Episode 48: Wait for the Signal with Duke Jones, CMT
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Welcome to Fill the Gap, the official podcast series of the CMT Association, hosted by David Lundgren and Tyler Wood. This monthly podcast will bring veteran market analysts and money managers into conversations that will explore the interviewee's investment philosophy, their process, and decision-making tools.

By learning more about their key mentors, early influences, and their long careers in financial services, Fill the Gap will highlight lessons our guests have learned over many decades and multiple market cycles. Join us in conversation with the men and women of Wall Street who discovered, engineered, and refined the discipline of technical market analysis. ♪

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Welcome to episode 48 of Fill the Gap, the official podcast of CMT Association. As always, I am joined by my dear friend, board of directors member, and lifelong portfolio manager, David Lundgren, CMT CFA. How are you doing today, Dave? I'm surviving. I'm surviving, managing risk, keeping my head above water. What risk are you talking about? There's nothing in the news. There's nothing going on. Yeah, I'm not in the forecast business, but I think...

this year is going to end spectacularly one way or another. Spectacular in like a fireworks show? I just think the framework is kind of in place for one of two scenarios. We kind of talk about it in today's podcast where we're either just beginning a bull market because things that traditionally just begin to turn up after a bear cycle are just starting to turn up. But on the other hand, we also have record concentration, record...

bullish sentiment in some surveys, valuations, potential inflection in the inflation cycle. All those things point to a 10-year secular bear market. And so you can't have both of them. You can have them temporarily, but you can't have both of them coexist for long periods of time. So I think this year is going to be an interesting one. And I'm just thankful that I'm a technician. I'm just thankful that I don't have an opinion on it. I'm just observing and I'll respond immediately.

to the data as it changes and hopefully navigate yet another cycle for our clients, but it's going to be an interesting year. Absolutely. Uh, there are so many technicians that I get to meet and talk to, to throughout the world. I mean, even our toolkit has a lot of, um, measures that, uh, that are showing that exact tight rope. Uh, you know, if you think about a Bollinger band, you can get compression of volatility. You can get, uh, uh, things to, um,

Get to that critical turning point, but you don't know which direction it's going to break until it breaks. And then you have a high velocity move in that direction. And I think everybody that I've spoken to over the last couple of months is seeing exactly that. Well, it's going to be explosive in one direction or the other. And they're just kind of waiting for a little bit more data to come in.

And you need all your wits about you, Tyler, so you can't be jet lagged. So you need to get some rest so you can face these markets now. Yes, this was the perfect time to have a conversation on a Monday afternoon with our delightful guest, Duke Jones, fellow CMT charterholder. Right after getting off a plane, you know, 27 hours, I missed my connection, David, JFK, and ended up driving home after a very long flight.

I'm happy to be back in this desk. Oh my goodness. But today's guest and this month's podcast with Duke Jones was fantastic. And there was so much material that we didn't even get to during the conversation. In particular, Duke saw this organization through perhaps one of the most tumultuous times, transformative periods for the organization in the early 2000s, right after the

losing all of our office space and records in the tragedy of 2001, and also seeing us through the recognition from FINRA, the great effort from the Board of Directors to gain that recognition from the highest regulator in the land. So he's certainly...

showed off his exceptional management characteristics in times of uncertainty. And I thought this conversation was fantastic. Dave, highlights that stick out to you about this chat we just had with Duke? I think, you know, this is a guy who's been in the business longer than I have and is a portfolio manager, hedge fund manager, quant strategist, analyst. So we're talking about a lot of accumulated assets.

And almost everything he said today, he finished with like, you know, I'm no better at this than anybody else. Yeah. You know, it's just like this ongoing level of humility almost with folks that are technically minded. And I think that's what's required to be a good technician is to just recognize that, you know, the market knows everything.

Yeah.

the more you realize the market knows more than you and everybody else. And that, that it just kind of feeds on the humility. And that's, I've seen that in my own career where the older I get and the more that I do this, the more I just kind of like listen to the market because it's very rarely proven wrong. Yeah. You know,

You know, we had invited Duke to a full-day seminar hosted at Texas A&M Mays School of Business in the fall of 2023. And in that conversation to the students in his presentation materials, he talked a little bit about some of the fundamental cycles that he incorporates into his work. And on today's interview, he talked about how he tried to get a little cute. And seeing some information on the fundamental side, he preempted what

what would have been a technically driven signal,

And he said, you know, when you try to get too cute, the market really takes the wind out of your sails. And he said, it's best to stick to my knitting. And I love that phrase that, you know, sometimes the simple stuff and waiting for the signal is really beneficial to portfolio managers. So Duke is still learning lessons, even late in his career, and generous enough to share that with our listeners, which I thought was great. Yeah.

Well, Dave Lundgren and all of our listeners, please enjoy this episode 48 with Duke Jones, CMT.

Welcome to Fill the Gap, the official podcast of the CMT Association. My name is Dave Lundgren, and along with my friend, fellow CMT charterholder and co-host Tyler Wood, we are joined this month by Duke Jones, also a fellow CMT. Now, according to Duke's LinkedIn profile, as of just three short months ago, he is both retired and an artist in residence. So that sounds like a lot of fun. I'm a little bit envious, so looking forward to learning more about that. But

But prior to joining or prior to retiring, Duke held several positions in the investment business, including senior portfolio manager and analyst at Merrill Lynch, portfolio manager at BlackRock, as well as a hedge fund manager and quantitative analyst.

The CMT Association, of course, has Duke to thank for having served on the board of directors in the early 2000s, one of the more transformative, if not volatile periods in the association's history. So we'll talk a little bit about that as well. So with so much to discuss, Duke Jones, welcome to Fill the Gap. Well, thank you very much. Glad to be here.

Looking good. Pleasure to have you. I don't know about looking good, but looking much more rested, I'll tell you that. I definitely have screen envy. That's the largest market screen I've ever seen in my life, and I've seen a lot of screens. Unfortunately, I can't even see over here. I've got two more here, and then I've got another two on the other side of me here. As I've gotten older, the screens have gotten bigger just because of my eyesight. There you go.

Well, fantastic. Well, really looking forward to this conversation. I mean, when I think about Duke Jones, I think about fusion analysis and pulling everything together. And at the end of the day, when we were thinking about what to call this podcast, we came to fill the gap because the point was to show how technical analysis can be used to do just that, fill the gap between all the other things that we deal with in the markets, whether it's fundamentals, macro, behavioral, finance, and everything. And then earlier, prior to us getting started, you had said that

If you had to get rid of, if you had to keep only one style of analysis, it would be technical. And I think that's a really, really powerful statement. So hopefully we can dig into all of that. But before we really get into all that, let's hear a little bit about your background. We'll get you to technical analysis and maybe tell us a little bit about your career journey.

Yeah, I was going to say, as we were joking before, we were talking about Kosar and how he got his start kind of off the floor. Since John's a good friend of mine, I'll poke shots at him along the way because I know eventually he'll come back on and probably do the same. So I'm going to get in early with my shots.

But whereas John sort of came off the floor, you know, basically had no experience. I sort of grew up in the business. So my dad was a municipal bond underwriter for Merrill. So I grew up with Mother Merrill sort of in my background. And even as a little kid, I...

would ask, you know, a lot of questions. So my dad would, during the summer times, my mom was a teacher. And so she, you know, got tired of having me every day. And so my dad would take me to the office. And back in those days, both the institutional retail offices were in the same, you know, same floor, you know, divided by a glass wall. That was it between institutional and, and, uh,

And the retail side. And my dad was a bond guy. And so he would basically do scales on valuations of bonds to bid for school districts or a bank issue where one might be. And they would either do competitive negotiated deals. And so to keep me from asking a thousand questions, my dad would sit me in front of basically the ticker tape. And my dad was the epitome of a buy and hold guy.

guy, I mean, on the stock side. He bought the IBM or whatever it is and never let it go. Whereas my personality is interesting to see, having grown up in the business, very much like my dad, I think the only good use of a bond is to get out of jail. So that was sort of my mindset. So that was the difference of us. And ultimately, we'll talk about maybe why we couldn't ultimately work together because we tried to at one point.

But my dad would just sit me in front of the ticker tape and he'd give me like the symbols to look for, like, you know, look for IBM and it does just sort of write down what the price is every time you see it. And it just was to keep me busy. Right. Because I would ask a million question as a little kid.

