Markets have “short-term memory” and this correction does not account for the innovation that the leaders of the S&P 500 are producing, said David Barse, CEO of XOUT Capital. Barse told David Lin, anchor for Kitco News, that “This is the same issue that has occurred in the first quarter of this year where a slight uptick in Treasury yields seems to cause a deflation of everything that’s innovative.”
It's dangerous for an investor to underestimate the impact of technological disruption on the markets. We'll be talking about this with our next guest, David Barce. He is the CEO of X out capital, and he focuses primarily on investing in those companies that are technological leaders, leaders in innovative.
Welcome back to the show. David David, it's great to be here as always. Thank you again. Uh, you, you are a famous on our program for, uh, for being a market bull. I mean, we don't see a lot of those these days, but, uh, you're adamantly bullish on the stock market. So that's worked out pretty well so far, except we've had this little glitch, uh, in the markets and the last couple of weeks ever since the start.
Well, the middle of September, shall we say this morning, as well as we speak on Monday morning, the, uh, the indices are. Uh, why do you think that is? Well, look, I think the market has a very short-term memory and this was the same issue that occurred in the first quarter of this year where a slight uptick in treasury yields seems to cause a deflation of everything that's innovative.
And I just don't understand why the market's memory continues to forget that as companies report earnings and fundamentally show how they can continue to grow, even in what is a challenging environment. I think we can all agree that what COVID has done to the marketplace. It's going to take some time before it works itself, back to normal, but the market seems to forget.
So what's happened since the middle of September, as you pick the timeline. And today in an exacerbated way, is this just memory loss? And we'll see some earnings announcements that are going to be coming out over the next few weeks and we'll smack everybody right back into place. And I will continue to be an optimist about.
Well financed growth companies and how those are the ones that you should own and leave it to a company like X out to get rid of, or exclude or in our parlance X out the company's, you know, So you brought up several things. Now, David, I want to touch on yields first. So the tenure yield, I'm looking at the chart right now.
It's been about 20, 25 basis points since the end of August. And that has coincided with the decline of the stock market indices that we talked about. Do you think there's a correlation there? I mean, as a fund manager, aren't you concerned about rising yields? Doesn't that affect valuations at all? I mean, I don't think I was born yesterday and I would say.
If anyone, and there are a lot of people who you bring on your show, who I disagree with. There's no one who's going to disagree with the fact that interest rates are generally going to be moving in only one direction. Right. Yields are going to continue to rise. They can't get any lower, so they got to rise.
So these sloughed in slightly upticks and yields over these periods of time, whether it was in the first quarter, remember where the tenure get to, I think 1 76 or something like that at its peak. We're still not back there yet. And it's shocking to me that the market acts like this is new information.
There's nothing new about this. They're going to go only in one direction and everywhere. Should be prepared for that. And I think the companies, again, that we focus on our thinking forward, not backward and anticipate that we're going to be back to a normalized rate environment, whatever that means in the future.
So just to recap for the audience, for those people watching now who have may not seen our prior interviews, your fund takes the broad index and you X out, so to speak, you real eliminate those stocks that you deemed. And your words, loser stocks. Now you have a model, you have a strict set of rules that you abide by, and those rules will tell you which companies will likely underperformer outperform based on those rules.
So you've picked out, I read that list. We'll show that again. On the, on the screen here, you've picked out a number of stocks that you think are laggards, according to your metrics. Now you talked to me earlier about. Technological disruption. So in some sense, you're kind of a futurist. When I like, I, you know, we liked that about you, you kind of look at how the world's going to be in the future, and then you eliminate those stocks that you think are not going to keep up with the pace of growth towards that future.
Right. So let me just ask you this. What do you think the future is going to look like in 10, 15 years? What do you think society? What do you think our economy is going to look like? What kind of technologies are going to use? What do companies need to do now to prepare for that vision of your future? How about this?
Yeah. And, and I'd say to you that the, the beauty is no one has a true crystal ball for how it's going to look and how we're our behavior is going to change. And what has to happen to alter our behavior is unforeseen disruption events. So I posit that the pandemic that COVID-19 brought on. Changed our behavior.
It was unforeseen no one predicted this would have happened, but now all of a sudden hybrid work environments are accepted. You know, when I ran my company, if someone told me they wanted to dial in for a meeting, they lasted for a week, maybe a month, but they'd be gone because they had to come into the office to work now.
That is not the norm any longer right now. It's okay. Right. We're seeing hybrid environments change across the globe. And even in New York city, you know, the center of finance around the globe, you're seeing companies all for different, um, work environments, right. Different paradigms are coming out of this.
So that's a change in behavior, right? Who's to predict how long that will last. I'll tell you. It's probably a permanent change right now. And I think we will adjust ourselves. So that's one thing that people should stay focused on. How does that impact the way in which we conduct commerce on a go-forward basis and what are the, who are going to be the winners and who we're going to be?
