SKEPTIC’S GUIDE TO INVESTING

The Institutional Perspective: Adam Parker on AI, Equity Investments, and Market Trends

• Steve Davenport, Clement Miller

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What does the market look like through the eyes of a seasoned Wall Street veteran? Adam Parker, founder of Trivariate Research and CNBC contributor, joins us to share his institutional perspective on today's investment landscape.

The conversation begins with Adam's surprising take on political developments – while headlines focus on tariffs and tax policy, institutional investors are looking elsewhere. He shares what's really dominating client conversations and why certain sectors remain largely immune to policy shifts. As he puts it, "I think investors just didn't focus on it that much."

We dive deep into the AI revolution, with Adam providing a framework for categorizing companies in four distinct ways: direct revenue beneficiaries, productivity winners, businesses impregnable to disruption, and those vulnerable to AI-driven obsolescence. His unique insights come from systematic analysis of earnings calls using natural language processing to identify trends before they become obvious. Remember – in November 2022, major investment banks made zero mentions of AI in their outlook documents, yet within six months, we witnessed the largest upward sales revision of any mega-cap in history with NVIDIA.

Perhaps most contrarian is Adam's take on international investing. He dismisses the recent European outperformance as "a temporary trade that's already over," explaining why structural differences make US equities structurally superior: "The reason Europe is cheaper is because it's worse. It's the same reason Motel 6 is cheaper than the Four Seasons."

Throughout our conversation, Adam emphasizes his core investment philosophy: "The two things that matter most to investing are changes to perceptions about growth and changes to perception about rates." This simple yet powerful framework helps explain market movements and provides clarity amid complexity.

Whether you're managing a large portfolio or just beginning your investment journey, you'll appreciate Adam's no-nonsense perspective, combining statistical rigor with practical wisdom gained from decades on Wall Street. Visit trivectorresearch.com to access Adam's insights for individual investors and financial advisors.

Straight Talk for All - Nonsense for None

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Disclaimer - These podcasts are not intended as investment advice. Individuals please consult your own investment, tax and legal advisors. They provide these insights for educational purposes only.

Stephen Davenport:

Hello everyone and welcome to Skeptic's Guide to Investing. Today, Clem and I have the honor of a guest from CNBC contributor and frequently cited in the press, Adam Parker from Trivariate Research. Adam has a newsletter that he distributes for investors and firms institutions, so we think it's really nice to get someone on our show who is going to give us more of a high-level institutional view of things. I know some days we spend time talking about individual names, Sometimes we spend on individual bills in Congress, and today I'd just like to have Adam kind of update us on where he thinks we are and where we think we're going. So it's an interesting time in markets, Adam, and I really appreciate having you here.

Adam Parker:

Yeah, thanks for having me. Pleasure, pleasure's mine. I really appreciate having you here. Yeah, thanks for having me.

Stephen Davenport:

Pleasure is mine. Let's start with the big beautiful bill. Adam. Do you look at that and the peaceful way it went through Congress and the way it's being implemented as having stabilized a lot of our next few years in terms of what we can expect from the tax rates and what we can expect from government? It feels like what could have been a very volatile time has ended up to be a pretty big win for the Trump administration. How are you viewing the big beautiful bill?

Adam Parker:

Yeah, I mean honestly so what we do, our core business, Trivariate we sell research and services to institutional investors and I just got back from two full days of meetings all day and that didn't come up one time during my meetings. So I'd say, like day-to-day institutional investors aren't super focused on it because I don't think they think it introduces a ton of volatility into the P&L or the top few hundred US equities of volatility into the P&L or the top few hundred US equities. There are a couple. We do a lot of natural image processing where we look at all the earnings called transcripts. There are a couple of companies that have talked about the big beautiful bill so far during this earning season.

Adam Parker:

But I don't disagree with your setup that to the extent that there were companies that maybe were at risk of paying a higher tax rate, that being pushed out is probably a positive. But honestly I think that investors just didn't focus on it that much. I think they focused more on tariffs, which hurt the market in Q1, and then sort of the lack of impact that most of the verbiage has had on companies and the huge rally. I mean the best signal this year, I think, was from the president. It was April 9th when he said it's time to buy stocks and since then I mean he was right. But I haven't heard a lot about Big Beautiful Bill in my meetings.

Stephen Davenport:

How do you see the tariff situation? Do you think we're going to get all the answers by August 9th and it will start to just go into everyone's assumptions and models for companies in terms of what their foreign exposure is to some of those drafts, and it feels like there's kind of been some names have been taken to the woodshed but other names have been kind of rewarded for the way they've handled it.

Adam Parker:

I like that phrase take taken behind the woodshed. Uh, it's a good one. Um, I just hope it doesn't happen to me.

Stephen Davenport:

Um, we're pretty old dogs here, Adam, so we're gonna, we're gonna bring out some old, you know that's an old school uh, that's an old school phrase that I like, um.