And so he would do that. And then over time, I got to know all the regular stock guys in the office. And so they would start to tell me the stories. Oh, but here's why we do such and such. And here's why we liked IBM. They came out with the AS400. And it's a great machine. And we talked about it. And so even as a little kid and getting into my early teens, I loved the stock side. And I loved talking to those guys because, quite frankly, bond guys were boring.

And so that was how I sort of kind of grew up in the marketplace. And so I kind of had that as my background. And so that's how I sort of got into it. And my first trading, my dad got me to buy some stocks. And unfortunately, I had very little money. And so I got to buy two or three shares of something because back then, commissions were about a third of what I had in dollars to buy something. And so I wasn't really seeing a great progress. And as I got into my later teens, as I was in high school,

I got into options because obviously options takes little money, big bang. And I became an instant genius, right? Because I was, this is late 1979 into 1980. And if you're a market historian, you know, those were two pretty good years. I think 1980, the market was up better than 20 plus percent. And so I was hitting a home run. I took literally a thousand dollars and I made it into like almost $17,000.

I was an option genius. Mom, you know, yeah. Larry McMillian, amateur, right? You know, so no. Right. So you guys know what's coming because obviously the reason I said that is then of course 81 comes and I, the only reason I didn't lose it all, thank God,

As I actually bought the car, I was looking at a used car, a 1969 Camaro that I was trying to buy. And that spent a good deal of it. Luckily, other than that, I would have lost every dime. I mean, I got crushed. And so a good first lesson about maybe risk management. More importantly, as my dad was very happy to remind me as I was constantly throwing it in his face about how great stocks were and options were versus bonds.

about never confuse a bull market with genius. And so, yeah, that was the first real lesson. So as I said, I sort of, fortunately, I learned many of those lessons early in my career before I had any big money to lose. And so it was very helpful for me, I think, as I kind of went on, because I then learned very quickly that there's a reason why Larry McMillian is still trading options and writing about options. And I still have my tail between my legs and very

to this day, very cautious about any kind of option trading. Again, that's just how it started. RAOUL PAL: Did all this happen in Texas? Did you grow up in Texas? MARK BLYTH: Actually, my dad was-- we actually grew up in Michigan, actually, until I was about 12. And then my dad was a wannabe Texan. So

He got an opportunity to come down and do the Texas market. So he covered basically Oklahoma, Louisiana, Arkansas, and Texas, and then I think a little bit in Mexico. And so he basically did the underwriting for that area for Merrill.

And so, yeah, so I got down because I was a skier and a hockey player up until we moved down here, which were not too big of items at that time in Texas. And still it's really today's maybe hockey finally. But but I went back up to boarding school, back up into Michigan and finished high school there and then and then came down to transfer down here and basically went to college down here. But that's how we got to Texas as my dad was. And so, yeah, I grew up my my.

sort of allow us was, you know, getting up at four in the morning and feeding steers and walking steers and sheep. And thanks. Cause my, my dad wanted to do the whole farm, you know, ranch experience. You got to have the animals. And so we were the Guinea pigs. So my sister and I were, uh, you know, I think about every kind of FFA for each animal you could do. We did. So,

And are you living on a ranch now? Yes. And this is the irony of it all. When I was a teenager, I said I will never live more than three miles from a 7-Eleven or a stop and go. And now I live, you know, 20 miles from one because I'm out in the country. I'm on a lake, actually. So we have actually a river that goes out to a main lake up in Livingston. It's about an hour north of Houston. So, yeah, I'm now out in the countryside, back with animals. You know, this time mostly chickens and dogs. And so that's mainly for my wife.

But yes, so I've gone full circle here. And you had built and demolished the entire options account before leaving high school? Oh, yes. Yes. Yeah. While in high school, I actually traded. So, you know, did the phone calls back to, you know, to a gentleman by the name of Zach Hill that, you know, I think...

I don't think Zach is probably still alive at this point, but he was a great guy. Got me actually sort of the first time I actually saw stock charts was through Zach. So I still didn't know what technical analysis was at that point, really didn't understand any of it. But that is how I sort of got into the business, if you will, or the interest of the business and sort of how I wanted to sort of go this path, if you will. Awesome. Awesome.

Awesome. How did you get into the business? How did you transition from that near catastrophe and options into the actual business? I was told to get in because I was told it was really sort of the retail and institutional side. And I didn't know there was an equity institutional because my dad never really talked about it. And so I didn't really-

Yeah. And so, yeah, it wasn't his business. So, so I, all I saw was the retail guys and I thought, okay, that's where I wanted to go. And so I, I started in the business in 1986. Um, but before you could do that, my dad said you had to get some sales experience because you're going to have to be able to, you know, talk to people, open up accounts, all that stuff. So retail advisor, um,

And so I ended up right out of school. I went to go work for a paper company because if you said you really want to go get bruised up, go work for, you know, basically a really good blue collar job where you're going to get, you know, just your nose rubbed in the ground and told no more times than you'll ever care to know. And it was right. And so I did that for a couple of years and then out of college and then and then joined Merrill.

And back in those days, you couldn't do, there was no nepotism. You couldn't join, like I couldn't team up with my dad or do anything like that. So I was on my own. Unfortunately, everybody else who was in the business got to open up all their family with accounts. My family already had accounts. So I really, you know, my dad really knew how to kind of tag me to actually work on my own. So it was a good thing, you know, it ended up being a good thing.

But so I started, you know, literally 1987 was my first full year in the business. If you, if you, you'll see, if you go back to in August of 87, you look at the high tick of WEINX. I remember this to the day, which I think was the 24th, which was the high of that year. I bought my largest transaction across my clients on that day, just before the crash of 87. So,

Obviously, there's a good lesson learned that maybe having some kind of technical background would have been more helpful, not mine, just before the crash of 87. But it was a great learning experience. And so that's how I sort of got in the business retail side. And this is where, again, having a dad in the business was very helpful because this is sort of one lessons I try to pass on to people. Yeah.

you know, to the advisors that we work with and all that was, is that, you know, when the crash happened on that day, I don't know if you guys remember this. So, you know, if you, if you remember the old movie, the original wall street, you know, there's Michael Douglas sitting on the, on the beach, you know, with this big Motorola, big cell box phone, right. You know, the shoe box phone. And I was, I had that, you know, of course you had to have the phone, right. The first cell phone. So out there with the shoe box phone, I was actually on that Friday when the market was down, I think 180 points.

for the 500 point day. I was actually on a golf course trying to entertain some clients and I called in and, you know, my assistant was like, I said, so what's marketing? She's down 108 points. I'm like, no, really, don't, don't joke with me, really. What's marketing? She's like, seriously, it's down 108 points. So,

So I actually, on that Monday, I actually had some appointments. So I didn't get into the office until like around 10 o'clock in the morning. And I just remember this. It was very strange because this is before, you know, FNN didn't start the predecessor to CNN, didn't start until noon, really. And I remember on Monday,

Broadway Bank in San Antonio had a sign that gave you the market and it only did basically two digits. So it didn't do how far we were down in points. And so it looked like we were down like

80 points or whatever it was or something like that, which at that time was like 380 points. So, by the time I walked in, I just remember the office was dead quiet. You didn't hear, there was no phones, everybody. And there was a gentleman, I won't say his name, but he was sitting at his desk. And I was obviously a rookie broker sitting out in the little cubicle out in the front and behind, you know, in front of a more established advisor there. And he had just had his hands on his face, just looking at his quote drawing like this.

I just thought it was sort of strange. And so I flipped mine on now. I got my, you know, basically I was, this was high tech when you had the orange versus the green letters on the Quotron. And I flipped that thing on and I look around and you could tell just everybody, when I look around and I said, is there something wrong with my machine? It says we're doing like 400 points and I'm looking around and you can just see the, just the bullets coming towards me, the stairs, like what a moron. And, and so,

Now I start to realize, well, now it's like noon and now the phones are just starting to go crazy. And, you know, people are starting to call. And I didn't know what to do. So I called my dad and I said, dad, that's a, you know, what do you do? And he goes, well, he goes, I call your clients and say, hey, yeah, well, yeah, bye bye. He should have said that. Perfect.

