LAWRENCE CARREL | Long Run Consultants

Cannabis, astrology, mergers and acquisitions, and what does an Investment Bank actually do? Always good to catch up with Lawrence to gaze into the crystal ball and look forward to 2022.

Lawrence has contributed to various publications including The Wall Street Journal, Associated Press, Barron’s Online, Big Money, Brides, Economist Intelligence Unit, Financial Planning, Global Finance Magazine, Global Investment Technology, Guitar, Hard Assets Investor, Journal of Indexes, Major League Baseball.com, MarketView, Markit magazine, Musician.com, New York Observer, Offspring, Phoenix New Times, Razor, Reuters Money, Structured Products and Time Out New York.

Lawrence Carrel a former writer and editor at the Wall Street Journal and current contributor to Forbes.com. He has spent his career creating insightful, engaging, high-impact content for a variety of audiences: consumers, retail investors, sophisticated advisors, high-net-worth individuals, and institutional investors. He's also the author of Dividend Stocks for Dummies, a guide to learning how to incorporate dividends into your portfolio.

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EPISODE TRANSCRIPT

Chloe (2s):

Stocks for Beginners.

Lawrence (6s):

A lot of CEOs want to put their mark on the company or they want to put their mark on the market and they want to become famous and they want to do something big in their industry. So yeah, they go looking for things to buy because they want to make their company bigger, they want to grow it. Instead of holistically, naturally by getting more people to buy their stuff, they want to buy another company and just add those revenues and boost it to their current bottom line.

Phil (29s):

Hi, I'm welcome back to Stocks for Beginners. I'm Phil Muscatello. And to the first fresh episode for 2022. And I'm hoping that it's going to be a good year for all of our listeners. And I'm pleased to welcome back. Lawrence Carroll has been a previous guest on the podcast. Hi Larry.

Lawrence (47s):

Hi Phil. Thanks for having me back on.

Phil (49s):

Thanks for coming on. As we were talking about beforehand journalists, media people, we kind of vibe off each other, I think. And we're on the same wavelength and you're not selling your book.

Lawrence (60s):

No, I'm not selling my book, but I'm happy to plug it.

Phil (1m 3s):

Oh yeah. We'll plug your book, but not your investing book. So Lawrence is a finance and investing journalist and contributor to publications such as The Wall Street Journal, Forbes, Barron's Hard Assets and many others. So just before we get started, I know that you pitch ideas for your stories. So what are some of the themes you think you're going to be pitching this year?

Lawrence (1m 27s):

Well, always stocks and bonds are a big thing but I think the main topics this year are gonna be cryptocurrencies and whether Bitcoin recovers or whether it, you know, has a major crash and then cannabis stocks, which I think people have been waiting for them to do something after their big move up a couple of years ago. So I think that those will be big areas. And then of course, ETFs, which I cover a lot of, there's always new ETFs coming out, the industry is growing more people are getting into it and you've got areas like, you know, climate change and ESG. So a lot of very specific niche-like ideas are coming out. So that's pretty much what I see. Yeah.

Phil (2m 5s):

What do you think about these niche idea ETFs? Are they just marketing exercises or is there actually a consumer demand from them in your opinion?

Lawrence (2m 17s):

No. I think a lot of these ideas come from traders or trading firms that go, "We would like an ETF like this." And so they go to an ETF firm, then those guys make it. So is that investor demand? I guess so, but is there a broad investor demand? No. I think a lot of companies can have the exact same mutual fund idea, whether it's an S&P 500 index or a biotechnology fund or a technology fund. But with ETFs, they have a thing called first mover advantage because once the fund comes out, it sort of gains all of the assets and all the attention that a fund with the exact same idea that comes out afterwards is always a second rant. It's very hard for that fund to pick up a lot of steam and overcome the first one: it's happened a few times, but not very often.

