing. But it’s going to be– take quite a while before we get there. So, you know, I definitely believe that lower oil prices are going to help. And we see a slower world economy, that’s going to bring oil prices lower.

In addition to that, you see the government opening up the federal reserve, you know– the– I guess you call it the oil reserve. And, you know, the combination of those two things have definitely brought prices of oil back down. But I believe that you’re going to see inflationary pressures persist. And you’re going to continue to see oil prices go higher. So if there’s one sector I would be buying, it would be the energy sector and specifically, you know, ConocoPhillips, Exxon, Chevron. These companies pay really nice dividends and I believe that they have a lot more upward movement to them.

AKIKO FUJITA: Yeah. And I guess there is a bit of an irony here. Just days after the government acted to release or tap into the Strategic Petroleum Reserves, we’re already seeing oil down on these fears of COVID. Bottom line, investors today, they’re watching saying, well, what do I do? Do I stay on the sidelines to, sort of, ride out the volatility or is this a time to maybe reassess your portfolio? If so, where do you put your money?

ED BUTOWSKY: Well, I definitely would be reassessing your portfolio at this point because this is the beginning. And, again, I don’t want to be the boo-hoo, you know, everything’s terrible person, but my clients know that I’ve been very cautious about the stock market for quite some time and been pleading with people to reduce their equity exposure. And this is just the beginning of what I believe to be, you know, a downward move.

So what you should be doing is looking at senior rate floating notes, business development companies, and preferreds, staying away from the interest rate-sensitive bonds. Do not go into interest rate-sensitive bonds. Those are your higher quality bonds, your AAA, AA, single A, and BBB rated bonds. But go into the BB and single B rated bonds, that’s where the balance sheet matters more than interest rates.

And I wanted to ask you how much of a sigh of relief do you think Fed Chair Powell may be breathing right now because– does this sort of give cover to the Fed to now move more slowly because we’ve already seen, you know, rate hikes being pushed further down the road now, with only one for next year and the next one coming the following year?

ED BUTOWSKY: Yeah, I think that this has played perfectly into what he has been out there saying and he’s been very dovish. And I believe that he likes this news and believes that this is going to give more support for him to slow the tapering. And, you know, that’s good in some cases. You know, it’s good for your banking stocks to some degree. And, you know, I believe that you’re going to see a very slow growth in inflation. But you have interest rates really low at this point and I think they’re going to continue to stay low, which is going to be a negative for inflation.

AKIKO FUJITA: Ed Butowsky, Chapwood Investments managing partner, appreciate you joining us on this Black Friday, appreciate the time.