Markets lower as China tensions rise

Yahoo Finance Video

Yahoo Finance’s Alexis Christoforous and Brian Sozzi discuss the latest market action with Heritage Capital President Paul Schatz.

Video Transcript

ALEXIS CHRISTOPHOROUS: We have a down market here in the very early going with the Dow off about 270 points. And this just crossing the wire, GE Aviation is going to cut 25% of its workforce because of this coronavirus pandemic. And GE's stock is under pressure right now.

Want to welcome Paul Schatz now, president of Heritage Capital to the program. Paul, always good to see you. Just-- we haven't talked in a few weeks. What have you made of market action over these past few weeks, the fact that we've gotten some really bad economic data, but the market has seemed to hold up OK?

PAUL SCHATZ: And good morning. I hope you're well and staying sane. A couple things. So the last couple of times I've been on, I've had a common theme, and that is, regarding the markets, not the health crisis, it's always important to see what the reaction is to bad news, not what the bad news is. Everybody knows bad news. But when stocks trade higher on bad news, that's a super, super bullish sign. So that's kind of the big picture.

Shorter-term, I thought last week, markets went about as far as they were going to go. So you want to call it Dow 25,000. We'll round it, that's fine. I think we're in a range, let's say it's 22,500 on the downside and 25,000 on the upside. And now the market's going to digest and maybe catch up with some of the news and maybe some of the turns we're seeing in earnings.

BRIAN SOZZI: Paul I know you were glued to the Yahoo Finance exclusive live stream of Warren Buffett's annual meeting this past weekend. So when Buffett comes out here and says, I'm exiting all my airline stocks. The fundamentals of these businesses have changed. Does that signal to you a short-term market top?

PAUL SCHATZ: Absolutely not. I did watch yesterday. I thought Andy did a great job in the intro segment. And you know, kudos to him. It was really nice.

So Buffett, I think's, being Buffett. He's being candid. You know, he's got $134 billion in cash. On the airlines, it wasn't new news. That came out I think it was a week or so ago. So the fact that it's the second or third time he's invested in airlines and gotten burned. He's clearly not an airline investor. And I would argue in the rest of his life, he's not going to invest in airlines again.

The only thing surprised me-- you know, think about it. He-- I'm sure he was all jacked up with the billions, ready to make one of those crazy desperate deals. The companies needed capital to survive. And then the government came in with the nuclear arsenal and said, nope, not going to happen.

The only thing that surprised me about Buffett was during the collapse in March, he was not a net buyer in those 5% positions in companies he just loves-- would love to own. That was the only thing. Other than that, what are you going to do when the government comes in and says, we're going to backstop America?

BRIAN SOZZI: But, Paul--

ALEXIS CHRISTOPHOROUS: Hey, Paul--

BRIAN SOZZI: --Paul, I would argue, real quick though, that what Buffett-- Buffett did with the airlines, that applies to a lot of other companies, cyclicals, industrial companies. All these companies are taking on more debt. And it remains completely unclear when demand will-- will come back. And we've seen this market rally on the notion that we get this V-shaped recovery later this year. And maybe we don't get it.

PAUL SCHATZ: So I've argued since the beginning, there won't be a letter to describe the recovery. It's not going to be a V. It's not going to be a U. It's going to be something a lot more complex. But I take Buffett--

First of all, I said early on, those-- there's a certain segment of the markets and the economy, the airlines, the cruises, the restaurants. You can go-- we all know what they are. That they will not-- they-- you know, those restaurants, they will not immediately bounce back. They're going to have-- most will be zombies, frankly, for several years to come.

But on the flip side, you've got a whole segment of the economy that is going to boom out of this. So it's-- it's going to be so much clearer, haves and have-nots. I'm not flying anytime soon. I will not get on an airplane. I'm not getting on a train. I'm not-- that's me. Maybe I'm on the crazy end of the spectrum, but I'm not. I'm not going to Disney, and I'm not going on a vacation where I've got to be around a zillion people.

I think he gets it. The airlines have a unique challenge in front of them, just like maybe the casinos do. And it's going to take a lot more time and science for people to be comfortable. Think of all those conventions in Vegas. People are not going to run back to those huge conventions in Vegas anytime soon.

So I think Buffett gets it. Why keep a position that you know you're going to be wrong for the foreseeable future?

But on the-- some on the industrial side, Brian. I'm going to push back a little bit. I think there are going to be a lot more opportunities than it seems on the surface once you get out of kind of the discretionary part of-- of-- of industrials.

ALEXIS CHRISTOPHOROUS: Hey, Paul, before we let you go, I know you're not a huge fan of the Federal Reserve under Jay Powell. What do you make of what they've done thus far? What more could they, should they be doing?

PAUL SCHATZ: You're right. I have not been a fan of the Fed and certainly Chair Powell. I'll say this. I was applauding with both hands and both feet the entire way. Everything they did, I kept saying, do more. You got to be bigger. You got to be bigger. And they-- they pretty much accommodated my wishes.

My-- I'm so disappointed. I'm disgusted, frankly, that they decided to go into the junk bond market. I mean, they got to a point with munis. And we all know, they've been in every market, commercial paper, treasuries, mortgage backed. They should have stopped before they got to junk bonds.

Junk bonds are called junk bonds for a reason. They have the highest amount of risk in the fixed income spectrum. They should have stopped there and not gone to junk.

Investors-- some people have to be punished, number one. And two, it makes it so easy now in the next crisis to be Japan and start buying stock index futures or ETFs. And all this does is this creates zombie companies. The Fed should have stopped and not done junk bonds. And there will be major unintended consequences in the mid-2020s from this. But other than that, I like everything they did.

ALEXIS CHRISTOPHOROUS: All right. See, I knew you had something to say on it. Paul Schatz, Heritage Capital. Be well, and thanks for being with us.

PAUL SCHATZ: You guys too. Thank you.

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