Lawrence (3m 6s):

And while every mutual fund company can come out with an S&P 500 index fund, there's only two companies in the ETF world that have S&P 500 index funds because the first one, the Spider is so huge that people just gravitate to it. And then there's another one from iShares which might be a little cheaper and actually be a little better, but Spider gets all the attention. So it's very hard for a second firm to come out and cover an index that's already tracked. And that's the other thing, mostly ETFs are indexes. So an index is pretty rigid and why would I buy your index over the other next? I'm just going to buy the cheaper one. And so these guys have to create new ideas, either like interesting ways to manage gold and there's one coming out that's the climate change ETF and then ESG is a big thing in that people are trying to get this environmental, social and governance factors to determine I want to be more socially responsible.

Lawrence (4m 0s):

So each one of those can differentiate in a certain way. But other than that, you have to come up with something totally new to gain any kind of audience. And a lot of them are just, I don't want to say wacky, but they're wacky and they have a very limited appeal. I think they're trying to catch the immediate zeitgeists. There was a work from home one last year. So I think personally, my personal investment style was to stick with core ideas, you know, indexes, you know, that have worked and that represent the market like the S&P the Russell 2000, the MSCI EAFE, you know, you want to grab, develop market exposure or emerging market exposure.

Lawrence (4m 40s):

I like to go for the main funds, unless there's something that comes out that's really, you know, creatively better than what the original is.

Phil (4m 49s):

So of course, Larry, I follow you on Twitter. So this is where I get some of the links to your stories, and we'll put your Twitter handle at the end of the episode if anyone else wants to follow you, but you write for Forbes. And there was a couple of interesting articles. And the first one that I wanted to discuss was about cannabis stocks. What gets people so excited about cannabis stocks?

Lawrence (5m 9s):

It's a growth industry. People feel like they can get in at the bottom and there's potential to make a lot of money because there's a lot of growth out there, a lot of potential growth and a lot of things that haven't opened up the industry yet that should really break it open to make a lot more money, such as legalizing it in the US nationally.

Phil (5m 28s):

So it's got a lot of problems, this sector, funding is especially a problem. Why is funding a problem?

Lawrence (5m 35s):

Well, the big first one is that even though individual states in the United States have legalized it, the broad federal government still considers it a class one narcotic. So, you know, there's conceivably risk. You could be legal business in California, selling marijuana and still get busted by the feds. So there's that. And then the big thing that's really a problem for them is that the federal drug laws make national banks very leery of dealing with the cannabis companies. They don't want to give them money. They don't want to be involved. They don't want to be at risk of, you know, funding criminal enterprises.

Lawrence (6m 15s):

And banks are notoriously conservative so they don't want to give them money. And in fact, the Congress tried to fix that situation, but wasn't able to last year.

Phil (6m 26s):

So 2021 was a bad year for cannabis stocks in general, though, that's one of the points of this report that you expressed.

Lawrence (6m 33s):

Well, and another thing about that, you can't get funding from banks, you know, they don't have enough capital to grow, is that institutional investors are staying away. And the other thing is that that most of the big cannabis companies are Canadian companies because it's legal in Canada. So they're not really selling to the US market because it's very hard to sell to the US market. It's very hard to import it into the US. And so they're doing some global sales, but in general it's a very small market and it had its big spike when Canada legalized it. So you've got a lot of smaller companies that are trading over the counter. So they're tiny and they're illiquid, you know, and they're having a hard time getting capital.

Lawrence (7m 13s):

I mean, they have stocks, so they're getting it from there. But institutional investors, aren't allowed to invest in over the counter stocks and they're not allowed to invest in stocks that could be, you know, potentially federally criminal so they are avoiding them. And without that kind of big influx of money, you're not going to see a lot of price moves. You need capital to push stocks higher and institutions are the major source of capital in the stock.

Phil (7m 39s):

The reports from a company called Veridian, isn't it?

Lawrence (7m 42s):

Yes. They're a very small investment bank in New York that focuses on the cannabis industry.

Phil (7m 47s):

And that's all I do, it's just cannabis, that's the only thing that they invest in.

Lawrence (7m 51s):

Yeah. And they've been doing it since 2014. They work primarily with private companies, raising capital and providing M and A advisory assistance.

Phil (7m 59s):

Can you give us a bit of an insight into what a company like this is and does? It's an investment bank, you know, because we're talking to beginners in the stock market at the moment and these kinds of companies and organizations are a big part of what happens on Wall Street. This particular kind of bank, what is it and what does it do?