Adam Parker:

So yeah, I mean, look, we're what we do. Is we search every earnings call transcript and every webcast presentation systematically for anything related to tariffs. You know whether it's, you know, passing on pricing or price increases or what it does to the kind of production versus consumption. So is it changing anything about investment or CapEx decisions or delays? Is it causing any layoffs or hiring issues or workforce stuff, automation, whatever? Is it distorting backlog patterns so pull forward in demand, or those kinds of things, disruption of service, whatever. So the answer is there are a decent number of companies mentioning it, but we haven't seen a huge impact in terms of those mentioning it relatively outperforming or underperforming their industry. There are a few companies that have said they benefited, but honestly, I think most investors thought it would impact earnings more in April or the July guidance for October than it has. I think part of it is just the constitution of the S&P 500, which I focus on US equities. The most 58% of the S&P is tech, financials and comp services. So think of the big tech companies Google, meta and comp services, and then the financials and on the margin, they just don't have a massive tariff impact. I mean you saw earnings last week for most of the large financials across the board Goldman, morgan Stanley, jp Morgan, bank of America, et cetera and the earnings were good. I, bank of America, et cetera, and the earnings were good. I mean the numbers came up. They're provisioning less for losses than they were previously. So I think that kind of 17% 18% of the market's kind of immune.

Adam Parker:

A lot of tech companies don't have direct tariff stuff. They have pricing power over their products, whether it's software or whatever. There are some businesses where there's both supply and demand problems from China. So NVIDIA kind of got their revenue gift back from China for the 2026 outlook. But in general we've seen a couple of comments in semis last week ASML, the toolmaker, mentioned tariffs but then Taiwan Semi beat and raised and kind of said yeah, maybe, but things are still good at the high end. So I'm studying it really carefully. I haven't seen a big impact from tariffs yet. It's been less than I would have thought three or four months ago and I think part of it is two-thirds or three-quarters of the S&P 500 is just not really in the tariff game. I think if you go smaller cap or mid-cap it may be a bigger deal.

Clem Miller:

So, Adam, if I might, steve, so in terms of your review of the you know through NLP, of the various earnings calls and whatnot, yeah, is there any you know for the 58% you were talking about or the 58% minus financials? Is there any discussion about sort of these new techie type of regulations like the DMA in Europe or the you know digital services act in Europe, or even GDPR, even GDPR?

Adam Parker:

Not really.

Adam Parker:

No not really. I think people just don't believe it's going to introduce a ton of volatility into the P&Ls of companies. I mean, you know, I think people are still generally optimistic that we're going to get into a lower regulatory environment. I mean, the biggest risk, I think, is, you know, the S&P 500 benefits when the dollar weakens. The most crowded trade, macro trade out there, is that the dollar will continue to weaken. It's weakened kind of a lot year to date against a lot of currencies. So that benefits net, net the earnings for the S&P 500. All else equal for multinationals in tech and staples, pharma, industrials, whatever.

Adam Parker:

But to the extent that you ultimately have like a transactional translational crossover, meaning like eventually the goods just become so much more expensive that you lose demand and that offsets the benefit. We just haven't seen that yet. So I guess in certain luxury goods you might see that, but we just haven't seen it in like tech companies at all. It's not like people are saying, oh, I'm going to use some other inferior product that wasn't designed in yet or test out some other software or whatever. So I think that's why I mean I don't have the exact numbers in front of you, but I think the tech sector is 4% of Europe. It's 31% of the S&P. You just don't have the switchable.

Clem Miller:

Yeah, no, I was just thinking about these giant fines that some of the US tech companies are paying in Europe and whether that's having an impact on their P&Ls.

Adam Parker:

I mean the stocks have roofed since that news has come out.

Clem Miller:

Yeah, okay, okay.

Adam Parker:

And I'm not saying I don't want to sound like the whistling by the graveyard, but I'm just saying people aren't asking about it because it's not topical today.

Adam Parker:

And I think it's also like look, the dream is still innocent until proven guilty. About AI productivity the biggest investment controversy, I think, or one of the top three, is that these hyperscaler tech companies have massive capital intensity and they're spending a ton of capex, so at some point you have to get return on that investment. And so if we don't start seeing a lot of proof cases for AI efficacy where companies are driving revenue synergies and productivity synergies, then that'll be a problem because higher capex means higher depreciation burden on COGS, means lower gross margins, means lower multiples and so far the market's innocent until proven guilty on these AI proof cases. And if, if all the investments going to happen you know happened starting in 23 and it was going to hit the 26 and 27 P&Ls of companies you getting negative now because you're worried about it might be premature because you might get the upside at 26 and 27. I think that's where the the psychology is more there than any of these, you know, flesh wounds on one-time payments or other stuff.

Clem Miller:

Right, and what? What do you think? Since you mentioned AI? What do you think about the, the argument that you know the way to really take advantage of this is to invest in the, the energy suppliers and and you know other suppliers to the, you know, to the data centers.

Adam Parker:

So there's look. The Holy grail would be if you could tag every stock or identify every stock as as having sort of one of four possible AI related attributes. One would be like a direct revenue beneficiary, which includes, obviously, semiconductors, the associated compute software, the power uh uh, and utility portion, et cetera. Two would be harder, which is and that's somewhat easier to do. Two is sort of the productivity beneficiaries, so you know which businesses will be able to predict their employee and customer behavior better and have low margin. They have lots of employees and maybe they can drive you know, you know margin expansion, maybe, maybe grow their revenue without any net hiring, maybe fire people who are inefficient and replace them with technology. So that'd be the second bucket. The third, which is a little bit weirder, is maybe the multiples go up, price to forward earnings or whatever goes up because they're impregnable to AI, and so people say, okay, well, if you're impregnable, then your 2030 earnings or whatever are probably more relatively achievable than the market X impregnable companies. So think of toilet paper and water, but also maybe aggregates and waste management and select power and other stuff too right, like, per your point. And so those are getting higher multiples and the old school person would say well, I want to sell stuff that got more expensive. Should it mean revert? But maybe not. Maybe what it's telling you is that you want to own stuff that's more impregnable to AI disruption, and then the last bucket is those that are disruptible and have business models that are going to get kind of eaten, taken behind the woodshed, and so in that case the cheaper stocks are actually not like an opportunity but rather a harbinger of maybe more disruption potential. So that's the first thought that came with your question.

