Transcript:
Caroline Woods: Joining us now is Eddie Ghabour co-founder and CEO of Key Advisors Wealth Management. Eddie, welcome to the desk. Not your first time on the show, but first time at the desk. So welcome.
Eddie Ghabour: Thank you. It’s a pleasure to be here with you.
Caroline Woods: All right, so we have a big day ahead. We’re glad that you can be here for it. Fed decision coming up later this afternoon. You’ve warned that the fed is the number one thing standing in the way of this bull market, or could stand in the way of this bull market. Explain.
Eddie Ghabour: So the biggest reason why we say that is right now, the bond market has starting to show some warning signs when we see high yield spreads broaden out. You had the core. We’ve news on their secondary market in the bond market. And what that tells us is the cost of capital for some companies, especially small companies, which is the heart and soul of the U.S. economy, are starting to go higher when the cost of capital is higher.
Eddie Ghabour: That means there’s a chance of economic growth slowing when you look six months out. If the fed tightens monetary policy into an already tightening monetary situation like that, that’s when we use the term. Things can break in the in the bond market. And that’s our biggest concern. We actually have a proxy 2018, the fourth quarter of 2018. The fed ignored some signals they raised in September, they raised in December.
Eddie Ghabour: And the Nasdaq dropped by 20% in that fourth quarter. And they and the S&P dropped by approximately 10%. So I’m hoping that Warsh and company will respect the signals that the bond market is giving us and let rates be where they are right now. And lastly, I’ll argue the biggest reason why inflation staying sticky is because of oil prices.
Eddie Ghabour: Raising rates is not going to bring oil prices down. The only thing that’s going to bring oil prices down is the geopolitical tensions subsiding and going away. So what they’re trying to do, which I respect, is getting inflation down, but unfortunately they’re in a bad spot because they have zero control over the one thing that’s causing it to stay sticky high.
Caroline Woods: So it’s taking a look at the CME fed watch tool this morning. There’s a 90% chance that the fed will stay on hold today, but a 78% chance of another rate hike in December. So if they hike, what happens? Do we see a 20% downturn in the Nasdaq? Do we see this 10% downturn in the S&P 500?
Eddie Ghabour: I believe you will see that manifest in 2027. If they do that, if they raise rates again in December, as in the same time that the high yield spreads are where they are right now and what we’re seeing in the secondary bond market, we will probably start to sell our more our tech holdings and put a defensive playbook for 2027.
Eddie Ghabour: I do think the market is set up for a coiled spring in November. I think we’re gonna have a really nice catch up trade in tech, but if the fed raises rates, I think it’s going to put cold water on this bull market. We’re going to have to respect those signals as much as we want to be bullish, and we have to honor the credit markets.
Eddie Ghabour: The credit markets will see signs of cracking before the stock market does. That’s why I tell my team the bond market is smarter than the stock market. When we start to see the bond market flash warning signs, we will respect that and start to play defense.
Caroline Woods: What’s the warning sign look like?
Eddie Ghabour: So you’ll see high yield spreads widen even more. And we will start to see other names, not just core weaves. The core weave alone doesn’t worry us. It’s one company. I think there’s an overreaction here short term. However, if you start to see the secondary bond market on names like Oracle and the hyperscalers start to widen, that’s going to be the number one sign that we need to start selling.
Eddie Ghabour: Because what that means is mathematically, it’s going to be very difficult for them to meet their CapEx numbers for 2027.
Caroline Woods: Okay. So for the everyday retail investor who’s saying, okay, but if I start to see red arrows, how do I know if this is a buying opportunity or if this is a warning sign? What specifically should they be putting in their watchlist? What specifically should they be watching?
Eddie Ghabour: So they need to be watching. One of the one areas that just really watch is high yield bonds. They can look at an h y g, ETF for everyday investors. If you start to see that ETF start to go down in value and continue to go down, that’s telling you that those yields are widening.
Caroline Woods: Down in value. Like give us some numbers here.
Eddie Ghabour: What’s 5 to 10%. That’s a big move in bonds okay. And that will be that’s going to be our number one thing we’re going to be looking at is the difference between the yields and high yield versus the risk free rate, which is the government bonds. When those start to widen, that tells you that there’s some stress in the bond market and there’s concerns about the credit quality of some of these companies.