Lawrence (8m 18s):

It's an investment bank. And what they do is they give money and financing and help companies raise capital either through selling stock or selling loans, which are called bonds, and opening up to the capital markets to get investors into them. So these guys are bringing small multi-state operators in the cannabis industry, public to the market so that investors can invest in them, but they're tiny companies and they're creating on the over-the-counter markets, which are not regulated as strictly as the NASDAQ and the New York stock exchange are. And they don't get nearly as much trading volume. So they can be often illiquid stocks, it's hard to get in and hard to get out at a good price.

Lawrence (9m 3s):

And they're just inherently risky because they're small. You know, to get on the New York stock exchange or the NASDAQ, you have to hit certain criteria and you have to trade above a certain level and you have to have a certain number of, you know, years of earnings and revenues and these guys don't satisfy that so they're riskier companies. But they're bringing these companies together and they're also doing mergers and acquisitions between them.

Phil (9m 23s):

You mentioned M and A's, which has mergers and acquisitions. What does that mean?

Lawrence (9m 28s):

Buying companies

Phil (9m 29s):

A bigger company, swallowing up a smaller company. Would that be the case?

Lawrence (9m 32s):

Most of the time, but sometimes you get a smaller one, you know, biting off more can chew. Okay, an acquisition is a company buying another company. We are owning you and that you're going to become part of us entirely. And then a merger is you're bringing the two companies together, whereas in an acquisition, usually the executives leave and they don't have anything to do with the new company. In a merger executive usually stay and staff usually stays so you have more of looking for synergies there and as opposed to just, you know, "We want your assets, but we don't want you."

Phil (10m 13s):

Company CEOs often need to do something. They're in the job, the business of growing and they've got capital to deploy so they can either buy back shares and increase shareholder value, or they can make acquisitions to grow the company as well. And sometimes these acquisitions don't work out. In fact, often they don't work out. How do you see the mergers and acquisitions business and CEOs using us as one of the leavers that they can pull?

Lawrence (10m 40s):

Oh, don't forget dividends, they could give the money back to their investors

Phil (10m 45s):

And dividends as well. That's right. And you've written a book on dividends.

Lawrence (10m 50s):

Yes. So one of the nice things about investing in a company that pays dividends is that typically it's a mature company and they don't need to make these big mergers and acquisition investments to grow the company. And they realize that at a certain state of their development that they should pay back the, you know, stockholders and give them dividends and usually they sometimes increase dividends every year. And those are the ones who want to buy anyways. Mergers and acquisitions. Yes. A lot of CEOs want to put their mark on the company or put their mark on the market and they want you to become famous and they want to do something big in their industry. So yeah, they go looking for things to buy because they want to make their company bigger.

Lawrence (11m 31s):

They want to grow it instead of holistically, naturally by getting more people to buy their stuff, they want to buy another company and just add those revenues and boost it to their current bottom line. So one of the biggest failures was AT&T buying Warner Media a couple of years ago and they thought, "Well, you know, we're a big telecommunications company. We need content. We buy Warner, we'll have content to stream over all of our networks. And that way we don't have to buy from Disney or buy content from all these other people and we'll have it in house and it'll be a lot cheaper for us. So we'll make quote unquote synergies there by using our own product and sending it to our clients." Well, that was a lot of hubris.

Lawrence (12m 11s):

And for whatever reason, they couldn't make it work. And so the C, they ended up breaking it apart last year, complete failure. So all the money, the millions, the hundred millions of dollars they had spent buying Warner were a complete waste of shareholder value. So the shareholders didn't get anything for their money for their profits. And they're pretty much back where they were at scratch one. And instead AT&T could have taken that money and pushed up their share price by buying back their own stock or they could have given it back to the shareholders and rewarding them for being their investors. And dividends are basically that. You know, you're getting rewarded by sticking with the company and companies that pay good dividends, don't have too many of these crazy mergers and acquisitions because the people in the C-suites need to justify their existence by doing something

Phil (12m 60s):

And getting back to investment banks, this is where a lot of investment banks make a lot of money from as well.