Adam Parker:

The second one is look, you got to be careful the way you think about it, because if I go to every institutional investor and I say what growth themes do you like and what themes do you think grow above GDP for the next decade, most people are going to say, well, I like AI, semis and software kind of compute. I like power and industrials to power the data center. I like electrification, electrification, industrials because of energy, you know electric transition. I like you know whatever and um, all of those teams have like 0.85 correlated to each other. We have custom baskets and whatever no-transcript. And how much Vistra and Jeeve or Nova do you own? Because if you own those and then you also own Eaton. Like they're all 0.85 correlated to each other and we've seen days this year where that risk management problem has been exposed.

Clem Miller:

So those are the two vectors of thought that came to my head when you asked that. And what do you think you know for an individual who has an individual portfolio? What do you think about, you know, having a portfolio that is sort of bifurcated one among the sort of AI complex you know to use? You know the whole combination of things you were just talking about, and more defensive stocks, or even a gold ETF, because gold, given what the dollar has done this year, gold has certainly done pretty well and I would imagine, given some macro trends, gold's going to do pretty well in the future as well. So what about bifur, bifurcation and you know, using gold as a sort of a counterweight to those days when AI has its problems?

Adam Parker:

Yeah. So look, while our institutional business is Trivariant, we sell, you know, to the biggest, you know, asset managers and hedge funds in the world we have an individual business that we sell insights publications to for financial advisors and individuals. It's $100 a month business. It's trivectorresearchcom. People want to go and check it out and what they get for that is a lot of like sort of three buckets of advice.

Adam Parker:

One is sort of important aspects of running money. How do you think about a barbell strategy? It's how I think about some offense and some defense, and so the bifurcation thing you teed up. We do a lot of that. What are the good defensive ideas? What are the good offensive ideas? How correlated are they to each other?

Adam Parker:

We do an ETF analysis analyzer. We have a bunch of ETFs that we go through, we analyze, we give them letter grades, a little bit like Dave Portnoy's pizza reviews. We say this ETF sucks because you think it's a momentum ETF, but momentum has been like the most effective ever and it's barely beaten the S and P. We give that a C plus, but we like this one or whatever. So a lot of advisors like that. And then we do a lot of you know kind of things like how should you run money, like how do you dollar cost average new business, or why you, why you shouldn't make one month market calls, or what's the best way to sort of maximize return over a 10 or 20 year period, or those kinds of things. So people can check out tribectorresearchcom and we go through a lot of our offense and defense ideas. I mean I think the answer is you have to have both, because if you run super long momentum look at yesterday you had big momentum reversal the drawdowns can be really dramatic and you need to find themes that aren't super correlated. So my answer is like I want to own some offense, which is going to include some semis, for sure, and some power and some software, but then I have to balance it with defense, and so we actually wrote a note on Trivector Research a couple of weeks ago with like a bunch of lower beta, more estimate achievable kind of defensive ideas.

Adam Parker:

And I think the challenge is it's not, you know, your father's Ford, so to speak. It's not the same defense that you think of at Pharma, staples and Telcos that drove a lot of traditional defensive playbooks. It's more things like aggregates and waste management and tobacco, because it's really like Zinn and other stuff. So it's a little bit of a trickier defensive playbook than it was, I think, traditionally, and so we have a bunch of ideas we offer for people on the defensive side. I think that's important. I think you could also argue that some of the financials are in that bucket for the first time since the financial crisis, where they actually have a lot of shareholder return and sort of relatively more stable P&L. So people like insurance and other stuff is a bit of a kind of lower beta part of the barbell and other stuff is a bit of a kind of lower beta part of the barbell.

Clem Miller:

I got two more questions, steve, and then I'm going to hand it back to you. One question is do you look at short interest at all?

Adam Parker:

Oh yeah, of course. Yeah, yeah, changes in short, interest and level. I mean I guess you're asking because of the meme stuff yesterday with open door and Kohl's or just general. No, no, no.

Clem Miller:

Open door in Kohl's or just general no no, no, I've been a big fan of investing at least the defensive part of the portfolio in low short interest stocks.

Adam Parker:

So we study I think you mentioned this in the tee up, but I have a PhD in statistics and I started off doing a lot of quantitative research when I got on Wall Street and we look at factor efficacy across several hundred signals and a very common one is short interest. We look at change in level and short interest and it is true that for large baskets of stocks, if you buy low short interest stocks and sell a short high short interest stocks, you generate excess return. And the reason is because the very heavily shorted stocks on average you're betting against really smart hedge fund guys who are speculating that it's going to go lower and they usually have a lot of leverage and a lot of factor bets associated with them. Usually default risk is high, they have a lot of debt or a financing issue coming up or they're losing market share in their core product or some reason that people want to short so much of it. You can get a little tricky when you get really low price stocks or where you get retail manipulation.