The losers. I tell you, it's easier to figure out how to exclude the companies that are likely to get impacted by something like that on a, on a permanent or semi-permanent basis than it will be to pick the winter. Brought up an interesting question to me offline, which is what do you think the S and P 500 is going to look like in the future?
And I thought that was a very, very good question. That very, very important thing that investors should be wondering right now. I'm looking at your fund. For example, your top fund holdings are apple. Microsoft. We'll talk about the X out part in a bit, but your top fund holdings, apple, Amazon, Microsoft alpha.
So Google Facebook visa and the video Johnson, Johnson, Walmart, and, um, and other things. But most of those in the top 10 list I noticed are tech companies, but like you write a point where they pointed out before, to me, you're not a tech fund. You're, you're picking the biggest companies of the S and P 500.
And it just so happens to be that a lot of these things, um, are tech companies, is that the way of the future will look good. I think the interesting education is take that top 10 list from 10 years ago. And you'd be surprised at the names that are, that were on that list that are not on that list today.
And I would posit to you that 10 years from now, the names that are on this list today may not be there in 10 years from now. I, I have said many times to that. Technological disruption is impacting all companies in all industries. It's not just a technology phenomenon. So those 10 companies that are currently on the list, whether it be Facebook or Tesla, which isn't on our list right now.
But these are companies that could get disrupted themselves from innovation. And no one really knows right now, but we know that the forward facing risk of technology change has on companies is going to impact. And so I find it fascinating to talk to most people and everyone focuses on history and no one's thinking about the future.
And many of these companies are preparing themselves for the future. And we just don't know who the next winners who are the next Googles and apples and Amazons that are likely to emerge. And will those companies end up rising to the level of being top 10 companies? I don't know, but I think. Our job is to just figure out what not to own.
And it's so much easier to do that. Those companies that used to be in the 500 largest companies club, I'm going to call that little club and they're no longer in that club. What do those companies have in common failure to adapt? Uh, they, they have, um, Uh, product that, uh, let's, let's pick on the, uh, the energy oil and gas industry, right?
Exxon Chevron, we're perennial top 10, uh, S and P 500 companies. And they are just dealing with, um, a product. Now that, that is something that's going to, even though current commodity prices are saying something, otherwise the supply demand dynamic on a long-term basis is going to neutralize itself, right there just won't have demand for that.
What we're seeing being announced and the, the activists who are involved in Exxon trying to change them and trying to reorient the company towards the making investments for the future. I just think it's too little too. And so that's why that company is not likely to get back on, on our 10 top 10 lists.
Again, it's hard to imagine, actually right now, as we speak, of course, anything could happen, but it's hard to imagine Google being the next IBM in a, in a, in a, in a metaphorical sense. I mean, people have told me that it's kind of difficult. To, uh, overthrow the throne that these tech companies have built.
The moat that they've built around themselves. If a tech company, an emerging tech company were to disrupt the industry, so to speak, what did they just get bought out? Yeah, look, I, I, I don't disagree with you. The moats are huge, but the, the risk that I think the number one risk that these companies face.
On a forward-looking basis is not just the disruption that comes from their own peers or potential peers. It's the regulatory environment. And we all know that, um, there's a lot of change going on in leaders, uh, at and governments all across the globe and how they view the risk of the dominance of some of these mega tech companies has on things beyond just the technology space.
Right. So we're talking. You know, all the issues that, that these companies can potentially, um, engage in in terms of other economic activity. And so regulatory environment is probably the number one risk. And, and we watch that, uh, each and every quarter. And, uh, if it's possible, right, that th that could be the, the disruption that people are not anticipating right now.
But if you have a fun mandate of X from X out capital, if you have a fund mandate to invest in the largest. Why don't you miss out on some of the opportunities from the mid and small cabs. Those are the guys that are gonna disrupt the industry. No, it's, uh, those are, you know, again, we're trying to address one of the flaws of indexing in an index.
You buy everything. So we've attacked the large cap us equity space. First we are looking and studying how to attack the mid cap space. And then subsequently how to attack the small cap space and then move off the U S border into international markets and try to attack that space because we think all of these indices are fundamentally flawed and it is easier to just figure out what not to own than what to own and let the winners take care of themselves.
So I agree with you. Small cap, mid cap is a great opportunity zone. If you will, for investing. We're going to do that in a separate vehicle, because I think that space is right for disruption. Alright, X doubt stocks, Tesla, JP Morgan, MasterCard, Procter and gamble. Bank of America while Disney, ExxonMobil, Netflix Coca-Cola Verizon.
So we talked last quarter. You haven't changed your holdings or your Xed out stocks yet, but you will rebalance in well later this month after the 21st of October will be your third quarter rebalancing date. What's going to change. Can you give us a.
