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Kavar's Ciocca Favors 'Self-Indulgent' Consumer Staples (Audio) · Bloomberg Intelligence

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  Speaker 1: Global business news twenty four hours a day at Bloomberg
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  Speaker 1: This is a Bloomberg Business Flash from Bloomberg World Headquarters.
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  Speaker 1: I'm Charlie tell at thirteen minutes to go. Ahead of
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  Speaker 1: the close on this Monday, stocks are surging. S and
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  Speaker 1: P five hundred index, up the most in four weeks.
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  Speaker 1: Half of the latest polls showed the UK campaign to
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  Speaker 1: remain in the European Union is gaining ground. Aat of
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  Speaker 1: Thursday's referendum, the S and P five hundred index now
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  Speaker 1: hired by fifteen points to two thousand and eighty six,
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  Speaker 1: up seven tenths of one percent, as stack up forty
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  Speaker 1: four points, a gain of nine tenths of one percent.
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  Speaker 1: The now also up nine tenths of one percent, climbing
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  Speaker 1: a hundred and sixty three points to seventeen thousand, eight
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  Speaker 1: hundred thirty seven, the tenure down seventeen thirty seconds, the
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  Speaker 1: old one point six six percent, gold down to fifty
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  Speaker 1: the ounce to twelve ninety two, a dropped there of
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  Speaker 1: two tens of one percent, and crude oil of a
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  Speaker 1: dollar twenty three of Meryl, a gain of two point
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  Speaker 1: six percent. I'm Charlie Pellock. That's a Bloomberg business flash.
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  Speaker 1: This is taking stock with Kathleen Hayes and Gin Flox
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  Speaker 1: on Bloomberg Radio. To invest it in the SMP five
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  Speaker 1: hundred at the beginning of the year. You have a
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  Speaker 1: whopping two percent gain. Is that enough for your investments?
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  Speaker 1: Let's find out from Doug Cioca. He's the chief investment
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  Speaker 1: officer and partner of Cavar Capital Partners. He's based in Leawood, Kansas,
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  Speaker 1: helping to manage more than four hundred and fifty million
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  Speaker 1: dollars of customer assets, and he can be followed on
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  Speaker 1: Twitter at Doug Cioca ce I O double C A
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  Speaker 1: R Right, Doug Ciocca. When someone calls you and says, gee,
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  Speaker 1: you know, I invested in an SMP five hundred fund.
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  Speaker 1: It's up two percent. I can't live on two percent?
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  Speaker 1: What do you tell them he had a good afternoon
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  Speaker 1: and thanks for having me on. I think that it's
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  Speaker 1: a great question, because challenges persist to get back in
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  Speaker 1: line with those um kind of expected return levels that
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  Speaker 1: market historians have told us. We're pretty easy to obtain,
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  Speaker 1: and we don't have a client with a hundred and
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  Speaker 1: twenty year time horizon. But I guess if you did
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  Speaker 1: go back that far, you'd expect about nine and a
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  Speaker 1: half percent return in the SMP annually. The interesting thing
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  Speaker 1: is to him, just contextually, is the last sixteen years
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  Speaker 1: is going back to the turn of the millennium. UH,
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  Speaker 1: the SNP had average just above four percent per year.
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  Speaker 1: So maybe it's an indication that the mean reversion tendencies
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  Speaker 1: to get back on that nine and a half percent
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  Speaker 1: path are strong, or maybe it's giving us an indication
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  Speaker 1: that those types of returned to this point just aren't
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  Speaker 1: going to be available in the market. Interesting, isn't it, Doug,
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  Speaker 1: How you keep people keep waiting? You know, every so
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  Speaker 1: often the fact keeps waiting to raise rates, and the
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  Speaker 1: economy starts picking up and they think they can and
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  Speaker 1: then something happens, right European deck crisis, Greeks going to default.
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  Speaker 1: Now it's the Brexit vote, And I wanted for the
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  Speaker 1: markets to what extent. This is the same kind of
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  Speaker 1: condition where it's not just about company needs bottom line
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  Speaker 1: and top line and earnings. It's not just about even
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  Speaker 1: the strength of US economy or global economy. It's also
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  Speaker 1: about these global macro events that keep hitting the world
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  Speaker 1: and therefore hitting the markets. I think that's a great observation, Kathleen.
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  Speaker 1: It speaks to the sort of global flattening that's taken
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  Speaker 1: place in the general level of interconnectivity, particularly in the
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  Speaker 1: financial system. And if you think about Brexit specifically, right,
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  Speaker 1: it's largely a function of social unrest, function of economic discontentedness,
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  Speaker 1: anti established an uprising by generally a neglected class of citizens.