Adam Parker:

So you know stuff like coals, which is an impaired retailer, that eventually will you know, go to zero or get bought or turned into pickleball courts or whatever happens to their stores like that, that that gets squeezed from 10 to 14 because it's like a meme thing. So because it's got 50 short interest, so there's at some point where borrow costs and the level can really be make make it scary. I mean, open door is a you know a business that went from like 50 cents to three bucks. Same thing like a lot of short interest. So but I I agree with your principle. You want to be a little bit cautious when short interest is above five or ten percent in a name, um, especially for a mid or large cap stock. I think ten percent plus is a lot of short interest fee to be long a stock.

Adam Parker:

Okay um and there's, there's a lot of short interest fee to be long a stock Okay, and there's a lot of different detailed ways to get that short interest data. So we pay extra for real-time short interest data because we study its efficacy pretty carefully and borrow cost as well. There's some information in borrow cost too. So if you're getting kind of rack rate, usually it's not as intense. But there are a lot of businesses where you're going to pay 8%, 10% or more to borrow to short it and that means it not only has to go down but it has to go down soon.

Clem Miller:

Right, right, steve, I'll hand it back over to you now.

Stephen Davenport:

Yeah, thanks, adam, for a lot of the people who listen to our podcast. We talk about value and we talk about the ideas of dividend investing. I don't know if you guys cover much about dividend investing. I know you just got back from Europe and that's where the great first half of the year. Do you think this is a trade that will continue and that the dividend investor opportunities international are not just a fad but they could become more meaningful as we see? If and when the Fed does lower rates, people start to look back and say, hey, we're not getting 4% from our treasuries anymore, we're getting closer to 2.5%. Now getting 3% or 4% from equities is a good inflation hedge and it also gives us pretty good income inflation hedge and it also gives us pretty good income. How do you guys look at income and dividends or are you just mainly focused on more momentum and growth?

Adam Parker:

So there's a lot to unpack in your question. So I'll try to take three or four things that you said there. So one is we look at the top 3,000 US equities. We look at them by downloading hundreds of pieces of information and computing hundreds of pieces of information every single day back daily for more than 25 years and then we have 100 years of returns to the S&P, including the dividend portion. So we look bottom up really carefully at everything. So of course it's not just momentum or growth. We try to give advice to beat the S&P 500 or to find individual securities or ideas. Two, we also have a part of our business is we sell bespoke services to corporations, boards and law firms and management teams of companies, and we've been hired several times to talk about and study what's the optimal initial payout ratio, how she think about remunerating the variable compensation of your C-suite and dividend can be a portion of that, particularly if management teams get dividend on the unvested portion of their deferred comp. So we study dividend and dividend growth a lot. You know.

Adam Parker:

Obviously there was regimes where it's incredibly ineffective, but I think it's helpful to take a step back and say, well, over a 100-year period, if returns were kind of 9% a year. There'd been 10%, the last 50 and 20, whatever. Something like 20 to 30% of total return comes from dividends, so it's not a meaningless amount. It can be de minimis in years where the market's up 25% per year, like it was in 23 and 24. But over a long period of time it can add up. So I think most people know that and are biased toward collecting it. It depends on your user base. I mean, when I was the US equity strategist at Morgan Stanley, I think our average FA was 65 and their average client was 69. So there's a lot of people who are like I got 20 million bucks, I'm 70 years old and I want to live off the income and I don't want to spend less. So get me 400 grand a year or whatever the number was. So I got a lot of those kind of income related questions and I think it is important.

Adam Parker:

So I'd say for sure, we focus on dividend as a strategy. We measure it, we look a lot at payout ratio and I think distance to median is optimal, meaning you don't want too low of a payout ratio and you don't want it to be too high, because if it's too high there's a chance, they could cut or cancel it, and if it's too low, they're not really serious about deploying it meaningfully. So we do a lot of like studying on like how to pick winners from losers among the dividend payers as well, you know. I just think there's a factor bet associated with it, though, and so you know the way money's run now. It can be out of favor just because as a factor level.

Adam Parker:

You know, generally growth stocks don't have dividends and they use RSUs and options to pay their employees, and if you got a lot of options, then obviously mathematically the dividend devalues that and stuff like that, so there can be some regimes where it's suboptimal. You made a second comment in there about value investing, and I don't view that exactly the same as dividend, and I kind of alluded to it earlier in my comments about AI impacting valuation levels of securities, where I just-.

Stephen Davenport:

Well, I guess, when I think about, when I mentioned the value, I was really talking about the fact that Europe has been fallen behind for years now.

Stephen Davenport:

Okay, Deep value and value especially international, has been a bad bet for people. So, in my mind, this recent surge in Europe. I've been encouraging our clients to be invested in dividend payers in Europe and Asia because I think that they've been underpriced. Do you think that this is a repricing or do you think this is just a temporary trade away from the US markets and now that people are more comfortable, they're just going to come back to the US?

