Economists Uncut

David Lin (Uncut) 01-16-2025

Fund Manager Predicts Market Action After Trump Inauguration | Thomas Hayes

The purchasers of these technologies will be required by their investors to get a return on investment, so they either lower the spend and risk-seeding market share to their competition, or they get more compute power per dollar of spend competition catches up, and it’s a race to the bottom for margins, and this time will be no different. Well, the sell-off and January continue well after the inauguration will find out with Thomas Hayes, managing member of Great Hill Capital. He’ll also break down his sector allocation preferences and value versus growth, an interesting theme from 2025.

 

Thomas, welcome back to the show. Happy New Year. Thanks for having me, David.

Let’s take a look at my screen right now. This is the S&P 500 ever since. Basically, the top in December, it’s down roughly 5% or so.

Is this just a seasonal pullback? That we’re seeing, or is a certainty around the Trump administration starting to pile up here? Yeah, I think it’s not dissimilar to the volatility we saw after the election in 2016, Trump 1.0, through the inauguration 2017, and then things kind of normalized. I think what’s got people sideways is yields blowing out 10-year yield accelerating. First, you had the Fed uncertainty in December, and then you had that super strong job.

The Fed’s report, which worried the market that maybe we’re not going to get the two cuts that the Fed projected in their SEP, and instead, now we’re at only 70% of one cut by October, and the market is adjusting to that. If you look at the general indices, it’s almost misleading. You had industrials, small caps down almost 10%.

It was pretty violent interruption in December. You had seen a trend of regular broadening, healthy broadening since July of last year, and then as we got through the election and into that Fed issue in December, really an abrupt pause in that broadening theme. I do think we’re going to resume that for a number of reasons we can cover today.

 

The tell your yield, is that a signal of strength in the economy, or expectations for further strength in the economy, or simply that the inflation expectations are being pushed out higher, which may or may not be good for equities? It depends who you talk to. If you look at the University of Michigan, inflation expectations jumped up a little bit last week, both on the one year and three year expectation to 3.3%. That is embedded in the consumer’s expectation of tariffs increasing prices. Now you have seen the administration leak a couple of things.

Number one, maybe it’ll be targeted to certain industries or subsets. And number two, it might be gradual. We’ve been of the camp.

It won’t be as bad as advertised. I think the advertisement was 60% in tariffs across the board. I think that’s going to be more modest and more reasonable like we saw in Trump 1.0. Then on the flip side, you do have the fact that the economy is growing.

You’re going to have mid teens earnings growth, so there’s a view that yields are expanding due to that. And then there’s a third viewpoint that you got to issue $9 trillion of debt to refinance in 2025, so that yields are blowing out in excess. But what I will say is I’m more of the camp that this is exactly what happened between the election and the inauguration in 2016 to 2017.

He’s run on the exact same platform in 2024, and the market is trying to digest to what extent will he be the king of these two initiatives. And we’re taking the under. The market right now is taking the over.

I think the market is overestimating because as you saw in 2016 to 2007, 17, while the dollar rallied after the November election and bonds yields really accelerated. After the election, after the inauguration, bonds got bid, yields compressed for the next year, plus the dollar rolled over. International stocks took off, biotech stocks took off, oil stocks collapsed.

So it’s the exact opposite of what everyone was expecting, and we think it could be some version of that rhyming, not repeating. Yes, and as a hedge fund manager, are you positioned for more of a pullback right now, or is it still risk gone for you, generally speaking? We run a concentrated equity portfolio that has a very low correlation to the S&P 500 weights. So the business is we buy, we enter, we do a lot of turnarounds, and we’re buying at a point in time where we feel the margin of safety is extreme, meaning that if the business was liquidated tomorrow, we would make a profit.

 

If the turnaround plan plays, we make a double or triple over a few years, and in some cases, multi-bagger. So we’re less concerned with what the market’s doing on a day-to-day basis. If the market pulled back 20% in the next couple months, it wouldn’t change one view on any of the eight or 12 core positions in the portfolio.