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  Speaker 1: And to me that sounds real similar to the fervor
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  Speaker 1: the enthusiasms rounding candidates like Donald Trump Ernie Sanders. Right
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  Speaker 1: here in the US, it's almost to somewhat of an
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  Speaker 1: indication of an absence of leadership. I mean there's no vision,
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  Speaker 1: no articulation, no feeling of broad representation, inclusion, and there's
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  Speaker 1: a heightened susceptibility of fracture. Therefore, in any union, I mean,
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  Speaker 1: the Brits are at a very credit cull cultural inflection point,
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  Speaker 1: much as we are here in the United States. And
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  Speaker 1: I don't know if the if the leadership breakdown should
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  Speaker 1: necessitates spanning more global Uh considerations, is that David Cameron,
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  Speaker 1: is that is that the US Congress, is that Parliament
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  Speaker 1: at Brussels at the power base of the EU. But
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  Speaker 1: I think one of the things that gets lost in this,
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  Speaker 1: and certainly none of it is fairly to be characterized
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  Speaker 1: as noise. But what we end up having to focus
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  Speaker 1: on invariably is that there's a general misunderstanding that sound
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  Speaker 1: economic growth has a way of nursing all of these
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  Speaker 1: other social ills. So, however, we can get back on
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  Speaker 1: the path to understand what's in the collective goodwill of
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  Speaker 1: a strong economy should go a long way into providing
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  Speaker 1: some sort of a uh, supporting savs. So to speak
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  Speaker 1: to some of these issues that you're that you've just referenced, Doug.
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  Speaker 1: You know, it's always easy from the cheap seats to
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  Speaker 1: say what you should have done. And I was looking
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  Speaker 1: at the Philadelphia Gold and Silver Index up more than
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  Speaker 1: one year to date, looking at the all it off,
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  Speaker 1: the Utility Index up nearly sixteen year today. What area
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  Speaker 1: of the investment world should you be putting your money
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  Speaker 1: to work in right now? Yeah? And gold is always
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  Speaker 1: difficult to him. I mean, certainly gold had done so
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  Speaker 1: well for so long when none of the preconditions we've
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  Speaker 1: all learned and an educated the thing need to prevail
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  Speaker 1: for them to do well, right, the golden really well
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  Speaker 1: and low inflationary environments. Gold did really well even in
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  Speaker 1: the absence of adequate supply for some of its industrial uses.
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  Speaker 1: Gold certainly and utilities certainly this year have done well
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  Speaker 1: because they have been the manifestation of people's identification of
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  Speaker 1: fear and capital preservation and yield in the absence of
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  Speaker 1: a normalized bond market. But when we spend time with
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  Speaker 1: clients and trying to navigate some of these global market
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  Speaker 1: cross winds, right, we are looking for ways to reinforce
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  Speaker 1: balance in their portfolios and to revisit a theme that
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  Speaker 1: I shared a few months back using a baseball context. Think,
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  Speaker 1: we think you just need to try to hit singles here, right,
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  Speaker 1: The set up in this ball park of a market
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  Speaker 1: is not conducive to taking big home run type swings.
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  Speaker 1: If you think of the source of stock market returns,
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  Speaker 1: corporate profits, inflation, dividends, and multiple expansion, maybe you get
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  Speaker 1: to four to five on average and developed markets, and
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  Speaker 1: we think you can emphasize certain areas that can prove
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  Speaker 1: upon those prospects. So I am promised I will answer
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  Speaker 1: your question and you can alter that lineup of companies
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  Speaker 1: that straddle the line between economically sensitive and interest rate
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  Speaker 1: sensitive sectors. So our firm is partial to what we
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  Speaker 1: call self indulgent consumer stable stocks, right, alcohol, tobacco, salty snack,
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  Speaker 1: fast food, caffeine, etcetera. And we're also very very strong
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  Speaker 1: believers in healthcare stocks. And both these sectors have consistent
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  Speaker 1: organic growth components that are attributable to demographics and human nature.
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  Speaker 1: And yet they are at best unexcited in their composition.
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  Speaker 1: But when you have four years now before thousand and
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  Speaker 1: sixteam were value underperformed growth, when malaise is kind of
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  Speaker 1: a nice way to characterize the global growth outlook, and
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  Speaker 1: when multiple expansion is not an input into the expected
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  Speaker 1: turn calculation, we think those are pretty nice tail once
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  Speaker 1: to those sectors. Well, I don't think it's so boring
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  Speaker 1: to like things like self indulgent consumers, staple socks, all tobacco,
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  Speaker 1: salty snack, fast food, caffeine. Hey, what's boring about that?