Adam Parker:

I think it's a temporary trade that's already over. I think it ended in May. I mean, the relative outperformance is really January through May and I think the reason is because I guess I think the end of US exceptionalism as a concept is complete BS from the equity perspective. And the reason is, if I ask you to identify themes you think will grow above global GDP for the next decade, some of them I alluded to earlier, the US equity market just over-indexes to all those faster growing themes. The reason Europe is cheaper is because it's worse. It's the same reason that Motel 6 is cheaper than the Four Seasons it's just worse. It's great for vacationing, it's just not great for stocks. And I think the reason is because of innovation. The tech sector is 4% of Europe, it's 31% of the US and that doesn't count Google and Meta and other stuff. So I think it's really just the constitution of the market. You know, I was in France and maybe like 2017, I was giving a speech at US stocks and over Europe and all that kind of stuff, and when I was walking up to the stage it was several hundred people in this big ballroom. Somebody told me that the CAC 40, the France market, all the stocks were incorporated in 1968 or earlier and so I was born in 1969. So one of the things I kind of said was, hey, in the US they created stuff since I was born and everyone kind of chuckled right, but it was kind of part of the whole thing. I just think you can have these six-month trades, like we had a five-month trade where Europe does a lot better because of perception about where they are in the interest rate cycle with their policymakers or perception about they've taken austerity more than we have and we're running at a wartime deficit and all that kind of stuff. But I think the challenge is really the equity constitution we have is just superior. So I don't like that Europe over US trade. I could tell you that what's crowded in Europe for sure because I do a lot of stock picking and idea events are the defense stocks and the banks and people love defense because of a whole rebuild the Ukraine and just get the logistics and infrastructure and that stuff working.

Adam Parker:

And I guess I want to segue a little from that comment you made because you kind of referenced it twice and just thinking about valuation generally, I don't think valuation is a very good way to pick stocks. I don't think if you buy cheap stocks and short expensive, you really make any money. You certainly haven't in the last 15 years, other than some isolated six-month periods, and I think the part of it is it's a factor of that, as you alluded to around policy and interest rates, and I actually have totally changed my view on this. So, again, like I told you, I was born in 1969. So I'm 56 years old. If you had asked me 20 years ago, no-transcript of a recession is in the price. I'll make a judgment call about whether it's cheap enough to own it. It's discounting a recession. I'll do demand supply math and I'll make a judgment call about whether production you know production is getting close to, you know, being below consumption or whatever you need for it to be, to get the cyclical part of value right.

Adam Parker:

But now that's complete bullshit, right, like if you're a growth investor, what? What do you really do? Right? You say, let me look at the themes growing above global global GDP, let me identify the high quality secures in them and high quality growth is dominated. And if they get wrecked, like they did in 22, because of interest rates, what are you supposed to do? You raised money and told people. You were going to buy high quality growth names. So when you set it up like to only do growth, no, I don't only do growth, but the issue is that two thirds of the equity market's growth by market cap. So if you're trying to beat the S&P, then you're going to do more than half growth for sure, and I just think that's where Europe suffers. So, in a context of global MSCI being 67 or whatever percent US, like yeah, I want to own 70% US for sure, but anyway, you teed that up in a way that made me have several different thoughts about what you said. But apologize for the long answer.

Stephen Davenport:

No, I appreciate it. I've always heard from different experienced investors who said, look, these other countries just don't have enough growth to warrant the extra allocation. And I agree with you with Powell and Trump, and what's going to happen with interest rates or how long is Powell going to be in place? And I look at it and say a lot of these decisions are between whether you invest in one AI company that has an 18% growth rate and another that has a 30% growth rate, and the question is what value or multiple are you paying for that growth rate? And I think that those decisions aren't going to be impacted by a 2.5% or a 3% short-term rate.

Stephen Davenport:

So I kind of think that this is really just about the topic du jour. Just as we had AI is everything for 6 to 9 or 12 months, now we're having Powell-Trump is everything, and I don't believe either is true. So I think the AI is a lot more true than the policy. How do you think this whole vision of Trump and Powell and you know Trump replacing Powell with somebody who's going to deliver lower rates Is lower rates going to help the economy and drive housing back to a major part of our growth, or is this just a distraction that we shouldn't bother to let affect us.

Adam Parker:

So you know I want to talk about the AI thing a little bit more, and then the Powell. I'll back up by saying here's what I think matters for investing and I've been, you know, working hard on this for the last 25 years or so, so I'm not sure I've learned anything yet. But if you made me say what have you learned in publishing two research notes a week for 20 years and being on the buy side or whatever for four years, I'd say the two things that matter the most to investing are changes to perceptions about growth and changes to perception about rates. So when you talk about AI, you're talking about changes to perception about growth, and when you talk about Powell and Trump, you're potentially talking about changes to perception about growth. And when you talk about Powell and Trump, you're potentially talking about changes to perception about rates. So let's just address those two things that matter a lot, in order.

Adam Parker:

Okay, I have like a zillion interns at Trivariate and Trivector. I don't. We have more interns than we have employees, and the reason is because I'm a bad person. And when one of my friends says can my niece, nephew, uncle, kid where? If you always say yes and I regret it every time because it's like a tax on the business. But I try to be a nice guy, all right. So the problem is with chat, gpt research 03 button. I have 10,000. Goodwill is improving. I have 10,000 interns, okay. So Goodwill account gets generated. I'm hoping that's, that's. I'm trying to pay it forward. You know what I mean, but we'll see. But you know, the whole point is like it's hard to utilize them because, like we, uh, all of our researchers code in python against their database or do nlp work and like to train somebody up over a six-week internship when they're 19 or 20 or 21 years old. Um, it's just impossible. Just to be clear, like I have kids that age. So I'm not, I have kids that are 22, 20, and 18. I get what they're capable of.