Fortunately for me, he said, well, why don't you just tell them, you know, how many days do you get a 20% one day off sale? I'm like, I can't tell them that. People just lost a boatload of money. It's like, look, just call them and just talk to them and make sure that you just tell them that things will be okay. And, you know, and just see, you know, make sure that they're okay. And he goes, you will be surprised if you do that. And he was right. I started calling people and what was more surprising is everyone asked how I was doing.

And that was sort of my first really good lesson about no matter if you're not in a direct client contact kind of state point, that really is in the key to our business is with your clients is that's when they need you most is when things are the ugliest. And so that always stuck with me as a PM that I needed to be more proactive, even if I wasn't the direct client person, just making sure we were talking to people because it was a great lesson to learn. And it was a really...

significant part of my life just because it was, you know, the first big time the market had ever seen that kind of action. And so, um, and so that's sort of how that was sort of my start. And then from there, what happened was is obviously after 87, the institutional market, both in equities, uh, dried up, um, because you weren't selling to many institutions. And about that time, my dad, we were starting now to start selling the stress from the, from the, uh,

Basically, the savings and loan crisis. And so, you know, establishing the RTC and all that kind of stuff. And so my dad's business started to dry up. And so we thought, well, maybe we could team up because there had just been a group or a broker and his daughter had just gotten approval to team up. And back in those days, you had to go all the way to, I think we had to go to, I think it was either Comansky or...

Might have been Schreier, whoever it was, then the chairman of Merrill at the time to get approval. Whereas in Epitizum, you go and there's teams of families everywhere now. But back then, you had to go all the way to the CEO to get approval. And so we did it. So my dad and I worked together for about two years. And so while I was doing that, what happened was because pretty much there was no institutional people coming in, but we still had big, big people in San Antonio that still needed approval.

basically to show the analyst around, if you will, because we had USAA and some big users, teachers, retirement services, things like that out of Austin. And so my dad said, well, they constantly call me. Would you mind taking them out? And I said, no, I'd love to. I'd love to learn more about them because I was already de-experienced

deep, I was already a fundamental guy being with my dad, you know, sort of by and hold and obviously accounting and things like that. So I started to really get into, and as they would come in, this was the early days of, we went from Lotus to the new Excel and spreadsheets. And, and, uh, I got, you know, really into looking into their models because they'd show me how they build their models. And so we'd go on calls together. And so I would drive them to the calls and I would listen to what they say and how they built them. So I got really interested. That's sort of how really my fundamental side got peaked, if you will. Hmm.

And trying to learn about the fundamental side and how they evaluated stocks and all that. And so the more I did that, the more I got into, the more I started to build my own earnings models and started to learn about how to, you know, sort of do the stock valuation side and the differences between, you know, what is a good stock versus a good investment, so to speak, you know, what really can drive and move a stock.

And so I started to do that. And then ultimately I, I got to where the points I was actually going on an institutional calls myself. And one of my clients was a bank and I've been a gentleman made with George Mead. And he, he ultimately goes, he goes, Duke, you, you tend to seem to know more about this stuff than the analyst does. And you seem to make better calls than analysts. And I'm like, well, it was great. And he goes, because would you be interested in maybe working for the bank, you know, on the portfolio management side?

And about that time, Myrtle had just come out with its sort of first discretionary platform, if you will. I think it was called Asset Power, if my memory's right, but where you could actually have a do some discretionary management on it. And I, we had, we had the first, my dad and I had the first account in the office and

And about that time, my dad and I were, again, because we're very different personalities. And I decided I was either going to have to leave or kill him to continue working the business. Because it was just, we were just butting heads. Because again, my dad was buying hold. I'm like, you know, we need to not, you know, number one to survive. Because unfortunately, this was still a commission transmission or transaction kind of commission oriented business. You needed to be able to have some stuff move.

And to tell you, my dad's book, even to the time he retired, I think his turnover was like 0.00, he was one of the lowest in the firm. In fact, he got, you know, 90% municipal bonds. And that was his. But, and because again, he transitioned sort of to the retail side as, as again, during the financial or the savings and loan crisis. But so anyway, I ended up leaving. My dad to join the bank became, came in as an analyst and became then a PM and

Uh, which is, I, I, I highly recommend the bank as a, as a great transition because especially bank trust departments, because usually there's a lot of turnover there because once you get good, you move somewhere else. And so, and they're willing to train you and it's usually a pretty good, decent training. So just as a career path, if somebody is looking definitely, you know, keep that as an, as a mindset to be able to, to, to look at, cause that's, it worked for me as a path. And, uh,

Anyway, so that's how I sort of got into it. But while I was at Merrill, I got really my first introduction into technical analysis from, again, my dad recommended. I had just had my head handed to me, really my first big loss in a stock that I had recommended. And I told my dad, I said, it's like the market knows something I don't. And he goes, well, I don't really know much about the fundamental side. He goes, you know, the technical stuff, but some of these guys swear by it. And he goes, we've got a guy in the firm you might want to go talk to you.

And so, uh, guy's name was Bob Farrell happened to be. And so I went up and spent, uh, basically almost a full day with Bob. Uh, there was a couple other people there, but I got to spend it. And, uh,

Bob basically said, I gave him my example. He walked through and then he started showing me all the signs that were there, sort of that the market was telling you that maybe something was wrong with the stock. Because from a fundamental basis, in my head, I could make an argument for it. And then ultimately, it came out that there were some issues with the stock. Which stock was it? I think this was Mid-South Utilities.

So now energy. So it became energy. But what happened is they were having some problems in Louisiana with some transmission issues, cost issues, cost overruns and things like that that had not been reported. But the market obviously knew before, you know, we did or especially I did. Fascinating. That was how.

And so that's how I got to Bob. Cause I was like, somehow people are selling this stock. Somebody knows something I don't. And it just, and so that's when he said, basically he said, you know, fundamentals can tell you what to buy, but technicals can tell you when to buy or sell. And I'm like, okay. And so that started my path. And so, and then as I got into the bank, I got more into the technical side and, and, uh, uh,

Started to read up and right about the time, you know, some software came around that, you know, I, it's sort of interesting now I, I started thinking maybe because again, I'm a, I'm a very much a spreadsheet quantitative data kind of guy, but

And so I thought if there's ways to make this faster automated and some software came out that was system writer, which is now TradeStation. And then it was also AIQ, which was one back in the late 80s that had come around. And so through AIQ, I got to know about group power, which was John Bollinger's basically his his amalgamation of his custom groups.

And I could definitely see having how sort of now having to be able to visually see how groups move on a chart and then basically know how they move together as a fundamental group. Because obviously, as you know, rising tide lifts all boats, both fundamentally and technically. So that was an interesting sort of moment for me to say, OK, you know, maybe it's software being able to see this technical side and the fundamental side.

And not long after that, I got to go to my first sort of MTA event, if you will. Dodge Darlan was the first person I met. So I would, I like to thank doc Dodge probably today. Couldn't pick me out of a lineup. It was me and four Oompa Loompas, but, but he was, he,

super nice. You know, he introduced me, walked me around. Um, and so I got, and so I had my first, and it was actually the first event that I went to was in San Antonio, believe it or not. So, um, and got to meet some really great people and they invited me to come out. And so from there, and so the next event that I got to go to, I think was, might've been Jupiter beach in Florida. It was the next one. And back there we had, uh, you,

Ian Notley had what we call a walkabout. And so, which was, I don't think we've done them for a long time, which I'm going to throw this to you, Tyler. I think it's something we ought to definitely bring back. It's sort of like you have now, you have sort of your out sessions where you can spend some more time.

But there was a great time as you had some great people of the MTA. Basically, you had like 10 or 15 minutes to sit there and just fire questions off at them or listen about their career and path. And you got to rotate around. And so, you know, you had Ralph and one of them was John Bollinger. And so having now seen John's work.

I basically camped out at that table and poor John had to sit through me with for two hours what it was sitting at that table, peppering him with questions, as I'm not afraid to do. And you didn't actually walk about, did you do? Yeah, so I missed I probably missed some great stuff. But I got to sit there and you know that that conversation, which as empty events, you know, went continued on into the bar, which was actually fantastic.

To this day, I think the bar conversations are some of the best because you get a little, you know, maybe sauce into some folks and they tend to open up a little more and you can really pick their brains. And it was great for me because, again, not afraid to ask questions, even stupid ones. And so I peppered John to no end on questions about markets, groups and things like that.