And very likely, if the indices pulled back, which we don’t anticipate anything of that magnitude, but if they pulled back materially, what that would tell me more likely is that the rotation that we’ve been talking about is playing out, because the indices pulling back is evidence of the MAG-7 predominantly getting hit because of the weights in the index. And we’re going to make our money in the 493 and international prospectively, which would be less impacted by the overall market liquidation. Thomas, you talked about some sectors that surprised some investors.

What surprised some investors during a Trump 2.0? So let’s talk about some of these. In particular, energy is interesting. The oil price right now is moving up a lot higher.

Now, some of it had to do with sanctions on Russia, but perhaps expectations are that Trump is actually going to follow through on some of his promises. What are these going on in the energy sector right now? Yeah, we have exposure to the energy sector to a company called Comstock Resources. Jerry Jones, who owns the Cowboys, owns about 66% of the stock at around $7.10. Our basis is about a buck higher.

It’s now trading around 20. We believe the intrinsic value of it both proved reserves PV10 that they have to report to the S&P 500 around 20, 30 bucks per share. And then unproved, we think, is another $20.

So we don’t really worry about the day-to-day vacillations in natural gas or in oil prices. I would say that sentiment got so pessimistic on oil and oil stocks in December that it was clear that we would get some level of bounce. The problem with the integrateds and even some of the servicers is that when we get involved in a business, we are looking for a meaningful IRR over a few years, 30% plus.

 

And I just didn’t find the risk reward, despite low quote-unquote PEs and high dividends and buying back shares, et cetera. I just didn’t find the asymmetry in the general oil and gas space that I did during 2020 when we were buying at handover fist when oil turned negative. That’s when I like to get involved.

So for now, our exposure is limited. If you put a gun to my head and said, how are you going to take advantage of the increased drilling and the energy favorable policies from the Trump administration? I’d be inclined to be in servicers, potentially like a slumber jay or something like that. We have no position there, but if we do expand our energy exposure beyond Comstock, that is where we would be looking.

And it would not surprise us at all if we see some follow through both in the sector because that’s a component of value, which we think is going to have a better year than it did last year. And some of the initiatives as far as the consolidation in the industry deals happening in the industry, et cetera. We’re not getting enough juice for the squeeze, so we’re looking elsewhere where we can get a lot of juice.

And how are you in a tech sector now that Trump has probably signaled a doubling down of tariffs and the trade war globally is a tech sector at risk from tariffs and more protectionism overall? I think that as we look at the MAG-7, which is an overweight in the indices, so you are over dramatically overweight tech if you loan the S&P 500 passively and dramatically overweight if you’re chasing the Nvidia’s. And the Google’s and et cetera. The thing that our view is the outperformance of the MAG-7 last year was somewhat justified by the earnings power of the MAG-7 last year.

 

So it’s okay to have a 33 times multiple when you have 33 percent earnings growth. The problem going into this year is that earnings growth is going to decelerate for the MAG-7 from 33 percent down to, it was 21 percent as of a few days ago. Now I’ve seen numbers down to 18 percent.

So your earnings growth is going to almost have, but the multiple is still at 33 times, so the multiple still hide has not yet derated. So that’s not where I want to be. Where I want to be is where is the earnings growth accelerating and the multiple has not re-rated to the upside.

One of those areas for sure is small caps. You’re going to see in the small cap 600 index earnings growth grow from 8 percent to 21 percent, but you’re only paying 16 times. So half the multiple as the MAG-7 for the same or slightly more earnings growth.

If you look at the Russell 2000, which has more non profitable companies turning profitable, that earnings growth, I’ve seen some estimates to be 50 percent this year. So I think that’s an area. The other theme that we’re looking at here, David, is the last shall be first right along the theme of the earnings growth relative to value.

Two of the worst performing sectors last year because they had among the worst performing earnings growth were health care and materials. This year that is going to flip on its head because the health care is expected to grow earnings 20.4 percent, which is meaningfully more than the S&P at 14, 15 percent. And materials is going to grow earnings at 17.4 percent.