Caroline Woods: Okay. I want to touch on your defensive playbook as well. But before we get to that, what’s the upside scenario if the fed stays on hold today and then again in December?
Eddie Ghabour: I think this runs. We’re going to see S&P 500 to 9000. By the time we get to the first quarter of 2027. It is the underpinnings of this market with the fundamentals in earnings and the profitability we’re seeing and productivity with is like something we’ve never seen before. I’ve been doing this for nearly 30 years. These earnings numbers have been fantastic.
Eddie Ghabour: The gray cloud over everything has really has to do with this war and the impact on inflation. If you remove that and no rate hikes, this market is going to really accelerate to the upside because there’s a lot of people pessimistic right now that are short this market. They’re going to be forced to buy and take it to new heights.
Caroline Woods: So 80 509,000 would be if we don’t see rate hikes, but also if the Iran war ends.
Eddie Ghabour: That is correct.
Caroline Woods: And oil comes down to what.
Eddie Ghabour: So oil in our opinion, once we get rid of that, that threat, with Iran, oil’s back down to the 70s and 60s very quickly. Matter of fact, we can look at July in the summer when we had the, the peace treaty or thought of what was a peace treaty, oil came down substantially. And that means that the rate of change of inflation will decelerate.
Eddie Ghabour: And that brings yields down as well, too, which is good for borrowers because the housing markets also been hit with this. That covers a big part of the economy. So, and I think there’s a high probability that you see those things. If the fed just stays patient.
Caroline Woods: There two vastly different scenarios though. So do you trust the fed funds futures and expect that the fed will hike then in December. What do you do right now as you wait to see how this plays out.
Eddie Ghabour: Right now in this market where we are looking at it short term, you have to worry about right now. And right now, there’s not going to be a hike in November as well. We don’t think there’ll be a hike today or October. I’m sorry. October, yes. We don’t think there’ll be a hike today, so that should be a really nice set up for this next month of November.
Eddie Ghabour: As you get to mid November, you’ll start will start looking at the probabilities of the bond market. In regards to a hike. We’ve seen many times where probabilities went really high and then came back down.
Caroline Woods: It changes all.
Eddie Ghabour: That’s correct. So trying to worry about a December hike right now I think is too premature because so much could happen. And again, if oil prices peak and start to decelerate, that puts less pressure on the fed as well, because they’ve seen there’s areas right now in inflation that are coming down. And I point the housing because that’s a big part of the calculation of CPI.
Eddie Ghabour: And housing is starting to come down. Rents are coming down, prices are coming down. So right now I’m not worried about December because I think by the time we get to mid-November we’ll have a better idea. I want that probability looks like what if.
Caroline Woods: Fed Chair Warsh indicates that a rate hike is coming?
Eddie Ghabour: It will be a very bad 2 or 3 days in the market. I will tell you, I would buy that dip because I think we are oversold. In a matter of fact, that is I think one tailwind that we could see is everyone’s expecting a hawkish pause. I think there’s a higher probability of a dovish pause today than many people have priced in.
Eddie Ghabour: So but you’re right, if he’s hawkish today and says that we are not close to getting the job done and implies that there’s going to be a hike in December, it’s going to be, you could see a 2 to 3% pullback on the broad indexes.
Caroline Woods: That you would buy. Absolutely. Now when we spoke in April, it’s been a while. You were encouraging investors to buy the dip, particularly in small caps and some of the beaten down software names. Where are you finding the best opportunities right now.
Eddie Ghabour: So right now our best opportunities we found are in the in the beaten memory names and the semi names. They went through a nasty sell off, just like they did in the summer. And that’s been one of their hardest things to manage in this market as we’ve seen a lot of rolling I call it crashes anytime something drops by 20% or more.
Eddie Ghabour: We define that as a crash amongst our team and clients. And you’ve seen big companies like microns of the world that lost 30 to 50% of their value in a month. Those to us have been the opportunity. So we use the month of September to really start to increase our tech exposure in these beaten or beaten up areas, as well as the recent selloff that we’ve been seeing to increase tech going into November, where we think there’s a big catch up trade to happen.