And thank God I didn't bother him so badly to today. We're good friends and he has been instrumentalized or consider him my mentor in the business. He has been very instrumental in sort of. And so I, you know, not to circle back, but I come back to that and sort of his, his terminology was rational analysis, the combination of fundamental and technical. I sort of added quantitative because at that point, this is sort of pre the CMT sort of bringing in a little bit more statistical awareness, if you will, and, and, and sort of,

you know, backtesting and things like that and having some more statistical significance and indicators and systems and things like that. But as I sort of, as I got into the bank side and had to deal with individual clients, you really couldn't apply as much of the automated kind of systems trading, if you will, that I sort of enjoyed because you had,

trust accounts with certain restrictions. You had, you know, um, turnover issues. You had more conservative, you know, prudent man sort of restrictions, especially, especially back in the early eighties and nineties in Texas. Um,

And so I sort of pushed that sort of the backside, except really the data part of it. I really kept the data testing and really, because that was important for me to know that I had some confidence in what I was doing. And then at least whether from a, not so much from a trading statistical edge, but really from a long-term standpoint. And that sort of changed my mindset. And so when ultimately, yeah,

I've covered sort of, you know, sort of how I got in the business that we can go from wherever you're here from, but that sort of led me when I got to BlackRock is BlackRock was a very much a quantitative shop. And so, and we had great tools that, you know, again, primarily from the fixed income side, but you could take a lot of that and apply it to the equity side. And so I did. And that sort of is sort of how I,

Again, you know, basically from, you know, coming from a bank, moving to BlackRock, managing assets there and really managing from a more from a quantitative side, adding, you know, technical wherever I could. But again, and then ultimately, I had the same issue, though, as most of the clients that I dealt with were very much tax sensitive. And so.

And it sort of changed my mantra about how I had to manage assets a little bit away from sort of my personality, what I wanted to do. Because again, you were more tax-focused because we had larger clients. I typically dealt with the advisors, larger clients. In fact, that's how I ultimately got to where I spent the last 15 years of my life with the team was is they were –

There's a team of four advisors that basically, if you know Merrill's structure, but Merrill has the 15,000 thundering herd of retail advisors. And there's about 350, 375, what they call them. They used to be called private banking investment group. Now it's wealth management advisor. I'm not sure what the technical term is, but yeah,

So they basically dealt with much higher asset-based clients. So typically, I think the minimum was 10 million. I think our team was 25 million. And they had two partners. Two of them left to go to join another firm, sort of the up-and-up. And so they were...

Had no idea really how to manage money. They were great asset gatherers, but knew nothing. And they said, look, with these bigger clients, we need somebody who's got an institutional background to be able to help us transition them because they wanted to go away from the brokerage commission-based model into an asset-free business. So when I got there, we had 17 million on discretionary assets. And when I left, we were about 3 billion. Wow. Whoa. Yeah.

So, you know, part of that was obviously converting existing clients to a discretionary platform and then obviously helping them grow the business. So maybe in a nutshell, maybe if you could...

I guess, summarize the investment process that's come out of this career, this sort of storied, multidirectional career. You ended up with a process that kind of guides you through all these different cycles you've been through. So what would the bumper sticker look like in terms of what you do as an investor and a portfolio manager?

Control risk. That's the bottom line. And I say that because, again, I think you sort of have to manage to your clientele. I had a clientele who had already hit the home run. And in fact, I got this very great lesson the first day I joined the team. I met with one of the founding partners of a MLP who was a client. And he said, Duke, I've hit the home run. Don't screw it up.

So, you know, he goes, that's, that's your job. And I'm like, got it. Lesson learned. Okay. So, and again, taxes are a much bigger issue if you're fluent and you've got a big chunk of money because you've probably got multiple assets generating taxes from other where, whether it's real estate or business. And so that sort of that tax efficiency sort of forced me to learn to be more tax efficient and to manage. So again, and again, I think it was a great lesson learned.

Because when you typically most advisors, you know, most risk profiles will say, do you, you know, can you lose 20%? Are you comfortable losing 20% of your assets? Right. And most people go, yeah, 20%, that's not bad. Well, if you just had somebody who's just monetized a business for $10 million and then you tell them, uh,

Would you be comfortable losing $2 million of your 10 that this is the last bit of money you're ever going to have because you just sold your business and you're never going to get another one? And 99.9% of those people are going to say no, right? And that's the difference of being able to put it in a measure that they truly relate to instead of our dark jargon, which is typically dealing with percentages and things like that. And so that, again, was a great lesson because it helped me sort of rephrase when I was talking to clients about how I manage things.

But it also had forced me to change sort of my, my way I managed, because again, when you're dealing with BlackRock and it's really just truly beat the S and P and it obviously is still my goal. And that was still the goal of the clients, but it really was just try not to go backwards. Or as one of the advisors I used to say is, you know, if you're sitting, you're sitting on third, don't try to steal second. Right. I mean, you don't want to go take super risk when you do it and go backwards. And so that was sort of,

So that's the way I had to sort of manage. So my process was really trying to be able to look at having a fundamental background, a fundamental data set of companies I liked, and then using technicals to basically tell me when that risk reward was much more attractive. And again, using that technical side to be able to tell me how much of that market exposure I could take.

And that's where being able to use the risk and the beta and the volatility of it all to be able to measure to make a portfolio. And that sort of migrated into other types of management down the road. But that was sort of the start of defining a process because I've had to sort of change my process in the sense the tenants were basically the same. Is that try to buy good quality, good companies at good entry points and then exit them when they show signs of distribution. So it's basically simple, very simple premises.

Which I have to, you know, if any of you follow me on Bollinger's List or that, you know, that mark, you'll know that in 2023, I sort of dropped going back to that. And in 2024, I had to go back to the basics because I started getting a little too cute and too smart and started preempting sort of the technical signals and maybe the fundamental signals and end up shooting myself in the foot with one of my biggest relative underperformance years I have ever experienced in my lifetime. So I was under by 600 basis points, my benchmark.

That was still up 16% or 17%, but the benchmark was up 23%, 24%, whatever it was. It was a good lesson, again. Even as, quote-unquote, I would say, experienced as I was, sometimes sticking to the traditional knitting can save your hide. Last year, getting back to the basics, I had a much better year. From a process standpoint, I've had to take...

the technical side and use it. So I sort of consider what I call, I call it sort of fire. Basically, I say, you know, basically fundamentals identify risk and return environments. So that to me is, that's my basic premise in using fundamentals is it can help me not only determine what I'm going to buy from an individual security basis, but it can also tell me what kind of risk environment I may be entering into or exiting from. And so, because obviously we know to me, I think, and I've just somebody really to prove me wrong. I think

Fundamentals control about 75% of a trend because I think you need fundamental guys to basically say, I don't care. This is too cheap. I am going to buy it because technicians won't buy something that's in a downtrend. Whereas fundamentals will finally say, this is just too cheap not to buy. I'm willing to wait and take the additional risk for this thing to come out the other side of the trough.

So, and then I think, you know, the last maybe 10% or 15% of a trend is driven by the trend itself, maybe, but it's ultimately the fundamental guy saying, I don't care if it goes up higher. I don't want to take the risk that this exposes. And to me, that's sort of, you can sort of watch that. I call it sort of the tsunami slash, you know, sort of wave effect is if you think of like a tsunami in a bull market trend.

It starts with a movement, whether it's a fundamental catalyst, it's a technical catalyst, whatever it might be, you know, gap, but usually some kind of news event or some kind of event that basically forces the market to sort of reevaluate something. And then as that bullish trend gets going, it's usually what I call deep water. It's probably already been beat up if it's a fundamental stock, if it's a value stock, it's already beat up. And so I call it the water's deep. There's a great deal of fundamental support there.

So in a zip order, and if you've ever looked at a tsunami, if you ever looked at waves, right, it's as the wave doesn't actually get really big until it gets closer to shore. And as you get closer to the shore, that shallowness of the fundamental begins to come into play, right? Because now the wave gets higher. Volatility profile picks up as the wave gets closer to shore.

Right. So the crash of the wave is the end of the trend. Right. So that's why I used it, because it's an easy visual for people and clients to understand is that sort of how you can explain this is what we're trying to find. We're trying to find this stuff down here, but we're trying to find when the sort of the tsunami starts. I'm not going to ever probably catch the first 10 percent off the low. And I'm OK with that. I want to capture maybe that 80 percent of that trend and as right as long as I can. And so, again, to do that.

