Any stimulus will be a win for Trump, and Pelosi just won’t let that happen: expert

Yahoo Finance’s Alexis Christoforous and Brian Sozzi discuss what’s moving the markets today with Michael Lee of Michael Lee Strategy.

Video Transcript

ALEXIS CHRISTOFOROUS: Want to get back to the markets now and the Dow, NASDAQ, and S&P opening at one-month highs. Michael Lee of Michael Lee Strategy joining us now. Michael, why is the market so enthusiastic here? What is happening that's making investors want to jump back in with both feet?

MICHAEL LEE: Yeah, look, I think you have a multitude of factors here. The first I'll say is economic data really continues to improve. We got the ISM non-services number on Monday with a really high reading, 57 and a half, and both the new orders and production elements of that, the best leading indicators of the service side of the ISM, were in the 60s.

And then you've got to follow on that today with the continuing claims, these weekly claims, I just believe there's a lot of noise in them as with the non-farm payrolls numbers. There's just so much activity going on. And when they're at this volume, I think the room for error is really large with state unemployment offices being kind of, I don't want to say overrun, but really overwhelmed.

So when you drill down to the continuing claims, we're sub 11 million, and we peaked at 25 million. So this recovery has been nothing short of remarkable. Earnings estimates for last quarter were down-- started at minus 40%, and they came in at minus 30. I think this quarter, they're, you know, somewhere in the minus 30. They'll most likely be better.

And then when you look out next year, next year may be the best year of earnings growth going forward-- I'm sorry, best year of earnings growth percentage year over year. However, as someone that's very optimistic on the economy, I am becoming a little bit cautious on markets right now because there's very little shorts out there, very little bear sediment, very little bad news about overvaluation in equities.

And when you start seeing the consensus come in and the fact that the equity market is good, things are going really well, you know, that tends to be, you know, it's a counter indicator to me. I tend to get a little bit more cautious during that. So I would say, you know, I don't believe that there's going to be stimulus before the election.

I just think any sort of win-- any stimulus will be viewed as a win for President Donald Trump, and Nancy Pelosi is just not going to let that happen. And the election's only a few weeks away. So I think that'll be after the election. So I think markets trading on that at the moment may be a little bit ahead of themselves.

JARED BLIKRE: Hey, Michael, I just want to touch on something we were talking about before the break here, and that's the gamma flips that we're seeing here. Has to do with the increase in options, trading. It's always been an effect, but it's even more so now. You got the Robinhooders plus SoftBank, other whales buying tons of options. How is that affecting the behavior of single stocks?

MICHAEL LEE: Yeah, so I think you're getting more in the indices with that point and the sectors because a lot of that-- a lot of these are future straights, right? And index trades along that line, which allows a lot of the HFT, hedge funds, big money, fast hedge funds, and I don't-- so just as a point of opinion, I don't think Robinhooders move anything, right?

I think-- I think big money accounts follow what Robinhooders are doing to figure out where they can basically get some momentum to get somebody to be the second leg of their trades so they can find an exit. So what you're seeing is a lot of pressure and people pushing the market around vis-a-vis options. Because when there's massive call buying, the opposing, you know, the way that the options market makers hedge your positions is by shorting the market.

So when those call contracts come into the money, they have to cover those shorts. So it pushes the market much higher very, very quickly. And, you know, to the flip side, I think that had a lot to do with the selling that we saw in the month of September. Because when those put contracts come into the money, you see a lot of selling for the options market makers to cover those contracts.

So you're seeing a lot of, I don't know that I'd necessarily call it manipulation, but it's not fundamentals moving these markets massively in these directions. It's a lot more high frequency momentum trading on the backup options, which is something that's newer that we haven't seen in years past from all these big money, high frequency, fast money hedge funds.

BRIAN SOZZI: Mike, what are some of your best stock ideas into the election?

MICHAEL LEE: So, look, we're getting-- like I was saying before, I think we get a little bit frothy. But I like these big dividend payers that have proven that they're not going to cover their dividend. So the first one is AT&T, and I don't necessarily think that's a sexy name or a fast name, but they're going to sell DirecTV.

They are much more likely to move forward with an asset divestiture than, say, a dividend cut. And so for people that are out there that are afraid to get involved in equities, you've got a really healthy dividend in a company that's going to shed non-core assets to support that dividend and improve equity prices that way versus just cutting their dividend. And then you also start with a little bit of a contrarian play, you look into Exxon Mobil.

So, you know, energy is not going to zero, these energy companies are not going out of business. And if Exxon was going to cut their dividend, they would have. And so you combine, you know, those names with the favorites in tech, you know, my favorite in tech right now would be an Oracle name that hasn't moved that much.

So I would be moving more towards a quality trade that I think will continue to work regardless of election outcome. And then on the dividend side, you get paid to watch those trades work out for you. And then the last one is Abbott. So I think what the president went through with this coronavirus will be the model going forward. I'm skeptical of a vaccine.

But if people can be tested daily or every other day or multiple times a day and then given a therapeutic at almost first glance of a positive test, the chances of surviving this virus and not having a really horrible outcome, even if you do survive, are what's more likely. So Abbott's a leader in testing. I think that's where we're going to go.

I think all those names work regardless of who wins the election. And I, you know, I think they haven't really run up with the market. And, you know, I'd be-- and if you have cash on the sidelines, I'd be more inclined to wait for that gamma trade to go the other way than to the upside.

ALEXIS CHRISTOFOROUS: Real quick, what are your thoughts on IBM? They're saying this morning that they're going to spin off their IT infrastructure unit, focus more on the cloud. Are they a value play in your mind right now?

MICHAEL LEE: Yes, so this is a huge pivot for them, right? So IBM has been an acquisition machine for the last decade, as Jared noted earlier, like, the stock has been a stick in the mud. I think now this dramatic shift in management strategy is something worth looking at in terms of shedding non-core assets and focusing themselves on where the growth is. And the growth is clearly in the cloud.

You see now with Microsoft, you see now with Amazon. So I definitely would be watching it closer now. I don't know if I'm ready to jump into it right this second.

ALEXIS CHRISTOFOROUS: All right, Michael Lee, chief strategist at Michael Lee Strategy, good to see you this morning.

MICHAEL LEE: Thanks, guys.