Caroline Woods: And not too late. Micron obviously bouncing today SK Hynix up about 10% today. Micron was up 4% last I checked. Not too late to get into those names.
Eddie Ghabour: I don’t believe so.
Caroline Woods: Any other names in terms of tech that you’re buying the dip on.
Eddie Ghabour: So we love cybersecurity names. And I think some.
Caroline Woods: Is there a dip there.
Eddie Ghabour: There hasn’t been a dip there. And so from a technical standpoint, a lot of times when you see these breakouts, they continue to go higher. The one thing we like about the cybersecurity names is from a fundamental perspective, when you look at the next 6 to 12 months, the biggest concern we have from tech as a whole are companies pulling back on their investment in regards to data centers and all the CapEx numbers that we expect to when we talk to CEOs, the biggest concern they have with this AI driven world that we’re in today are cyber attacks.
Eddie Ghabour: That’s going to continue to be one thing that keeps them up at night. So when you look at corporate America, an area that they will not skimp on, on spending over the next 6 to 12 months will be cybersecurity, there’s going to be a big push to make sure that your data is protected.
Caroline Woods: And I get that. And we hear that thesis a lot. But how do you know which cybersecurity names to buy?
Eddie Ghabour: In our opinion, one of the best things for everyday investors to do is just look at an ETF bug is an ETF bug is an ETF that we own for clients and that has your best of breed names, your CrowdStrike, your Palo Alto of the world. So versus having to try to pick one winner. And and also tech is extremely volatile.
Eddie Ghabour: We know that. So it also reduces your volatility exposure there but still gives you the upside potential that you’re looking for when you get into a space like that.
Caroline Woods: But you did bring CrowdStrike as a pick with you. So you are stock picking within cybersecurity as well.
Eddie Ghabour: Absolutely. So our client base, when we look at them we custom design their strategy. Some clients have a much bigger risk appetite than others. So the ones with the bigger risk appetite we will go and put individual names with the underlying ETF as well too, just to get that extra exposure and hopefully that extra alpha.
Caroline Woods: Okay, am I getting this right that Eli Lilly is another one of your eye plays?
Eddie Ghabour: It is and and Lily to us because of some concerns that we have for next year. Health care is then usually a great defensive area to be in. And it’s it’s odd to now have a defensive sector that’s benefiting from AI. And I think that’s something that clients and investors need to look at is instead of just only looking at the chip names and microns.
Eddie Ghabour: And Nvidia’s of the world is look at other areas that are using AI to increase profitability. And Lilly with the GLP one drugs that are out there, they are the leader in that space. They’re investing quite a bit internationally as well too, and they’re in a sector that we like for 2027. So it checks off a lot of boxes for us.
Caroline Woods: It’s good to go back to your April picks. The beaten down software names. Several of them did see a nice bounce since then. Time to take profits. They’re not too late to get in there. What software names do you still like?
Eddie Ghabour: So we still like Microsoft. Again, we want to increase the quality of our portfolios. Palantir we like as well too. IG is a software ETF that we bought during that dip as well too. We still own it. We did take a little bit of profit off of it. When we started rotating into the beaten down memory and semi names, but we still have a core holding there, and we still think that software is a strong place to be.
Eddie Ghabour: Heading into the month of November.
Caroline Woods: What about some of the software names, excuse me, that aren’t Microsoft, you know, CRM workday?
Eddie Ghabour: We’ve stayed away from those days.
Caroline Woods: Oracle.
Eddie Ghabour: Oracle we staying away from Oracle as well to what concerns us with Oracle again as some of the signs of the bond markets telling us when you look at the secondary bond market for Oracle, it’s not nearly as extreme as some of the neo cloud names, but the cost of capital for them in the bond market has been increasing as well.
Eddie Ghabour: So that concerns us a little bit. And that name has extreme volatility. So if you want exposure to an oracle that to us has a much higher, beta and a lot more volatility, I would on the side of caution. And being an ETF that has.
Caroline Woods: Exposure, you technically gave us a software or I’m sorry, a health care pick with Eli Lilly. Although that’s as an eye pick. So tell us outside of tech and AI what areas of the market do you like?