As a premise, then, to do it technically, then, is I have to really focus, again, on the fundamentals only for the fact that if I want to try to get past a 12-month holding period to get something in a long-term capital gain standpoint, it really sort of, because that's our client's focus, is efficient returns, right? So, again, trying to minimize the capital gain side of it.

That forces me to sort of then have that preset basket of stocks and then wait for the technicals to then screen for and show that, okay, now this may be now the ideal time to do it. So that's sort of, you know, I know that's not as specific, maybe I can go into more specific. That's sort of how my mantra has been. As I've gotten sort of now for myself managing, I'm going back into a more, I would call it more automated, more system-like approach where

Because it's something I feel comfortable with. I'm having a portion of my money. So I've managed throughout my life about maybe 10 or 15 to 20% of my money sort of systematically. You know, the advent of ETFs and even stocks. But I couldn't do it. It was very hard to do it because under the situation both at BlackRock and at Merrill,

Um, you couldn't front run, obviously clients, not a good thing to sense, but you always had restrictions on when you could buy something. Right. So, you know, I, I had, I couldn't buy something 24 hours ahead of time or after. So, you know, that you tend to, it just makes it hard to do systematic type trading in that kind of market environment, uh, or compliance type of market.

You mentioned the capital protection for these clients was critical. And in an average market year, we'll have a 10% correction or more.

but also turnover is a big constraint, meaning the capital gains that you would incur for selling out of positions. How do you balance those two requirements of the fund structure and the clients? Yeah. So ultimately is capital preservation comes first over taxes, right? So ultimately if it's something where something is, you can see there's going to be an ugly situation, it's only going to get uglier.

then taxes would be damned, right? I mean, because that's a very easy description to talk to clients because you can say, look, you know, yeah, I'm going to cost you, you know, 20% in taxes, but you really want to lose 40, 50% of the principal value, right? Well, no client's going to say, yeah, let's go and lose the 40 and not take any taxes, right? So, but it's in the management side of it, it's tough for obviously trying to manage. So when you're doing like a portfolio in the risk control, it's always looking at it from that lens of, okay,

Is it better just to peel a little bit of it off? Because then if I'm constantly on a tax-efficient management basis, I'm hopefully trying to prune off those losses and building up at least some, I call it loss capital, if you will. So I've got something to offset, at least to minimize down. Maybe not eliminate it, but at least I can lower it down. And so most clients are okay. We try to stay within a 20% to 30% turnover, but there's years where I was 40% or 50% because

you had a situation, well, like in June of last year when you had the tech situation. I had pared back too soon to some extent, but from January into about May, some of that tech exposure before that happened was

Because again, it just got to be now from a risk perspective, portfolio management perspective, I was very dominant in a very correlated concentration of portfolio. Well, I may not have the mag seven in a sense of the weights and concentration. My portfolio is going to very much mimic what that does to the marketplace because of that risk profile. So I had to back off some of that. So fortunately,

Even though 23 was also a good year, I was able to take off some stuff that, you know, didn't pan out and able to book some losses to be able to carry forward. So that's part of that, you know, job as a PM is, is you're sort of playing both offense and defense, but also you're, you've got to remember, you've got a lot of other tools that,

that in the sense of the clients. Now, if you're, if you've got a portfolio where this is what's, what's strange is our business, we had very little retirement money. Most of what we had that was that we didn't have to worry about taxes was foundations. So if you were, if you're, if you're an advisor, who's got a lot of,

you know, retirement money or a lot of, you know, people, and they're really more concerned about capital accumulation and taxes aren't an issue. It's a different style of management completely. You're, you're much more index focused, less risk adjusted because again, you're, you're trying to be more benchmark like maybe, and you can assume a little bit more risk because there may be a younger basic client. So that's why I said, you sort of have to adapt the management to your clientele and, and,

So, and that's, it forces a learning curve and it was a learning curve for me to try to be more, more tax efficient. Cause again, I was more basically focused on the risk structure of it, but you sort of also have to balance those two. So maybe we can hop a little bit into process as well. And maybe we can kick it off with,

how you would address this question and how your process helped you navigate this, I guess, challenge. So, of course, at any time, the market can pull back. We know that, as Tyler mentioned, the market kind of drops 10% every year. And if the market's dropping 10%, the stocks you own are probably dropping more unless you're very low beta kind of thing. So what tools have you sort of developed over the years to help you

distinguish and differentiate between just a traditional pullback that you should be buying and a kind of pullback that you want to avoid on behalf of your clients so that you don't get a 20% drawdown. So what kind of tools and process did you build to help you distinguish between those two things so that you weren't constantly selling higher and higher prices in a bull market for fear of a 20% decline, yet at the same time walking that fine line of not delivering a 20% decline to your clients?

Well, and that's, that's, this is sort of, and this is, it's,

This is probably where other folks have a little actually more difficulty than I do because very few of our clients had 100% equities, right? Because they've hit the home run. So right off the bat, I've got an advantage in a sense of my initial asset allocation is I'm never going to experience a full decline as a portfolio. So I don't have to be as cognizant or worried about a 10% or 12% decline because if I've got an average client was probably a 55% to 60% equity exposure max, that would be more on more risk clients maybe in the 70s maybe.

But I'm a big believer in sort of reducing down risk exposure early. Now, that will cost you some returns in relative performance in up years in the market.

So, but clients are okay with that if they know the process. So again, talking to them about how I manage the structure of it, they're okay not getting 100% of the S&P returns if it's a double digit, you know, let's say in the 20s. They're going to be okay with 18 or 20 if the market's up 25, right? Because again, they're more concerned about going backwards. Most retail clients are going to be ticked that you're not at a full return.

you know, market return because they're probably a hundred percent equity or close to it. So that's sort of a difference. So I am a big believer in the asset allocation side and a sense of controlling risk. Now let's pick a 2022 where, uh,

asset allocation, it's not just controlling the risk on the equity side, it's controlling risk on the fixed income side as well. So this is where I think technicals were very advantageous because fundamentally we know, okay, if the Fed starts to raise rates, well, the market was telling you in advance technically well before the Fed made its first move. So if you were just following the Fed, which many people do, you knew in advance that the Fed was going to raise rates because the market was already telling you they were already pricing a hike well before the Fed moved. So

So there in the case, you're trying to reduce risk in the fixed income side with reducing duration.

And so I'm already helping myself because I'm giving myself normally what would be my shock absorber and the fixed income side for the equities in 2022 didn't work. Right. You think you lost, I think it was one of the worst 60, 40 years in portfolio history. Right. So they both move down together. Yeah. So, so we in fixed income, I shortened duration from a normal, you know, my, I normally would be intermediate taxable side or tax free side would be around six to eight.

where I'd be an intermediate portfolio and I shortened duration down to sub two in cases. At one point it was 0.75. And so right off the bat, a lot of my portfolio volatility is reduced there.

On that front, can you maybe walk us through, give us some examples of how your process led you to do that? What was the catalyst for that decision? Right. So basically, this is where, again, I think technicals being able to screen and monitor things from a technical basis, looking at the price movement. So if you start to see relative outperformance in short duration versus long duration,

that's the market already signaling that there's a change in structure in fixed income, right? And you can also look at it by a lot of exterior things. So in fixed income, you're looking at spreads, you're looking at obviously high yield, things like that, things that are starting to tell you that the market itself into 20, basically starting actually in 2021, fixed income was starting to give you signs that the bond market was starting to be a little questionable as far as from a duration management standpoint, right? So you started to see it in CDOs, you started seeing it in mortgages, right?

So, again, it just tells you from a fixed income standpoint, you're going to start to screen and say, okay, it's a first warning sign that says, all right, if I've got in a normal market environment, short term should not be outperforming long duration. So there's your first warning clue. And it says, okay, so maybe the market is trying to tell me I need to sort of adjust my duration. So you start to adjust your duration. Now, the question is, do you go full blown, you know, right off the bat into, you know, going completely short?

Again, fortunately, fixed income didn't have big gains and things, so I was able to make bigger changes there. But even there, I started to be a little more tax efficient. So I moved like about a third to maybe about 40% of my portfolio from a duration to start with from about six, I cut it in half down to about three. And so unfortunately-

And fortunately, this is actually where the one time you actually have advantages over fixed income security managers. I had to use funds and ETFs because it's hard when you have clientele to try to do the individual bonds.