Lawrence (13m 7s):

It's probably 50% of where they make money from. So their job is, you know, sometimes companies will come to them and say, "I want to grow, find me some candidates that would be good for the merging with me." And then sometimes in investment bank will go, "So-and-so, it looks like there are for sale," and they'll go to one of their clients, "We think you should buy them." So the investment banks, that's how they make money, that's part of how the capital markets work, its constantly moving things around. So that's a big part of their business. The other part is to raise capital for the company, either by selling stock to investors or selling bonds, to people who are loaning them money.

Phil (13m 48s):

So the next article I'd like to explore is titled "Astrology Fund Predicts Correction In 2022; [it] Says [to] Sell Stocks, Buy Gold". And this reminds me of the quote from the great economist J K Galbraith, who said "the only function of economic forecasting is to make astrology look respectable". Tell us about the astrologist fund and Henry Weingarten, who runs it and the newsletter.

Lawrence (14m 16s):

The Astrologers Fund was a hedge fund for many years. And after the fiscal crisis, he changed it to a family office. And I don't know all the details about that but that's what's happened there. Anyways, at the end of the year investment banks and financial firms, they come out with their global outlooks to show how good they see the market and why you should invest with them. And so it's a pretty common thing that at the end of the year, everybody comes out with their global outlook. So Henry Weingarten came out with the global outlook at the hedge fund. And what he did was he uses a little bit of fundamental analysis and a lot of technical analysis. And then he would do an overlay of astrology on top of it, look at the stars.

Lawrence (14m 56s):

And he would actually, you know, take companies and markets and indexes and put them into some kind of formula that he looked at the stars and he would come up with broader predictions from that. And he also looks at what are general themes in astrology, you know, like mercury rise and themes that are well-known that caused changes in the stars and the structure and the, you know, the atmosphere around earth.

Phil (15m 19s):

The universal vibes

Lawrence (15m 20s):

Yeah, universal vibe and, you know, the age of Aquarius and all that. And that's what he does. And so he came out with a prediction. He had his outlook and I wrote that up at the end of our last month. And so far, he's been pretty good. I mean, I don't want to say he predicted the crash in 2020, but when it came out, this was his prediction at the end of 2019: in 2020, we're going to have a debt crisis and geopolitical uncertainty. And he saw two crashes of 10% each. So there was one crash of 30%. So, you know, you can't call these things perfectly. But the fact that he anticipated a major downturn in 2020 and a debt crisis, there was a debt crisis, and geopolitical uncertainty, a pandemic.

Lawrence (16m 8s):

So I think, you know, he's worth listening to. So anyways, this year he comes out and he says, he wants you to buy gold before January. Well okay, we've started January. He says anything below $1,800 is a buy, sell and short the markets, he predicts another correction this year of 15 to 25% and go defensive, get into more cash and to buy copper and silver on weakness. And he had five market canaries in the coal mine. And he says, if any three of these occur, the risk for a market meltdown is very high. So the first one, you want me to go through those Phil?

Phil (16m 44s):

Please, yeah. Go through the asset prices.

Lawrence (16m 47s):

Right, the negatives are inflation. Well, he gave the broader outlook. I mean, I can take another step back. He says that there was a movement in the stars called Saturn square Uranus. And traditionally Saturn, the planet, represents a building and preserving while Uranus, another planet, represents change and destruction. So when Saturn and Uranus form a square, we see cracks appear in the foundations of society and the problems with our political, financial and social institution that become exposed. Well, I think we've definitely seen over the past year financial, political and social institutions have seen their foundations a little bit cracked, problems are becoming exposed, so that's happening.

Lawrence (17m 31s):

And then he says, "And then they crumble." So it happened in 1988, Saturn square Uranus happened in 1988. And at that time, the Soviet union collapsed and the Berlin Wall fell. So he's saying that a lot of the things that were good for the economy and good for the market have sort of petered out like the central bank is ending its stimulus, central banks and the government is stimulus. And the economy they've got a boost from COVID-19 vaccines is ending. And there's a few benefits on the sidelines like cash precinct dividend payouts and higher share buy backs but there's a lot of negatives.