Eddie Ghabour: So right now, as we’re starting to position for next year as well to, this is boring, but we really like gold. We think gold is an area that’s going to do really well next year.
Caroline Woods: Even if the S&P hits 9000.
Eddie Ghabour: We do. And the reason why is for all the factors that will cause the S&P to to report to those levels will be because the fed is no longer tightening. Yields are starting to come down. Inflation is coming down, the dollar stabilizes. And those are all positive catalysts for gold. Another contrarian play which has been left for dead is housing.
Eddie Ghabour: Housing has been beat up because of yields. We do believe the trends in yields next year will start to trend downward. And so that will be an area where interest rate sensitive areas that have been beaten up, like utilities, like real estate, will be great places to add to your portfolio.
Caroline Woods: Will be or are right now.
Eddie Ghabour: Will be. I would not be buying housing right now. I need to see what happens with the Fed in December.
Caroline Woods: I guess though, if another rate hike could cause a 20% selloff, why shouldn’t investors take money off the table right now?
Eddie Ghabour: So I think it depends upon how much concentrated you are in the high flying areas. Obviously, if you’ve had a huge return, there’s nothing wrong with taking a profit and getting yourselves to a 20 or 30% position. But again, when we look at the setup for November, we haven’t really we’ve already had a lot of things sell off and correct to us.
Eddie Ghabour: That’s not the time to take chips off the table. So I would be patient and doing that. And we would be buying the dip right now going into November. And as I said, I would start looking at the probabilities of the fed hike rate hiking rates because as you know, if those probabilities start to go down, that’ll be a tailwind for the markets.
Eddie Ghabour: That could give us the Santa Claus rally that we all hope for.
Caroline Woods: Okay. But let’s go back to your defensive playbook. If we do get a signal that the fed is going to hike, if the fed does hike come December, you had mentioned taking some chips off the table in tech. What would you be doing to protect your portfolio?
Eddie Ghabour: We would be selling the semis and the chips, and the software names. When you have that type of sell off, it’s going to go after your technology in higher beta areas. First, we’re going to have to protect our clients in that space. And we’re going to have to put the defensive playbook, which will be cash, gold, utilities and health care.
Eddie Ghabour: It’ll be the most boring. It’ll be the opposite of basically what we have right now in that scenario. And then we’ll probably if that plays out and that defensive playbook, then you’re probably going to see, in the second half of next year, some amazing buying opportunities. I have said to our clients, I think this next decade is going to be one of the best decades of our lifetime from a investment perspective, because of how powerful AI is.
Eddie Ghabour: But anything that’s this disruptive, you’re going to see booms and busts along the way.
Caroline Woods: But would that be a bust within a bull market?
Eddie Ghabour: Then it would be now what you will see, because I think the bullish trend is going to continue. But you will see. So Elon Musk got a lot of hype for his the post he put on X about some of the neo clouds. You’re no longer being here. That’s a realistic.
Caroline Woods: 200 plus of them correct. No longer being her being consolidated.
Eddie Ghabour: I don’t know if it’ll be that extreme, but anytime you see this type of new technology, a lot of folks get into it and some just aren’t going to make it. That’s just how the markets work. And that will be when you know that it’s time to start really buying aggressively.
Caroline Woods: Are you buying any neo quotes?
Eddie Ghabour: No, no. Again, we respect the bond market signals. And right now the bond market signals from the media clouds is waving a big red flag.
Caroline Woods: If someone owns too much tech right now, where’s the first place they should put their money?
Eddie Ghabour: If they take money off the table, if they’re doing it today, yes, I would sit it in cash right now. That’s what I would do and I would sit back.
Caroline Woods: Till mid.
Eddie Ghabour: November. That is correct. And then really see what the setup is going into December. Because if you’re heavy in tech, you’ve had a fantastic year. And instead of trying to, you know, be a little too greedy, just take some chips off the table, something that sometimes the best thing for an investor to do is just be patient and do nothing with the cash.
Eddie Ghabour: I think sometimes we feel like we always have to be fully invested, and when you’re properly risk managing a portfolio, there are times to push the gas down. And then there’s times that, you know, it’s okay to just sit back and wait and see how things play out, especially if you’ve had a big year.