Whereas I know I'm going to get executed at that daily close of the fund or ETF or at the moment of time in the market and the ETF itself intraday. Whereas if I'm an individual security buyer, I got to go out, put bids and I can't move as fast. So this is one place where you as a even sort of what I call a retail side have an advantage over an institutional player in individual securities because you're going to get instant marketing.

So, and you can make that change right then and there. And so being able to move those securities to a shortened duration, literally in half, I've already reduced my risk down. And then I did it again into 22. So right, actually at the end of 21, I think we had the first Fed was what, November, December of

Right. I think it was right. I think. Yeah. So the first the first hike. So and so the market. And then you started to look at that spread between securities and it was getting worse and you started to see expectations. So this is where using some sentiment. So I do use sentiment in a sense of of.

Try to feel where the market thinks things are because, and again, trying to say, okay, am I on the right side of if the market is right? Okay. I want to know where I am. I'm always more concerned about where I'm wrong. And so I will tend to be a little more cautious. So I started to back off again. I don't mind giving up a little bit of return. So I started to back off my fixed income even more. So again, I got down very early in the stage into the first quarter of 22. I think I was down to a 0.77, 0.75, 0.75.

total duration, which means that I had some funds in ETFs that were obviously SGOV, which is a 30-day duration kind of deal, to a basically, I think my longest was probably a short-duration fund that might have a duration of one and a half. So I got my yield still stayed up. My coupon sort of distribution cash flow wasn't too far off from where I was so that it wasn't such a big hit to those who were taking an income stream because, again, that's something else you have to

remember is that you've got clienteles maybe taking cash flow from a portfolio so you can't be too disruptive um being able to do that and still keep the cash flow roughly you know comfortable enough for them to you know understand you know might be a little bit of a drop but not going to be a totally we're going to cut your income in half kind of situation and then from there on the equity side it's the same kind of situation is there an equity side i started moving into late

Or in about the middle of 21, too early again. I didn't mind taking money off because we had a really good year already because we were sort of in the right sectors. And so, but I probably, if I had been perfect in my timing, I would have done it in January of 2022, I think when the NASDAQ peaked. But I was probably where I wanted to be in my equity allocation by October, November.

So I was early in the sense. So again, I knew sort of what my, my risk budget was, where I wanted to be, but also what my sort of my tax budget was. And so again, I sold some more off into that part. Luckily, good timing to do it because we sold the first couple of months of the year, you know, trying to push the gains into next year and that ended up being the high.

But that's sort of what you have to do in a sense of a portfolio allocation standpoint is try to sort of be a little preemptive and be willing to give up a little bit of that upside. And the same to the downside is I don't mind taking a 10% or 12% if I'm a full equity if I know that my risk reward is going to be two times that to the upside. Now, if I'm thinking my expectation of return is going to be I'm going to risk 10% to earn 12%,

I'm probably going to be a little more cautious and drop that down and try to lose five or six, right? Because now I've, now I'm back to my two to one sort of expected return.

And again, not worried about giving up too much of the first move off the lows. When you're thinking about that ratio, that's a critical ratio, the risk reward ratio. And I think one of the strengths of technicals is we have a pretty good sense of what the risk will be because we can identify our stops and position size accordingly. We can kind of almost map our potential losses ahead of time. But when you're trying to assess the potential reward in light of that risk, how do you estimate that potential reward ratio?

So I'm a big believer in sort of the big picture fundamentals. That's why I'm in the sense of economic side of that. I'm a big fan of economic data. Now it's, it's totally worthless in the sense of, I think of most of it, 99% of it from a timing, what we would consider as technicians in a usable timing window, if right, because, you know, obviously we had a situation like we were talking about in rates, rates gave you a pretty good window ahead of time of when things were not already well in, in rate land, right?

But you typically don't get that very often. And you typically don't get that as much in equity side of it. So, but fundamentals do tell you, as I said, sort of the fundamentals do give me the backdrop. So looking at,

like let's sort of, we can talk about the current period if you want in a sense of short, just in a sense of the short period. Right now is that you would say typically you don't have major corrections when earnings estimates are increasing or earnings themselves are actually rising. Corrections tend to be towards, as Tyler mentioned, more to the norm, right? You get to those 7% to 11% kind of range corrections. Well, most people are okay living through those kind of corrections. You don't necessarily have to make big portfolio changes to that.

But what you're looking for me as I'm looking for now is, is sort of, is the institution is we're starting to see if people were starting to talk about, because in the month of January, I think the equal weight outperformed the S&P itself for the first time again, since I think it was back in October where they had done it. But the more I looked at the breadth side of it, it was like, okay, we've got a situation where we've got fundamentals of sort of improving estimates, improving actual real, I should say real earnings, actually improving estimates sort of now mixed bag and,

That tells me that I'm in a situation where I've already got a high fundamental factor on PE. Let's just pick some measurements. We'll just pick any of them you could pick at. But where I'm actually still seeing some positive things are cash flow. Cash flows actually, we're seeing sort of upticks in cash flow across sectors. So to me, I'm a big cash flow guy on fundamental. That's one of my fundamental things to watch. I came from the old CFROI, cash flow return on investments, or the old Holtz school, if you will, one of the early tools and fundamentals that I used.

And so, you know, and you could sort of migrate that along with sort of a combination of EVA to say, okay, you know, these things are still in good shape. They're not horrible. We're at the upper end, but we're not in a situation that says, you know what, in 2021, we were through, if I, if I put what I call a wristband equivalent of a Bollinger band on it, both fundamentals and technicals, I was well above that band.

So not that I was necessarily going to say that 2022 is going to be a minus 22% year in the S&P, but you knew we're probably going to exceed the normal correction level that we saw in the marketplace, right? So that's what I'm looking at from is not necessarily to try to nail the exact percentages, but saying, okay, from my calculation risk, now I'm beyond my normal range where my clientele would be comfortable taking all that risk. And so I'm willing to back off. And so that's the judgment part of the business, right? That's the

I'm no better than anybody else telling you I knew that we're going to see a 20% decline because I didn't. But I can say that I knew the risk level was much higher, the probability of which was the way I calculated about 80%, higher than a normal correction level of the standard, as Tyler mentioned, of 10% or 11%. I typically use the 7-11 as my sort of range, if I will. If I'm beyond that in my portfolio structure of risk, the way I analyze it, I start to reduce that risk down.

I know you do a lot of research

I guess outside of, or I guess maybe cycle work where you're looking at different macro drivers and probably intermarket analysis, thinking of John Murphy and others. I'm curious in the last few years, how has that type of a lens helped you? Because it seems like the cycle has been really messed up since the GFC, right? Because of all the liquidity and things like that. So a lot of those traditional relationships have really been

if not ineffective, they in many cases have just completely turned upside down and actually have moved opposite. So I'm curious if you agree with that, first of all, and then if so, what kind of adjustments you've made to your process to account for those differences? Well, I'll give you an example of where I was wrong in using a process because I think it's sort of a learning experience for me and maybe somebody else. So, for example, if you looked at every correction prior to 2022,

Coming out of the correction, small and mid-cap usually led for the first 12 to 18 months, right? So this is where I was in 23 is I'm like, okay, coming out of 22, I overweighted. I sort of circumvented actually waiting for them to show that they were market or better performers and adding to that exposure. I sort of got preemptive, got cute. And because from a fundamental basis, mid-cap and small cap were hugely cheap, especially in 21 relative to large cap.

And so I got a little cute and said, oh, I'm just going to start buying these now and got a little early. Well, I got bailed out, fortunately, because the end of 21, we had a nice little or excuse me, in 23, we got a nice little spike at the end of the year that saved my hide because I had started buying them into about May into June or July of 23. Because now coming out of the correction that we've had in waiting again, I'm not buying the ultimate lows anymore.

Um, but that, that overweight, if you will, was detrimental in 2024, right? Because

Yes, you could say I was a diversified portfolio. You could argue it from an asset allocation standpoint. But from a performance standpoint, it was a mistake because I should have actually waited for them to actually show that they were more of a sustainable trend to invest in those two segments instead of just going off the fundamentals themselves. So here's, as I said, getting back to the knitting of looking at both the trend and also the fundamental evaluation of it.

and waiting for them to actually show the market beginning to reward them. So if not for that fourth quarter, if you will, now again, I got a little spike in 2024, but being overweight took away from my large cap exposure. Now, it did help my risk profile. So in the correction in June of this last year, we didn't suffer as badly in relative terms, right?