Lawrence (18m 11s):

And those negatives are inflation, president Biden's economic policies, sky high market valuations and the effects from the COVID-19 pandemic which is coming back: debt, defaults, bankruptcies and supply chain disruptions. Oh, and record insights selling, which is a nice indicator of the guys who know what's going on with the businesses are selling, maybe you should consider it. Anyways, he says, buy gold, solid short markets and buy copper and silver. And he says, if three of his five market canaries in a coal mine occur, the risk is extremely high. So he says, when the yield on the 10 year US treasury note rises above 1.4% to 1.85%, then that's one of them.

Lawrence (18m 53s):

It currently it is that a 1.72. And then if the VIX, the CVOE volatility index rises above 26, that's worrisome because that means there's more volatility and more fear in the market. But it's currently at 17, that's not too bad. If Bitcoin falls below 44,000, and it dipped far below 44,000 over the past week, actually a couple of weeks ago and it fell below 40,000 on Monday to 39,800. So today it's at 44,000 again. So, you know, is it hitting resistance going higher? I'm not really sure, but it did hit that mark the low 44,000. And then if Rivian Auto, RIVN falls below 78, but it is now at 86, so it's close.

Phil (19m 41s):

What's that one Larry?

Lawrence (19m 42s):

Rivian Automotive, which I think is an electronic vehicle company. So it was 96 when he predicted it. It's now 86, you hit 81 on Monday so it's bounced back And he says that it falls to 78 we're in trouble. And then GameStop, if GameStop falls below a hundred. So when he predicted this GameStop was at 160 and it's now at 128. So it's definitely falling and it could fall below a hundred, but it's not there yet. And finally gold. He's that if it's below 1800 buy it. So when he predicted this, gold was at 1,788. Now gold had been at 1,869 on November 17th and then it fell into December to 1,788.

Lawrence (20m 26s):

And that was December 21st that Weingarten came out with his prediction. And December 31st, 10 days later, it had already jumped back up to 1,827. And then a week ago it had fallen back down to 1,788. And now a week later, it's back up to 1,827. So it's definitely volatile. And he says, if you can catch it on a down move, when there's weakness, then you should buy it. So you think is gold, especially in the light of inflation, is a very good, very good purchase. And silver, which was at a 23, had been at 26, it's now down to 22. Says you should buy it between 22 and 23.

Phil (21m 0s):

You've covered a lot there and it was just a couple little eyes I want to pick out of what you've just came up with the list.

Lawrence (21m 11s):

Yeah, I threw a lot at you.

Phil (21m 15s):

No, that's okay. But the CBOE VIX index. Now that's the Chicago Board of Options

Lawrence (21m 22s):

Exchange, I think.

Phil (21m 23s):

Exchange, right, yeah. And the VIX is the volatility index,

Lawrence (21m 26s):

It's the Chicago Board Options Exchange Volatility Index. And they're looking at futures and that's a measure of fear in the market.

Phil (21m 34s):

And so when markets are benign and stocks are going up, the VIX goes down I assume.

Lawrence (21m 40s):

When there's a lot of complacency, the VIX goes down.

Phil (21m 44s):

Okay. And you also talked about record inside selling. How has that measured?

Lawrence (21m 50s):

You go to companies and you look at the executives have to announce when they're selling their options or they're selling large amounts of stock in their own companies. They have to announce it. And so you just follow those filings either at the SEC or a variety of other websites. And you can see which executives are selling stock in their companies and when. Like Elon Musk just sold a huge amount of stock in Tesla. But these guys have to make a filing months beforehand with the SEC to let them know "I'm going to do this at this date." So these things are not often quick and spontaneous, though some of them can be. Sometimes they just have to do it to diversify their holdings.

Lawrence (22m 30s):

But if they're doing it outside of those diversifications, that means they think their own stock is peaking and they want to cash out while it's at a high. And you got to figure that the guys who are running the business know the status of the business better than anybody else. And if they're selling, that's usually a good indication for you to sell.

Phil (22m 46s):

So you can't actually invest in The Astrologer Fund. There is no fund is there? I mean, we're back to a newsletter now, aren't we?