Adam Parker:

So we try to come up with products for them. The first thing I make them do is I make them read eight documents. It kind of puts them away for a couple of days and the eight documents are Morgan Stanley, goldman Sachs, jp Morgan and UBS's year-ahead outlooks for the economy and for US equity strategy. So I say, read these documents, tell me what people are thinking Now. Generally, these firms all do these things in November, right before Thanksgiving to project the year forward, and a couple years ago, this kid made an incredible observation.

Adam Parker:

In November of 2022, those eight documents JPM, goldman Sachs, morgan Stanley, ubs, strategy Economics the mentions of the letters AI were zero. So in November of 22, none of the people at the biggest and most important firms in economics or strategy thought AI would matter for 2023. Six months later, we had the largest upward sales revision of any mega cap company ever, with NVIDIA. The investments we were always told were going to be kind of three to four years for infrastructure and it'll be less software or whatever. So the point is, like everyone's an expert on this thing that's supposed to be a decade long growth rate that nobody heard of two and a half years ago, and the investments we were told are going to often hit in 26 and 27 from the beginning. So yeah, stocks are up a lot, but I think we're still in this innocent until proven guilty mode on growth rate and productivity and probably some of that's in front of us. So I think the perception about growth is still higher and it's hard to get too negative on US equities with that dream still alive If we don't get some proof cases in the next 12 to 18 months it'll switch to growth until guilty, not proven innocent. So that's my thought.

Adam Parker:

On the AI side, I don't think it's a fad. I think there's a ton of I think semis. I used to be a number one ranked semiconductor analyst for many years on the street and so I know semis better than other sectors. And it grew at 2% above GDP for 30 years and now it's growing 5%, 6% above GDP at higher margins. So I think that's real. I think the growth rate is a reality, not just a perception. It's going to be higher for compute generally.

Adam Parker:

Okay, the pal Trump thing, I think, is more fleeting. I don't really believe generally that. Um, uh, I'm not sure I'll go back and say like, look, the best time to get bullish on US equities was January 1st 2023 in the last few years. Why? Because all of a sudden, you covered your meta and Nvidia shorts, which were down 60% plus in 2022, and you got max long. Why? Because they were closer to the end of the hiking cycle than the beginning.

Adam Parker:

So, if you take that same logic now, because the market kind of rhymes with an increasingly anticipatory nature, aren't we kind of closer to the end of the cutting cycle than the beginning, and so I'm not sure I'm going to get this massive multiple expansion just because I get a more dovish guy in there. I think what you might get is a little bit what you said, which is a rotation underneath. Maybe housing works, maybe people play that playbook in anticipation of something improving. The truth is industrials housing, autos, oil and gas have generally been in recessionary or poor zones for the last couple of years, and so the bull case for equities might be that you start getting some cyclical improvement in some of those kind of older school industries. At the same time, some of the AI beneficiaries start hitting the AI benefits, start hitting productivity right.

Adam Parker:

That constitution of the equity market is really whack right now. The three biggest sectors at 58% of the market are the highest percentage. Three have been in 25 years since the tech bubble unwind right, and then the smallest four sectors which are utilities tech bubble unwind and then the smallest four sectors which are utilities real estate, energy and materials are less than 9% of the S&P. Nvidia is the same size as all four sectors. So if you're trying to beat the S&P, it's hard to take an active bet in one of these smaller, older economy sectors to have it really impact, you got to get the tech, financials and comp services right. That's the challenge. So anyway, you made me go in two or three different directions the way you phrased that. I apologize.

Stephen Davenport:

Well, thanks, I appreciate what you're saying and I realized that it's a numbers game. We use an equally weighted portfolio, so we've been suffering because of the equal weighting and we believe it's probably need to adjust, because the big players keep getting bigger and this just keeps getting harder and harder to keep up, unless you can significantly overweight some of these names, I think it's impossible.

Stephen Davenport:

The bigger you get, the harder it is for government to stay away from you and try to regulate and take money back, and so I look at Europe as a leader in terms of progressively trying to get money from these big players, and I think that the US government probably is not going to do it here under Trump, but in a new regime it could go after the technology.

Adam Parker:

So a couple of thoughts on that Less thoughts than the previous questions. So, look, we do a lot of risk management for people. So we have many funds that send us their equity portfolios to do custom risk work and people have Barra, axiom and Morgan Sinek Fund Service. They have different ways of doing risk, have many funds that send us their equity portfolios to do custom risk work and people have Barra, axiom and Morgan Sinek fund service. They have different ways of doing risk. But we try to add value with the way we're looking at things and I think one of the ways the reason I don't like equal weight is because some of these names have gotten so big that there's just massive risk management problem to be that underweight. Things that are below idiosyncratic risk and really replicable. So it's like it's hard for you to replicate Microsoft if you don't own any. You can't own other names and it's big. So I think it's a risk management challenge and it's just hard to offset that, even if your alpha is amazing, it's just hard to offset how big. You know, these seven stocks got to be 32% of the S&P and 44% on a beta adjusted basis. They were higher beta, like Nvidia and Tesla and stuff. So I just I think it's hard to have you know something that nobody else knows about stocks that are this well covered, this well owned and are this big. So I like generating alpha, but just it's hard on these big securities. So I don't love the equal wage thing and I don't think that's a tough road to hoe, as you said.