But it didn't help from a performance standpoint. In fact, it probably took away 120, 150 basis points of relative performance. So that's what I said. So when you're looking at in a market like we are today is that there's a lot of places you could go. Now, something that you talk about, some people are saying, you look at performance-based. Now, you have to say, okay, I got...

Tariffs and all this kind of stuff, well, if that's the case, if the market was really concerned about tariffs and all that, you'd have to say, "Okay, why is the IFA and things like that up about the same as or more than the S&P?" So maybe we are in a fundamental rotation to other markets starting because the fundamentals are saying, "Yeah, I'm willing to now be in these markets regardless of the risk or the returns of the S&P."

So that's sort of, those are things that make me curious and want to go a little dig a little further because it's like number one, it's, it's an underweighted asset class. International is across the board. I have been out of international for years. I mean, I 2017 was the last international exposure I had of any mean. I I'm a, I'm a big active asset allocator. I do not believe in a static allocation. I don't believe in a, in, in having a, you know,

let's go inverse of the old food pyramid, which now we found out the food pyramid is a joke, right? We've now found that out. Thank you. But, you know, sort of that was sort of the old sense is you always had 10% real estate. You always had 10% gold where, you know, the old back in the eighties, right. That was where we started with.

That to me never made sense. And it didn't make sense is because if you ever looked at the last 80 years, take the last eight decades of the marketplace and you look at an efficient frontier, no single decade looks like any decade before or after. So it told me, it says, why would I, yes, over a 30 year period, I'm going to get that average of those returns. Well, I don't know about you, but

If you lose a client in the first two years, you're not going to have them for the full 30, right? So you can't, you know, when you're doing asset allocation, that's the other side of it is you have to be pragmatic in your business sense. So that's where, again, it's a sense of looking at an asset allocation standpoint. That to me is an interesting market that says, okay, wait a minute, it's showing signs of life. Now, EM and ESM,

International markets usually always do in January. They always typically have a good bounce. It's part of the trade and we've had a good bounce. Another question is, does it continue on? So I, for myself as an asset allocator, I'm keeping an eye on it. I'm looking now, I'm starting to do breadth studies of all those markets. I'm trying to see, is it, you know, what's moving from advanced to client basis? What's moving as a group and sector level?

Because if I'm going to allocate there, then I'm going to try to allocate to the best spots in that place so that, again, if I'm wrong, at least I'm minimizing my mistake of allocating there. But if it ends up being right, I don't mind missing the first few percent off the lows because I'm probably going to own that for a much longer time period. I know we're kind of coming up on our hour here. But I wanted to ask you, given your experience and all the cycles you've measured, you've managed through and

and all the different sort of lenses you use to kind of observe where we are in the cycle. Where are we today? I mean, we've got the MAG7. It's the most concentrated market in history. It's arguably one of the most overvalued markets in history. It's possible that the bond market has inflected to a potentially a structural secular bear market.

Gold is out at new highs. We have this whole, this new toy jumping around on our screens called Bitcoin. Where are we? What are we going to look back at over the next 10 years and say, man, I wish I saw this more clearly? So this is where I think

Could be an issue where having a rear view mirror lens might be a little bit of a detriment. And this is something I'm struggling with and wrestling right now. If you look at a forward expected return basis just on price to earnings, right? The forward expected returns would tell you we're minus two to plus two or maybe three, depending on how far back in data you go and whether you're using a bottoms up or top down kind of number. But it tells you our forward expected returns over the next decade are pretty minimal at best.

So the question is, is that still a good valuation metric to use? Now, I don't want to be 2000 where we were all said we were making up metrics to justify the fundamentals were there. But, you know, and I'll give some credit. So Savita Subramanian, who's a Merrill quantitative analyst, you know, she came out with basically saying, you know, is the structure of the market the same as it was?

And I know Larry Williams sort of talks about this is that, you know, market does have a sense of memory, but it does change its structure over time. And so that's why some indicators go in and out of favor, things like that. Well, if the sense of the structure of the market was mostly manufacturing back in the 60s, 70s and 80s, and now we're in services and other things like services. So let's just use something like a Bitcoin as a different area of the market than traditional manufacturing.

then you would say that the level of capital requirements, the level of capital expenditures, things like that are much different. So therefore, the valuation should be different. And so you would say, okay, are traditional value measures applicable today in the review mirror? Because you would say, okay, based on a PE basis, the S&P is expensive.

So the question is, is that's why I'm starting to look at is, are we still seeing positive reinforcement? In other words, are we still seeing money coming into the market on positive news is still going on next news? I think in a cycle terms, we are probably if the way my fundamental models are telling me right now is I don't see recession yet on the horizon until the fourth quarter at the earliest.

So that tells me that at best, the market is going to price in sometime maybe in the third quarter would be my expectation of what a market volatility should pick up in a sense of big, broad picture. But I look at also I do things from like a system standpoint. When mean reversion systems are working well, that tells you automatically there's a subset of buying still in the market, even a non-buyer.

Mag seven stocks. So we're seeing in mean reversion systems, my mean reversion systems are having one of the best years they've ever had. That doesn't happen in a market that goes down.

I mean, meaningfully right up front. Now that could change obviously, but it just tells me that when you've got reversion, that stocks are able to bounce. Now you could have bounces on a continuing lower low, right? So that's the other thing is looking at the trend, but it tells me that the subset is still, we're not at the, we might be in the late eighth inning of the cycle, but I don't think we're at the end of the, I don't think we're the bottom of the ninth. So,

That to me is sort of the way I'm looking at right now. Now, again, I'm going to be like every technician and every economist, right? Things can change. And so, you know, as John Kenneth Grobler said, he said, you know, when the facts change, I'll change.

That's sort of where I'm at right now is right now I'm still long. I have reduced my risk down because of volatility profile. If I'm looking at the tsunami equivalent, my examination, we are getting closer to the beach, right? So I know my volatility is going to go up. So I have to look at ways to reduce volatility. Now, ultimately, towards the end of my career, I did that through hedging and strategies like that, because that's one way to...

still buy very high alpha stocks, but then take the beta component of the market away somewhat and, you know, do whether it's targeted beta or things like that, that is, you know, could be a whole nother conversation, but that's a way to sort of reduce. And that's what I'm doing now is sort of targeting to a beta I'm willing to be comfortable with personally. And I would be recommending that to, you know, clients saying, you know, get to a level where you're, you're comfortable with whatever risk exposure that you think you could stomach at this level. Because again, you know,

I'm sitting on a bunch of gains that I don't want to necessarily have to take right now. But I'm starting, so I'm hedging. I'm willing to pay a little bit of an insurance policy because it's still cheaper than me taking some, in my case, a lot of them short-term gains. So I'd like to see if I can get them to at least a long-term gain standpoint before I do that. But that's sort of my bucket, if you will, is I think we're getting closer to the end now. I think Bitcoin is one of those things that I...

I love it because it's probably one of the best things that is purely technical, right? There is no fundamentals to it. Now, yes, you've got regulatory risk, you've got things like that, but it is strictly a pure play auction market, right? It's as close as we can get to a... So to me, I love it from that standpoint. Do I trade much? No, because it's just a tough one for me to stomach sometimes. I mean, right? Even knowing what risk I could take,

And I'm just so I dabble, but it's very small. So do you do you follow the the economic cycle, like specifically the PMI and business confidence and things like because I'm asking because on the one hand, you might look at the S&P and say we must be in some sort of a strong economic environment because the S&P is doing what it's doing. But when you dig beneath the surface, the reality is the PMI has been underwater for decades.

with the occasional pop of zero, but it's been below zero for like three years or so, two and a half years. And the average stock has gone nowhere for three years. So in reality, this is why I asked you, because I'm not sure if we're near the end or if we're just getting started, because you can make the case that using traditional, you know, the economic cycle and things like that, we've only just begun this cycle up. And I'm just looking now, I'm looking at this data now where you're looking at the business confidence has spiked significantly.