Lawrence (22m 52s):

No, it's a family office now. I don't want to say it's purely for fun, I mean like reading the astrology pages, but I thought I'd been writing about a couple of other financial institutions that had come out with these global outlooks and, you know, stock predicting, economic predicting, any kind of forecasting is essentially, you know, guessing. So it's a glorified form of guessing. So, you know, astrology is just as, when you put it next to that, how is it any less respectable? I mean, when you're looking at charts and when you're looking at, you know, revenues, but again, anything could happen at any time. I mean, look what happened in March 2020.

Lawrence (23m 32s):

So, you know, some of these are educated guesses and I just figured the astrology one was interesting. And he was coming in with an outlook that was a lot different from these other guys. I find Wall Street banks and financial firms, they're always bullish. You never ever hear them being bearish. You never ever hear them saying "sell" or "it's time to get out of these markets". And so here was a guy who was being bearish and he was giving indications, he was giving real numbers and he had reasons and he was really pinpointing stuff that I find that a lot of these other guys, you know, it's much more nebulous or theorial, and then you can't pin them down on too much. And so I liked that, I thought it was an interesting story.

Phil (23m 53s):

So we're talking today on January the 12th and the latest inflation numbers have come out and it's a seven, I believe.

Lawrence (24m 12s):

In the US.

Phil (24m 13s):

In the U S that's correct. Yep.

Lawrence (24m 22s):

Yes. I think that's right. 7%

Phil (24m 24s):

Just in terms of the inflation concerns, I mean, it seems to me that the market is still seems to go up every day. And the inflation is one of the biggest factors, one of the biggest leavers on the value of the stock market. And it seems to be being ignored. Is that what you're feeling, seeing?

Lawrence (24m 42s):

Well, I mean, that's what it looks like today, but you know, the market had a big jump and it sort of, by the end of the day it had fallen into very minor moves upward. I mean, the Dow is up 0.1% and the S&P is up 0.3%. So it's really, you know, but still you would think that people would start selling with this kind of news and they didn't. It's very hard to guess where people are going and why they do what they do. And supposedly this should cause the fed to get more aggressive and tightening, which would be bad for the market. And I mean, it's just bad for people in general, it's bad for capital, it's bad for supplies for companies, it's bad for building stuff, lumber's going up dramatically high.

Lawrence (25m 28s):

So all these prices are going up, products are going up, services are going up, you know, it's going to be a tax on companies. It's a tax on buyers and investors. But you know, people bought today. I have no understanding of what happened.

Phil (25m 43s):

So Lawrence, how can people find out more about you and follow you on Twitter and follow your articles in some of the prestigious journals we've mentioned?

Lawrence (25m 53s):

I'm on Twitter at Lawrence underscore Carol C a double R E L. I have a page on Forbes where I post all my stories. I post all the stories on Twitter and you can find me there. You can find me on LinkedIn. And I have a couple of books out, one on ETFs and I have "Dividends Stocks for Dummies", "Investing in Dividends for Dummies" and "ETFs for the Long Run", which explains all about how ETFs work, why they're better than mutual funds and you get a complete history of the industry.

Phil (26m 24s):

Fantastic. Larry, thank you very much for joining me again and I hope 2022 is a good year and it's in the stars.

Lawrence (26m 29s):

Thank you very much.

Phil (26m 31s):

It's written in the stars. Actually, it's going to be bad written in the stuff that's by the sounds of things. Watch out for Saturn.

Lawrence (26m 40s):

Yes, watch out for Saturn.

Phil (26m 41s):

If you found this podcast helpful, please tell a friend. Especially if it's someone who needs to start thinking about investing for their future. You'll be helping them and helping me to keep this show on the road.

Chloe (26m 52s):

Stocks for Beginners is for information and educational purposes only. It isn't financial advice and you shouldn't buy or sell any investments based on what you've heard here. Any opinion or commentary is the view of the speaker only, not Stocks for Beginners. This podcast doesn't replace professional advice regarding your personal financial needs, circumstances or current situation.

Phil (27m 4s):

And thank you for listening to my podcast.

Stocks for Beginners is for information and educational purposes only. It isn’t financial advice, and you shouldn’t buy or sell any investments based on what you’ve heard here. Any opinion or commentary is the view of the speaker only not Stocks for Beginners. This podcast doesn’t replace professional advice regarding your personal financial needs, circumstances or current situation.