Adam Parker:

In terms of the regulation stuff, I kind of hear you on that and I think the US companies are advantaged over some of the European ones and others, because look at Google so let's take Google, alphabet or whatever as an example. So if they make the company break up, what do you think they'll do? Like what's Waymo worth? What's YouTube worth? What's Google's computational chemistry worth? Are you sure there won't be like a 1 trillion market cap Google computational chemistry business in five years? Maybe Waymo's like. So maybe as a Google shareholder, I would be happy to have four or five different things that are four or 500 billion market cap each.

Adam Parker:

I'm not sure that's a net negative actually. Yeah, apple, I don't know how much of their market cap is the data? Yeah, you know what I'm saying. I don't know. So the part that I like in the market that maybe is counteriary, stable demand and maybe it's really what technology has its most impact. I'm happy to go through that if people want, but in the short term, the biggest problem we have is we're running at a wartime deficit. If you try to cut money back, it's probably going to be healthcare and defense. How are you going to do that and and what companies? That impact is a, is a, is a is an investment controversy. But on the other side of that, I just I think it's. I view equity investing is like I buy my little dream today and I sell it to a sucker with a bigger dream later, and I think the healthcare dreams could get kind of juicy in a few years.

Clem Miller:

Hey Adam, you know, given the emphasis that you take on, you know, AI and long-term progress in those areas, what would you, what would you say, your?

Adam Parker:

investment horizon is 12 to 18 months. I think most of most of what we give advice at the industry and sector level is in that timeframe. We do sometimes, you know, try to make shorter term calls, you know, three to six months on relative estimate, achievability or other things. But to be honest with you, I've spent a lot of time on like trying to make one month calls and I think that's a good way to destroy value. So we published a few things. You know I trifecta business for advisors. We published a big note on like why you shouldn't try to make one month calls. It's just a waste of time and I have some pretty quantitative I mean I can tell you about it if you want, but we have a, you know, kind of a quantitative way of showing that.

Clem Miller:

Do you use limit orders when you hit targets?

Adam Parker:

So it's hard to answer that question in isolation, like I think it's like you asked before about gold and other defensive stuff. I think it really just depends on, like, your overall portfolio. Honestly, like the number one thing you need to know when you're giving somebody advice is like how rich they are. Yeah, it's, it's such a personal thing, like I always think of the financial advisor business. It's like a really hard business because, you know, here's what I want to know. I want to know how no bullshit, exactly how much money do you have? How much do you spend? How much do you give to charity? How much do you want to leave your kids and then after that give me all your money?

Stephen Davenport:

Yeah, it's a pretty hard.

Adam Parker:

It's a pretty hard sell, right, and so you have to like, take the concept in concert with that. Like, when you talk about risk tolerance at the stock level, like, do you mean in construct with what? How much real estate do you have? How much wealth do you have? Do you own Bitcoin? How did you get rich? Was it all concentrated? Because you were an engineer at NVIDIA? Because there's so many individual questions about it that I'd have to ask.

Adam Parker:

But at the end of the day, most trading strategies like that destroy value. Yeah, okay, because they're anti-momentum strategies or something else. But at some point you have to look at the beta of the stock, how replicable it is, how idiosyncratic it is and other things, because you got to put limits on it. And one thing I like to think about that a lot of people don't necessarily think about when they buy something is, let's say, god forbid. You're super right. How big are you willing to? Let it be? It be right?

Adam Parker:

So you got 10 million bucks and you're like you know what? I'm gonna buy some nvidia I'm gonna buy. I'm gonna buy a million. I'm gonna like, strap it on, put 10 of my net worth there. I own my house and I. This thing sounds awesome. What if you're right and it doubles? Are you willing to have two of your 11 million there? Or like, what's your limit on what you're willing to own? And I like thinking about the max percentage of my assets before I make the investment, because I think that helps you control the initial purchase a little bit too, because I think you know a high cost problem to have. But, like you know, you don't want half your net worth in a stock when you're 60 years old, right? So I think it's hard to answer your question.

Clem Miller:

Right, yeah, I mean my thought right now on limits and you know I'm not, I'm not a a $20 million net worth person, right? Like some of your clients.

Adam Parker:

I was just picking like the Morgan Stanley Financial Advisor Network because I worked there. It's just there's a lot of like they have a lot of like 70 year old clients with 20 million bucks. I was just yeah, yeah, but I you know I'm you know.

Clem Miller:

I was just thinking that, you know, limit orders are a way of being able to lock in a certain amount in a highly volatile environment and, honestly, I think right now is, uh, you know, with all the policies that we're seeing and all the potential policies we may not have seen yet, I just think, in geopolitics, I think there's a high degree of volatility, and limit orders are a way of being able to lock in some cash, maybe put it in gold, while at the same time maintaining a part of your portfolio which is high momentum. That's the way I'm looking at it.

Adam Parker:

So two thoughts. So we did do some work looking at the best way to dollar cost average. New business, if you're an advisor so a very senior advisor running a big book asked me how to think about this, and so we studied like you get a new client, the guy's got 10 million bucks to put in equities. Do you buy it all day one? Well, obviously, since the stock market goes up more than it goes down on average, the answer is yeah, buy it all on day one.