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  Speaker 1: Probably not our personalities if we partaken in indulging in them.
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  Speaker 1: So those things you're partial to, we are. Yeah, we
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  Speaker 1: we don't see the market offering a lot of double
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  Speaker 1: digit returns in spite of the two areas that that
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  Speaker 1: that pimages quoted with the current macro backdrop, and we
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  Speaker 1: even think still think there's some value in sixth income markets,
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  Speaker 1: specifically in municipal bond markets just would of course the
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  Speaker 1: appropriate for individual non qualified investors. But if you think
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  Speaker 1: about and this is again that sort of bifurcation and
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  Speaker 1: income inequality and just general disparity among developed economies both
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  Speaker 1: here over in in the EU, but they can state
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  Speaker 1: of the stock excuse me, the state of the housing
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  Speaker 1: market in the US very strong. I mean think about this.
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  Speaker 1: Mortgage payments and total debt services a percentage of income
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  Speaker 1: continue to drop in now stabilizing, they are stabilizing below
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  Speaker 1: the two thousand seven levels. And then you have this
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  Speaker 1: is a fascinating fact and two thousand and six team,
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  Speaker 1: the US government collected one point for a trillion dollars
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  Speaker 1: of tax receipts the first half of two thousand and
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  Speaker 1: sixteen in their fistical year. So the consumer who's participated
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  Speaker 1: these self adulgent um consumer staples, the homeowner, the taxpayer
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  Speaker 1: are generally in good shape. The bonds issued by the
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  Speaker 1: municipalities where these consumers and homeowners and tax payer ars
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  Speaker 1: live can make for generally attractive opportunities also in this market. Well,
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  Speaker 1: you just got talking about just not to finished talking
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  Speaker 1: though about the angst that people feel in the in
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  Speaker 1: the political environment. So if we can just put the
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  Speaker 1: sort of feeling part of it aside, I mean, what
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  Speaker 1: about buying a sector that has been beaten up, like
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  Speaker 1: the energy business? Yeah, and and and and it had
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  Speaker 1: been beaten up, I guess, but I think it's the
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  Speaker 1: top or top one or two performing sectors now given
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  Speaker 1: the recovery and commodities, and think back to because kath
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  Speaker 1: Lean was characterizing initially, you have a commodity market that
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  Speaker 1: was defined or driven by this fear of a Chinese
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  Speaker 1: hard landing, and all prices correlated so negatively. Granted it
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  Speaker 1: was exacerbated by the strength of the dollar and the
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  Speaker 1: expectation of higher Fed UH than the FED raising rates,
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  Speaker 1: but the primary function that drove those prices down was
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  Speaker 1: again more angst in fear that a market, an economy
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  Speaker 1: that's the second there large to the world, was only
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  Speaker 1: going to grow at six and a half to seven.
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  Speaker 1: So I think maybe the emotional parsing that can be
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  Speaker 1: done to have more of a fundamental focus on some
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  Speaker 1: of the economic underpinnings is what always needs to take
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  Speaker 1: place and tends to endure over a long period of
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  Speaker 1: time and investing. But in the short term, don't you
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  Speaker 1: think we'll always be ripped around, whipped around by some
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  Speaker 1: of the emotional components of the investor psyche. Well, it
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  Speaker 1: may be whipped around by it, but the idea is
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  Speaker 1: that if you're a pro, you want to stay away
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  Speaker 1: from the emotion. Absolutely, absolutely, and that's one of the
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  Speaker 1: things that drives us back to those two sectors. We
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  Speaker 1: like because human behavior patterns are a heck of a
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  Speaker 1: lot easier to predict than market patterns, and the consistency
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  Speaker 1: with with cash flow is allocated to those sectors to
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  Speaker 1: us is very sensible, and the enduring growth of cash
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  Speaker 1: flow capability that grows to dimdends and the stability of
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  Speaker 1: the stock prices are all things that attracted us to them.
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  Speaker 1: That's okay, thank you so much for joining us. Fascinating.
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  Speaker 1: He likes every thing from indulgent consumer, stable stocks, communities.
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  Speaker 1: The CEO and partner of Kavar Capital. I'm Kathleen Hayes,
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  Speaker 1: pim Fox, Taking Stock, Bloomberg Radio,