After being underwater basically for three years, this chart going back to the 1970s, it's the biggest, most vertical spike I can see on this chart, where business owners are finally gaining some level of optimism after three years of no optimism with PMI below zero, et cetera. That all tells me we're at the beginning, and valuations for the average stock are not bad. Yeah, and you can make an argument for that. To me, I think you...

market doesn't really make a big transition until you get the blood in the streets sort of effect. You can have rotation within market, but we're not yet really-- that's why I said when I look at the S&P equal weight, you would argue, least historically, you would say the S&P odds equal weight, odds of outperforming the S&P capital weight based on its valuation, based on everything else is around 77%. To your argument, the average stock should outperform

The stock now, and you would argue from a CapEx cycle, let's look at it from a CapEx standpoint. If in fact we have a, let's use AI as an example. AI is hugely capital intensive, right? Because look at all the infrastructure that's going to have to go into support AI, not just from a power grid standpoint, but manufacturing engine. I mean, you could go into a litany of things that go into it, right? Data centers that have to be expanded. I mean, there's just a litany of things that you could talk about in a CapEx cycle.

The thing is that I'm not yet seeing as I'm not yet. So I think, I think the, let's just go, what was, what was the feds, the green shoots, so to speak, the green shoots are sort of there, but they have yet to really take root. I'm going to call it. Let's look at it. So, and I think it could happen at any time. And, and, you know, to your point is that you could see a new cycle, new upwave cycle definitely could happen. So I can't make an argument against it. And I won't make an argument against it because I see a lot of the same things you're talking about.

What I'm looking at is so is, is that I don't think sort of like you had sort of like if we use the tech bubble, if you will, um,

we're sort of at that level of extremes where we were in 2000. It says, okay, you know, it took, I think from the tech bubble standpoint, it took 10 years from those technology stocks to come back into the, back into the forefront. Right. So that's the risk is that because they are such a big weight, because they are so institutionally owned, I don't think it's a below the surface, slow rotation. Yes. We, I think it happens ugly. That would be my guess. Now, again, I'm,

I'm no better than in a sense. So I typically say, where am I wrong? So to your sake, where am I looking for the green shoes? I'm looking for everything that tells me there could be some fundamental positives. Now, the things that are, that I like cashflow finally is improving to the point where you're actually seeing those, those cashflow levels improve. So companies now are in a situation where they can make advantage. They can take advantage of those opportunities to in the marketplace, expand and,

Before, as we went into, you know, cash flows were declining going into 21, but you saw even tech companies made huge changes to their structure and cost basis, cost structures, I should say. So, you know, I think that sort of led to the, you know, sort of the revival quicker than it might have normally happened. Because again, they were very fast, sort of like in COVID, right? I mean, when, you know, we had slashing jobs left and right, and a Fed who was very active.

So now to me, the things that are a little more tougher on the fundamental basis is I think the level of rates is probably going to be more range bound. I don't think we're necessarily heading to a new cycle yet. That's going to be an 80s typical cycle.

Although, because again, the fundamentals to say we're not at that level, but I don't think we're going down to back to sub two in the 10 year anytime soon, just because the embedded costs that were in there. And if you get things from an inflationary front, if we ever get a housing cycle that starts to catch on fire again, we already have wages sort of locked in in many areas that have been renegotiated deals. I think isn't Amazon voting today on their, their, right? So,

I think wages are going to be tougher to come down than they've been in the past, other than through major shakeups and layoffs. And that's only going to happen if we have, I think, a major structural change in the marketplace. So as I said, I still think we're in the cycle that we're in now. I think the cycle still got a ways to go. But is it...

Could it be a change in structure to like you're talking about? Absolutely. I just have not seen the catalyst yet to say, okay, I'm willing to bet that way just yet. So,

Am I wrong in thinking about when you referred to capital-intensive situations for the AI revolution, you're talking about semiconductor manufacturing, you're talking about server farms, but for the average stock, their implementation of AI is probably going to reduce labor costs, and it's going to increase productivity without a whole lot of overhead. I mean, that

I guess that's the story that we're all being told. I think the average brick and mortar kind of company, manufacturing company is going to benefit more from AI than many others. Think about Walmart talked about it in some of their earnings calls. They sort of referenced it in a couple of times. They were in distribution and logistics early in the 80s, 90s. They were famous for their efficiencies in distribution, right?

they've already seen incremental improvements. So somebody who was already known and was an efficient distributor has already seen five or 6% improvements in margin levels, just because of their efficiencies that they were able to do with AI, right? So taking the, taking the expansion of data mining on to a more real-time basis, and then being able to take web services and things like that, take people off on product because the backup side is able to have non-human employees provide information,

you know, things that, you know, web conferences, web chats. I think this is, so I've had this conversation. My daughter works for a company that's a small company. The reason got taken over and,

You ever go onto an online web, they do those chat boxes that pop up. You want to talk to somebody, right? So their market is, you know, every small doctor's office, every small attorney, automobile. So if you, oh, you need to book an appointment to get your breaks done, you can go online, go and, you know, book the appointment. They do all that stuff, right? They're already seeing a reduction in the people they need because they don't need a real life person there. They can do it automatically through AI.

So, you know, and so she like financial services, all of those. Yeah. And that's just the tip of the iceberg and go on. But you're talking as far as the infrastructure go. But think about from the power grid requirements. Right. We already know it's going to be expensive. So to me, what I think, you know, people are talking about energy being, you know, obviously drill, baby drill. Energy is going to be dropping down to me. I think energy is actually one of the better cycles. And I looked at today. I think energy was having a decent day. Or the fact that we're probably going to see one heck of an M&A wave in energy.

Because now you've got companies that have got a good regulatory environment, right? Politically, they've got great cash flow because as long as oil stays somewhere between 75 and 85, they're printing money. And drilling is relatively... So they've got the ability to grow market share through acquisition. And again, they've got a better regulatory framework to do it. And now they can actually get bank financing because now banks will actually finally lend them money again. So to me, I think there's a...

opportunity there in energy being able to look at being people get and you've already seen some deals I think more is coming so and also I look at our clientele who are looking to sell and get out of the business because they're at an age they're at the older age of the baby boomers they're a little older than me so

So we're basically six days older than Moses, as I like to say. So that's sort of the market. So to me, that's an interesting thing. So that's a fundamental story that can start to bear out. I think technically, you can start to look for those stocks that sort of start to move with maybe no news.

keep an eye on them because I think that could be an interesting market where you see it, you know, that M&A activity, I think it's going to be up 20, 25% minimum in energy this year. And the discovery of the world's largest oil and gas reserve off the coast of Pakistan. So to me, that's it. So I think, you know, that's where you could see a, you know, a market rotation that's going to be away from tech. That would be, you know, again, it's, it's not like it's, you know,

because people are talking about, okay, we drill all this energy is going to stay low. True. But as long as energy stays relatively stable, that's all you need. That's a pretty attractive market. So, um, those, there's a lot of those sort of pockets I think that are great, um, that you can find technically just by looking for activity. But fundamentally I have sort of my little universe, if you will, that I'm going to look for that I think they're going to be taken out. So, so I'm going to, I'm going to hopefully get struck by lightning at least a couple of times. No,

Not literally. Oh, dude. We could hog your entire afternoon, but I know in the paradise that you have now retired to, there are probably other things that your time and attention is needed for. I really appreciate it. I have big plans. I could go hop on my tractor. There's my new lifestyle. Spoken like a Texan. I love it.

Thank you very much for taking the time with us today, Duke. And if folks have more questions, I know you've been one of the most generous CMT community members. We didn't even get to talk about the Moxie indicator and other things that you share on Bollinger's listserv. Is there a place we should direct people to if they wanted to connect with you, LinkedIn or Bollinger?

You can try LinkedIn. I'm actually, I'm actually, cause I've been asked a lot now that I'm not under compliance umbrellas we've talked about, I'm trying to maybe start to share some things I couldn't maybe share before. So I've actually just started a sub stack. It's going to be free. I'm not trying to make a living at this. I'm going to, and so I'll have, hopefully that is a way to start to share some information. Cause it'll be an easy platform to throw stuff up on there and talk about markets and not have to worry about it. So that compliance umbrella or,

But again, you can always catch me at my email is [email protected]. Throw me a question if you got a question or you can poke fun of me. I got pretty thick skin, so you can fire at me and it will. - Well, and we'll put that Substack link in the show notes when that goes live. But thank you so much, Duke. And I'm looking forward to seeing you again really soon. - Thanks guys, I appreciate it. - Thanks so much, Duke. - You bet.

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