So we like opportunities in those two beaten down sectors as well. Speaking of valuations, here’s a note from Goldman Sachs, their strategist put out a note on Monday, reported by CNBC. US stocks are expensive, but GS says investors should keep buying them.

The US stock market is trading at an eye-watering valuation since his article after two straight big years for the S&P 500, but that’s not good enough reason to back away from domestic companies. The 2025 outlook for the unit released on Monday included a model portfolio for model risk investors that recommended staying overweight US equities while trimming exposure to foreign stocks. Is that something that of you that you share? Okay.

So Goldman’s 2024 outlook was the most pessimistic on the street. Their target price for end of year was 5,400. The S&P wound up well over 6,000.

And at one point in the year was at 6,300. So they got it wrong. They were the most wrong on the street.

Now, prospectively, when value stocks, speaking of prices, what you pay values, what you get, international is going to have 13, 14 percent earnings growth. That’s X US compared to the US about 14 percent earnings growth. The difference is US, you’re paying 22 times internationally, you’re paying 15 to 15 and a half times.

I think now more than ever, just like the first year, 2017, when Trump was elected, when everyone thought you had to be all US, international and emerging markets actually outperformed after the dollar rolled over after the inauguration. So I would take the exact opposite of this note from Goldman Sachs this year, just as taking the exact opposite of their note last year was the right call as well. And it does beg the question as to where capital flows will head now that the Bank of Japan, in particular, is on a path of potentially raising rates while everybody else is cutting rates, if not pausing.

Yeah, by the way, this is the most important thing to be watching in 2025. We got a preview of coming attractions in early August as the Bank of Japan is forced to continue to raise rates. And the Japanese bond, JGB yields blow out what you’re going to see as an unwind of the carry trade and the carry trade, that free money trade that has been concentrated in quote unquote US exceptionalism, but predominantly mag 7 stocks is going to abruptly unwind.

Because as that liquidity dries up, it’s coming out of where it’s been placed. And that has been in the mag 7 and they’ve not been buying, you know, small cap auto part wholesalers. They’ve not been buying Stanley Black and Decker tool makers.

They’ve not been buying Baxter International medical device companies. They’ve been buying Nvidia, they’ve been buying Palantier, they’ve been buying all of those things, which I think are going to take a breather. And by the way, I’m not saying short tech, this is 2000 at all.

I’m saying that there’s going to be a rewriting in multiples, which will cause the performance of that basket to do less well than it did last year, i.e. low single to high single digits. Whereas bigger money can be made in value across the board and we can talk a little bit about the history of value versus growth and why growth people seem focused on due to recency bias, if you’d like to move there. Well, wait a minute, is Apple still a growth stock? Did it Microsoft? Well, look, I mean, the story with Apple has been multiple expansion, right? So historically, it had traded at a 14 times multiple on 7, 8% earnings growth or actually higher earnings growth back then.

And then it decelerated earnings growth to low to mid single digits, which is where it is now and the multiple expanded into the 20s. So you tell me whether that makes sense. Now, the bull’s argument would be that services revenue increase and services profitability increased.

Therefore, it’s deserving of such a higher multiple, but at the end of the day, if you have decelerating earnings growth and accelerating multiple expansion, it’s a formula for not going, you know, not great things happening moving forward. So I would just say that we don’t have a view that the multiple has to go back to 14 times by any stretch of the imagination. But we do have a view that some of the gains that have been fostered through multiple expansion versus earnings growth expansion should consolidate the gains for some time to digest the price growth relative to fundamental business growth that has occurred in the last two years.

Okay, so the main drivers of tech earnings then going forward in 2025 in particular, do you think it’s still coming from AI? Do you think that that theme has sailed? What’s your take the narrative of AI and the expectation of AI transforming lives is correct, just like the narrative of Amazon changing the world in 1998, 1999, 2000, 2001, 2002. Was correct. The problem was in that first part of the shakeout, even though everyone was right about the story in 2000, it took 10 to 15 years to deliver the result, i.e., I press a button on my phone and, you know, here in California in sometimes the same day, it shows up at my front steps, sometimes it takes a whole day to do it.