Adam Parker:

But if you kind of look at the distribution of returns across 25th median, 75th percentile min max, it looks like the right thing to do is dollar cost average around six months. So what that means is buy short-term treasuries with what you don't deploy and put about one-sixth of it in at this month and one-sixth the next month for six months forward. So kind of taking that logic and extending it to the limit order. It's like saying, yeah, maybe because of volatility you're better off distributing across multiple securities over a longer period of time. So if you want to get a big position in a stock and it's a big bet for you.

Adam Parker:

Maybe you just spread out over several months.

Adam Parker:

And then the second thing, because the second time you mentioned it was gold, and so I don't know how you think about that.

Adam Parker:

There's a lot of schools of thought, but I mean, I think you know the question is like how do you view Bitcoin or other proxies? And I think now it's gotten a lot more acceptable, given that you know a lot of large RIA networks that are clients of Trivariant, the institutional side of our business and then obviously we have many individual advisors with Trivector. They get questioned a lot about Bitcoin as opposed to gold, just as a kind of dollar weakening kind of bet. And I think the legitimacy of it has really grown. And when I talk to senior people, more and more of them have owned some personally than you know year over year basis. So I'd say, like that's becoming, if people had a 5% gold allocation, people are now saying, yeah, I'll own a couple percent of Bitcoin and a couple percent of gold instead. So and maybe you don't like that idea, but I think a lot of people are doing it- I'm more of a gold rather than a Bitcoin person.

Adam Parker:

Yeah, well, that's why you have less money than all the Bitcoin people.

Clem Miller:

At the moment.

Stephen Davenport:

I think it's more of a speculation than it is an investment, but I agree that we just had a podcast.

Adam Parker:

It's up 60% a year for the last you know since inception.

Clem Miller:

With some volatility in between.

Adam Parker:

Yeah, yeah, yeah, totally, totally. But you know, if you think about those gold like, I bought gold in 2008. Personally, I bought it the day after I found out UBS money market accounts were backed by auction rate securities. It kind of like melted my motherboard and I bought some. I thought, geez, if I had like 100 grand in my checking account and they told me it was 92,000, I'd freak out.

Adam Parker:

So I bought a bunch of gold in the crisis and obviously it's underperformed. Everything by a giant country mile. Since then. There's nothing except for maybe like Europe or EM, that I mean every US thing. It's underperformed. But it's just. I kind of view it as like, I think the bull case on gold is probably different than you do. I think the bull case on gold is that for me I'm hoping this is what it is is I have several grandchildren and I currently have zero. Obviously is I have several grandchildren and I currently have zero, obviously. And I leave a shoebox for them when I die with their name on it with a bunch of gold coins in it, defrauding the government on the estate tax, transfer to them and cause who knows what it'll be if in that regime, and just have a little note in there that says don't sell more than 10 K at a time and at a time, and think of me well when you spend it.

Clem Miller:

That's my plan for the gold Right. But what about all the central banks that are buying up gold? Hand over fist right.

Adam Parker:

Yeah, I'm just saying it. Really, if you look at the supply-demand curve, it doesn't really trade that different from that over like 100 years or 50 years or whatever. So I don't hate it, but I think it's like a couple percent allocation and I think this Bitcoin thing is a little bit less speculative than I used to, just because it's become like well, our problem is that we are used to freely transacting in the US and there's a lot of parts of the world where they don't want the government to steal their money and they want to be able to transact in certain ways and it has a legitimate case that other things didn't have. I think we've been broadly disappointed by blockchain applications over the last several years, but I think Bitcoin, at 3 trillion in value, is probably beyond the speculative window and into something that's become a little bit like kind of gold, where there's not a lot of practical use for it with no income, but it's a perceived store of value versus a currency.

Adam Parker:

I could see that transition happening If there's 57 million millionaires on earth and there's 19 million Bitcoins and the millionaires are growing faster than the Bitcoins. There's 19 million Bitcoins and the millionaires are growing faster than the Bitcoins. You know, maybe. Maybe it's like more than just speculative it's. It's probably beyond tulips and and and stuff at this point, yeah.

Clem Miller:

I'll agree with that.

Adam Parker:

Yeah, I, I, I, I. I own none personally, for full disclosure. I own none personally and I own gold, but I just I'm telling you from people I talk to where what's changed.

Stephen Davenport:

Yeah, Is there any way that you could adopt Clem or I and we could get a shoe box in your closet as well?

Adam Parker:

I'm going to go with. I'm going to go with a hard no on that one. But uh, you know, I'll tell you what if you join, if you sign up for TrivectorResearchcom for $100 a month, maybe, maybe we do write about stuff like gold and Bitcoin.

Stephen Davenport:

I think we have to wrap it up, Adam. Yeah, sure, so I really appreciate you being on. You've done a great job. I think you've straightened us out and you've got Clem out of the gold and now he's going to try a little bit more NVIDIA. So I think that's going to be good for him and the and the future he's going to live to be a hundred, so he's going to need something.

Adam Parker:

I appreciate you a lot.

Stephen Davenport:

I think you did a great job today and we really enjoyed having you on.

Adam Parker:

No, thanks for having me Totally and any, any time. And I guess, when you, when you curate this, let me know and I can, you know, I can advertise it on our social media and that kind of stuff too, so happy to do that.

People on this episode

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Clem Miller, CFA

Co-host
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Steve Davenport, CFA

Co-host

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