Cameron Dawson: "Always Remember, Price Leads Data"

Danny Moses (0:02)

Welcome to the On The Tape podcast. I'm your host Danny Moses, and today I welcome back my friend and Chief Investment Officer at NewEdge Wealth, Cameron Dawson to the pod. Cameron has been generous with her time over the years, and I'm lucky to get her back on in such a pivotal moment in the markets. Cameron, welcome back to On The Tape.

Cameron Dawson (0:20)

Oh man, thanks so much for having me, Danny. Happy to be here. What an interesting time.

Danny Moses (0:24)

Oh my God, so there's lots to get to, and the proverbial bingo card is filling up with many unexpected events. Yet somehow, the equity markets find a way to survive and keep playing. Let's start there because I know you talk about financial conditions and breath and all this stuff. Give your overview here of the markets in general, at least on the equity side of things.

Cameron Dawson (0:46)

Yeah, I think first taking a moment to appreciate that effectively we have held so resolutely this 50-day moving average over the course of the last couple of months. Yes, we dipped below it slightly back in July, but really never even tested the 100-day moving average, despite the fact that we were throwing a re-escalation of war, higher oil prices, higher interest rates, a shift to a more hawkish Fed, new pricing in of many more rate cuts or rate hikes, sorry, that we've probably pushed up interest rates across the curve. But you also had big rotations under the surface of the market. You had bear markets and some of your high beta momentum parts of the market. All of this has happened, and yet, the market has been able to hold that 50-day moving average just like a line in the sand, and it's been really incredible. I think that the reason why the market has been able to do that is simply because you've had such a powerful earnings environment.

Even though you've had the market trade higher over the course of the year, you've been in an environment where valuations have actually fallen quite materially. They peaked about a year ago back in October at 23 times. We're now trading at 19 times, but the market's still up because earnings have been so strong. One of the things that we're watching and asking questions as we go into year 27 is is there that much more upside to earnings estimates from here? It's something that we could certainly pick apart because if you start to fray even just slightly the earnings story, or even if earnings estimates just go sideways, a lot of these macro things that we mentioned, oil, rates, bed, et cetera, all start to become a lot more challenging for the market just because they lose that earnings buffer. It all comes down to that and something that I'm sure we'll unpack.

Danny Moses (2:38)

Right.

Within the earnings sector, you bring up the fact that some of these megatech companies won't be able to experience some of the earnings growth that they've had this year and replicate that next year for accounting reasons, for other reasons. Talk about that because you talk about the mag seven, and I think you use a Jack Johnson line in your most recent note, right? Wait, watch, listen. What is it? I forgot what it was. Wait.

Cameron Dawson (3:03)

Oh, come on. I've been sitting, waiting, wishing. Come on.

Danny Moses (3:07)

Waiting, wishing. I think that was in relation to the mag seven, if I'm not mistaken in your note, correct?

Cameron Dawson (3:13)

Yeah. Look, I'm of the generation that grew up where in high school, someone had a guitar and someone definitely loved Jack Johnson. Not me, I was not said guitar player, but he was a big thing back in the day.

Look, the mag seven, I think, is fascinating because in some way, in a very distinct way over the course of the last month, you have been the ballast for this market. You mentioned breath earlier. Breath has really deteriorated under the surface over the course of the last month. Take, for example, the statistic where at the beginning of August, 70 percent of names were above their 50 day. Today, that number is 37 percent. So a big deterioration in the number of names participating in the bull market. But the reason why the index hasn't cracked is because of mag seven. But the caveat with mag seven is it hasn't made a new high since May, hence the sitting, waiting, wishing. You've been waiting for mag seven to make a new high. How does that feed into things like earnings quality and valuation? Well, where there's been the most valuation multiple compression is in the mag seven. The reason why valuations for the mag seven have compressed is because their earnings quality has deteriorated significantly. If you look over the course of the last 10 years, when you looked at mag seven, earnings growth and free cash flow growth tracked very, very closely together because these were capital light businesses. They could grow earnings at an extraordinary rate, but they didn't have to spend that much money in order to achieve that growth. We all know that that has changed significantly over the last couple of years, where all of a sudden to maintain their prior growth rates, they're having to spend a ton of money, an unprecedented amount of money. We know that that money is what's driving the earnings growth in the semiconductors. You don't have to rehash all of that chain of benefits. But there's been this distinct deterioration in the earnings quality of Mag-7, which is one of the reasons why we think valuations have come under pressure. To your point about accounting dynamics, I've been thinking a lot about how nitpicking at accounting is very cyclical, meaning that we typically have more issues with how companies are doing their accounting and making certain judgments and doing certain things at the end of the cycle. When you're getting more and more desperate to be able to show that things are good, that typically happens when growth is starting to decelerate and you're closer to the end of the cycle. Whether this is actually some bell that you're ringing to say, this is it's over and it's ending, that's not what I'm saying. But it's a very late cycle dynamic for companies to be playing certain games with their accounting. We've seen things like reclassifying things from operating leases to financing leases to make free cash flow look better. We've seen things like the extending of payables at the Mag 7 in order to make free cash flow look better. That shows up in videos, extension of receivables.