So all of that stuff happened. The problem was you were paying as if it already happened in 2000, when it would take 15 more years to deliver, which is why you saw in 2000 to 2002, the greatest company in the world, Amazon down 90% in price, despite the fundamentals of the business continuing to improve in each of those years, 2001, 2002, 2003, while the price was crashing, the fundamentals were improving because you had simply paid too much for what was to come 10 to 15 years later, as if it had already come 15 years earlier. So then bottom line sector over, sorry, please.

So as it relates to AI, you know, I made a joke, Jensen Wong is flying, the bad news is Jensen Wong is flying too close to the sun, the good news is his wings aren’t melting yet. I mean, you have a company that is trading at 30 times sales, 40, 50 times earnings, and if you look at CapEx banned from the MAG7, it’s going to decelerate this year as it relates to AI, because investors are demanding, you know, they made record CapEx in 2024 on AI chips, Jensen Wong was the beneficiary, but now there’s something that’s going to be there. It’s something called return on invested capital that investors demand in order to allocate capital.

And it’s eroding their return on invested capital or return on equity, depending which metric you like to look at, because they’re not getting the revenues commensurate with the spend in the near term so they have to temper that that’s number one, number two, once you have all these large language models trained, and I’m not saying that’s done, as we move to the inference part once the language models are trained, the inference requires less hardware, because it’s less demanding, it just starts to make use of the large language models and the demand for the chips goes down. So I do think you’re going to see a re-rating of some of these arms dealers in the AI race. And the third thing I would say about Nvidia is like, it’s worked well because he’s had no competition, but like every semiconductor cycle, and a lot of people that are betting on Nvidia weren’t even through puberty the last time this happened, and they don’t have any point of reference, but competition is coming.

Okay, they’re not curing cancer over Nvidia that I can assure you, and the chips will be replicated or even substandard versions that people can buy at quantity at price will start to replace particularly again as we move from large language models to the inference phase of the cycle. And the purchasers of these technologies will be required by their investors to get a return on investment. So they either lower the spend and risk ceding market share to their competition, or they get more compute power per dollar of spend through cheaper competitive chips.

 

And what we find as we find every single semiconductor cycle is that chips are commodity and sooner or later, competition catches up and it’s a race to the bottom for margins, and this time will be no different. Two questions on that. First, good point on competition.

 

So competition from where is my question. If there is going to be competition, why hasn’t it already happened is probably the question on the street. Intel, I know they got rid of their CEO.

 

They’re searching for a new one. AMD hasn’t caught up. Taiwan, semi.

 

I don’t know. What’s your take? Well, Taiwan is in the best position. They’re in the beat.

 

The thing is, if Taiwan conduct, this is the thing that people forget. If Taiwan semiconductor ceases to exist, there is no Nvidia. So Nvidia can design chips, but if they can’t produce them, they have no business.

 

So as much as there’s pessimism around the Intel’s of the world, which, you know, if they just liquidated the thing now, investors would get their money back plus a few dollars. The US has invested $8 billion of real cash and then billions of subsidies and everything else. So whether they stand up the fab or not or put it into a separate entity.

 

First thing they got to do is announce a new CEO. I think when all is said and done, what you’ll find is that everything Gelsinger said was going to happen. He had basically gotten to the 10 yard line and they took the ball away before he could cross the finish line.

 

He did the four nodes in five years. Look, he burned a lot of cash, so he had to go. The board got the board.

 

So the name of the game is they need to hire someone and announce someone who’s credible and then just finish Gelsinger’s plan because everything’s in place. And if they can get the fab business going either in the current entity or in a separate entity and they can catch up. I think that one’s got an interesting possibility relative to margin of safety of if you’re conservative and you don’t believe in their future as a fab.