I don't know, but I can tell you and I've, and I've said this, that I think a company like Tesla, which surprised us that it didn't score well in our model, remember we are a rules-based methodology relying on seven fundamental factors that we score. We have a proprietary weighting system for how we score that.
And it kicks out the score and the 250 worst scores get kicked out or Xed out. And the remaining 250 companies are left in the portfolio. Tesla just came in below the midline for its score. And as a result, it didn't make the grade. I was surprised our model is going to, as it does every quarter reevaluate.
And I would suspect that that if you want it a little teaser, my, this is pure conjecture, but I would suspect that a company like Tesla. Which got eliminated primarily because it decelerated its growth rate. I think Elon Musk was aware of that. And this is why just yesterday or the over the weekend, they announced how many cars they, they sold for just one month.
Um, I think he's starting to indicate to the market themselves. There's your teaser, if you will, that they produced more cars and one month. And I think in an, in an environment where a lot of folks believe they're a company that's going to. Severely impacted by the supply chain challenges that are going on in the marketplace because of their reliance on semiconductor chips.
I think he's telling everybody, we figure that out. We're smarter than everyone. We're not going to get disrupted any longer. And so there's your. I want to talk about your model and just for just a bit, now I know you have a rules-based methodology, but when a stock like Tesla continues to grow in terms of its valuation to this price, do you think to yourself, maybe, maybe we should reevaluate some, some aspects of this model where maybe we can make an exception for the stock.
Maybe Tesla has scored low, poor. Um, using the metrics on this model, but if the stock continues to perform because of sentiment because of hype or whatever reason would you make an exception is my question. Yeah. I mean, I wish I was that smart, David, I don't think I am probably your viewers mostly think about things that about me already, but I would tell you that the reality is human beings.
Who are in the asset management business who are stock pickers or security pickers. If you want to be more broader, those who are successful at making a good decision about when to own, when to sell and when to buy is a rare breed. It's a very select few that are good at that. And I learned after a long career of being in the stock picking business, that it's really hard to do that well and do it consistently.
So what did, what did that learning translate in. X out a rules-based methodology where all of the work that we did, all of the brain science went into the preparation of that rule. And once the rule was put in place, I will never override it because I learned a very valuable lesson that it's really hard to beat the market over time.
So making that exception decision would be one of those decisions that I'm sure if I made the exception, it would be wrong at the wrong time. And heard our performance and I think that's why we've done so much better than the yeah. I noticed you don't have a lot of brick and mortar stores and you're holding.
So that partly explains, well, it is explained by your thesis just now. All right. Well, uh, we'll talk more about, uh, how you pick the lagers next time. Uh, after you rebalance your portfolio, we've talked about this a lot, so I want to see how your portfolio changes. And, uh, we'll talk about that next time and discuss why you think those new X dot companies are losers in your mind.
So for now, the last point to you, this is not about day-to-day week-to-week month-to-month or quarter to quarter. This is about long-term secular decline. So we might make rebalancing decisions like a Tesla, where one quarter they come out and then another quarter they go back in really the more meaningful.
Um, illustration is again, if you put that list of the top 10 names from 10 years ago, I bet you, a lot of people will be like, wow, I can't believe those were the top 10 companies. The S and P 10 years ago. Only two of them are left today. I mean, isn't that fascinating? So I think that's what this is really about.
So technological disruptions here to stay. It's the most important forward facing risk. We all have to deal with. Let's see what will happen next quarter, but I think much more interesting will be what's going to happen 10 years from now. Excellent. And finally, you are rated five stars by the CFRA. Tell us about that.
What's that rating based on? Yeah, so they're a research from a very well respected research firm in the ETF space that, uh, evaluates all ETFs and, um, they are, um, Uh, they have only recently just last week, came out with a report giving five stars. I'm not sure exactly what the metrics are that gives one ETF, five stars and another ETF, one star in our case, they believe, uh, as they can tell from the statistics, right, that our portfolio has requisite diversification.
And as illustrated, even though in a short period of time, only two years, we're just about two years old. Uh, it has materially outperform. An index like the S and P 500. And as a result of that performance, we have received five stars. Yeah. And I'm noticing on your fact sheet here since inception, the X up index was up 33% while the S and P 500 was up 26.7%.
So performance by quite a, quite a bit of a margin. Now, congratulations, once again. And, uh, I look forward to speaking with you after your rebalancing quarter three. Great. Thanks, David. Great to be here. Great to have you as always. And thank you for watching Kitco news and don't forget to subscribe to our YouTube channel.
I'm David Lynn. Hello, I'm Larry Drummond, the executive director of the IPMI. I want to take this opportunity to introduce you to the IPMs upcoming 45th annual conference. A hybrid experience. Our sessions will be held on October 7th, eighth, and ninth. During our conference, we will bring industry leaders, experts, and stakeholders from across the globe together in a new way to connect you to the world of precious metals as the COVID-19 pandemic.
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