Caroline Woods: And if I do have a pile of cash that’s sitting right now, I would joke that people would be like, where’s all this cash coming from? So I do understand that. But if I am sitting in cash right now, where’s the first place I should put it? If I want to put it to work today.
Eddie Ghabour: I would be buying the semis, the memory names, and I would buy some high quality. I would buy names like Microsoft again if they’ve got the right risk tolerance. And the reason why we say that, especially in the semis and the memory is they’ve had a pretty big correction already. And if we’re going to get a catch up trade in the month of November like we expect, I think you can see some really nice returns in those names.
Eddie Ghabour: They’re violent, so they’re not for everyone from a volatility perspective. But we’ve seen the proxy all year. Even when you look back from last summer till now, we’ve had software, had big corrections and come back. We’ve had memory, had big corrections and come back and we’ve had the semis, had big corrections and come back. And I think we’re at that same inflection point right now where the semis are poised to go back to where they were.
Caroline Woods: And are there any tech stocks that would be safe? If we do see that market downturn, would you flee to safety in some of the hyperscalers?
Eddie Ghabour: Maybe Apple is probably the safest name to own in that space because Apple is they’re not very aggressive and I are not perceived to be. They’ve got a very strong balance sheet. When you look at the debt markets, they have no problems with credit. So to us that would be the number one name to start piling into for a defensive playbook on that high quality.
Eddie Ghabour: When you look at high quality tech, there isn’t a name that checks that box off more than Apple.
Caroline Woods: Would you buy it here?
Eddie Ghabour: I would not buy Apple here because Apple has had a move, because the other areas have taken a hit. So you can use that as a short term proxy as when memory and semis are hurting, money flows to Apple. So we wouldn’t be buying Apple here because they’ve already had their move because of how the semis and memory names have been hurt.
Caroline Woods: But you would buy on a dip. Absolutely. Okay. All right. I think this is a great time to pivot to our rapid fire round of butter that you’ve played before. Quick questions, quick answers. No hedging. Are you ready, Eddie? Yes. Ready, Eddie. Bull market continuing or coming to an end?
Eddie Ghabour: Continuing.
Caroline Woods: Stocks by year end. Higher or lower? Higher. How much higher?
Eddie Ghabour: 5%.
Caroline Woods: Fed in December. Hike or hold.
Eddie Ghabour: Hold.
Caroline Woods: Bigger risk to stocks. The fed or disappointing earnings. Fed market leadership in 2027. Broadening or narrowing?
Eddie Ghabour: Broadening into health care real estate, utilities.
Caroline Woods: Tech sell offs. Buying opportunity or warning signs.
Eddie Ghabour: Buying opportunities.
Caroline Woods: Semiconductors or software.
Eddie Ghabour: Semi’s.
Caroline Woods: Microsoft or CrowdStrike. CrowdStrike I infrastructure builders or I beneficiaries. AI beneficiaries Eli Lilly or Microsoft for the next three years.
Eddie Ghabour: Lily.
Caroline Woods: Finish these sentences one. AI beneficiary every year. One AI beneficiary every investor should consider owning.
Eddie Ghabour: Is CrowdStrike.
Caroline Woods: The most overrated Meg seven stock?
Eddie Ghabour: Is meta.
Caroline Woods: The most overrated stock outside of the Meg seven is.
Eddie Ghabour: Is, the NIO clouds.
Caroline Woods: The first warning sign that this bull market is ending would be.
Eddie Ghabour: Bond yields in the high yield space.
Caroline Woods: At what level?
Eddie Ghabour: 4% over the risk free rate.
Caroline Woods: The stock I’d buy today and hold through 2027 is.
Eddie Ghabour: Micron.
Caroline Woods: Eddie Gabor, thanks so much for playing along. Thank you for all your picks and your perspective. Really thanks.
Eddie Ghabour: For having.
Caroline Woods: Me. That’s Eddie Ghabour, co-founder and CEO of Key Advisors Wealth Management. If you enjoyed this three talk, check out our full interview with George Seay. He explains why he thinks stocks will end the year higher and the names to buy. Now there are some similarities and some differences.