 

It’s probably a double just on the legacy business. And if they get the right CEO. And if you do believe in Gelsinger’s full plan, then this thing could be a multi bagger.

 

But leaving that aside, the AMD’s will catch up. The Marvell’s the broad. There’s a lot of people gunning for a piece of the Jensen Wong Pie and like every cycle, you can be assured that they will get some of it.

 

Not all of it, but they will get enough of it that you’ll see margin compression and you’ll see a normalization of multiples. Last question on AI and NVIDIA. This came in this week.

 

NVIDIA stock falls after Biden administration releases updated export rules for AI chips. So the stock’s been down about 12, 13% since its top in late December. But anyway, this came out.

 

It fell nearly 2% on Monday after the Biden administration released an updated export rule aimed at controlling the flow of artificial intelligence chips. And then there were some tips to adversaries such as China. The White House said that the rule will cap the number of AI chips called GPUs that could be ordered by most countries without a special license, smaller orders of 1700 or fewer GPUs would not count toward the export cap.

 

Is this significant for the industry at all or or not so much? Can you expect this to be reversed? It’s significant for the industry, but not for the reasons that you think. Number one in the short term it will hurt the industry a little bit in the intermediate term to long term it will it will destroy the industry because what you basically did in the name of national security is you’ve taken a eager paying customer to US companies and said you can no longer buy from us. So you’ve given them no choice but to learn how to create that competency for themselves.

 

And how do they do that? It’s very simple. They pick off the best talents. They reverse engineer the technology and they do it themselves.

 

Whereas if the government did not impose these restrictions, they would stay dependent on us forever. So effectively in the short term it looks like a win because they don’t have the same technology in the intermediate term after they shipped the chips through other countries and ultimately get them in reverse engineer them. And they front loaded a bunch before of this anyway to buy them a few years to reverse engineer the technology and hire out all the best talent.

 

The big issue is maybe the competition that I’m talking about is not coming from the players that we’re anticipating and it’s coming from players that are just now getting going and from from China. Great. Thank you very much.

 

Let’s close off on your sector over weights and under weights of 2025 something everything together. Yeah, I think three themes here. First, values outperformed growth by 4.4% per year since 1927.

 

So we want to be skewed to adding value this year. And the and the recency bias around value in the last since 2010 has been zero interest rate policy. If you believe we’re going back to zero interest rate policy then stay overweight growth if you believe we’re in a normalized environment which we do start adding some value into the portfolio.

 

The second theme is small over large you get the same or better earnings growth for half the multiple this year. It worked in Trump 1.0 and the third theme is start to get some international exposure because like value and growth that runs in cycles international and US runs in cycles and when you see headline US exceptionalism. The note that you referenced it’s often time to start to get some exposure internationally.

 

Again, you know, 13 14% earnings growth for 30% less multiple and I think the one of the surprises of 2025 is that following the inauguration into the first quarter. I think you’re going to see bond start to get bid 10 year yields start to get bid yields compress. And I think that the the pounding the table around 5% is going to be more like 4% would be my bet as we move throughout the year.

 

I take the under. I’d see the 10 year yield closer to 4% than closer to 5% towards the end of the year for sure. Interesting.

 

Okay, good. Thank you very much. Where can we learn more from you and hedge fund tips? We have our blog which is hedgefundtips.com. We publish our weekly research note on Thursdays and our top ranked hedge fund podcast.

 

It’s called hedge fund tips with Tom Hayes. You can get it wherever you get your podcast. You can also get it at YouTube just putting hedge fund tips in the search bar and all of our stuff will come up at exits at hedge fund tips and at TikTok and Instagram.

 

It’s at official hedge fund tips. Excellent. We’ll put the links down below so make sure to follow Tom and hedge fund tips there.

 

Great, great resource for anybody interested in markets and updates. Thank you very much for your update today, Tom. We’ll speak again soon.

 

Take care. Thanks so much, David. Thank you for watching.

 

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