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Second stimulus package could lead to a ‘much bigger bounce’ in the markets: Dan Niles

Satori Fund Founder & Portfolio Manager Dan Niles joins Yahoo Finance’s Zack Guzman to discuss the recent market volatility amid the coronavirus pandemic.

Video Transcript

ZACK GUZMAN: And, overall, I want to highlight Novavax here catching our boost here as well. Shares up more than 10% after the company, which notably has never brought a vaccine to market, announced it has started its phase II trial in the UK. The company also plans to move a trial here to that stage in the US in a month.

The vaccine trial, of course, marks the fifth late stage trial from a company supported by the federal government's operation warp speed and one of 11 trials worldwide to reach these late stage moments here, as we continue to track the race for a vaccine. And that's important here, as we are seeing daily cases of COVID-19 tick higher in the US that came in at 42,393, which was up 109 cases versus what we saw about seven days ago.

The trend line has been moving higher here over the last couple days. And that has investors a bit worried here, as we approach what medical experts have warned could be the beginning of a second wave here. And that has rattled the markets, no doubt, over the last couple days this week and the week prior.

So let's focus in on what that means for the markets here with our first guest today. You know him well. It's Dan Niles, Satori Fund founder and portfolio manager. And Dan, you've managed to be up through a lot of this chop here and a lot of the panic that we saw here back in the spring.

A lot of investors, though, I think, are starting to look at this uptick in cases and a couple of the other risks here, whether it be election risk, COVID risk, fiscal risk now and say I want to take some chips off the table. And we saw that out of the Bank of America fund survey here noting that stocks and the equities positions here came down by about 25.8 billion.

That was the most that we saw in a while here. And especially when you look at tech funds, chips off the tech funds that came off the table here, that was the most that we've seen withdrawn in their position since June of 2019. So what do you make of where we sit right now in the macro risks to the market at these levels?

DAN NILES: Yeah, I mean, we're at an interesting juncture here at the markets, because you can't make any case that the market is fairly valued. I mean, it's expensive. We've talked about market cap to GDP being at an all-time record high for the stock market, 1.6 times the average over 50 years, 0.8.

So you can have a lot of downside from here just based on the fact that stocks are expensive. Obviously the weather is getting cooler. We're going to get, you know, the normal flu season. On top of it, we still have COVID, which will probably pick up because of the weather and also kids going back to college.

So I think, you know, you can make a real good case that the market should be down a lot even from here. I mean, it makes no sense obviously that the S&P is flat. But then that gets us to the upside potential, which is the S&P is flat year to date because you had 30% of US GDP brought in as stimulus, both monetary and fiscal.

And if you get a phase five stimulus package passed, then, you know, you could very easily see a nice 5%-plus move in the markets. And so we're sort of positioned expecting a bit of a bounce. If we get a stimulus package, you'll get probably get a much bigger bounce.

But you have to be nimble. And that's kind of what we've been focused on and try to moving into lower risk names. I mean, we're making money this month with the S&P down close to 7%. But that's been really from focusing on risk management and training around positions. And you're getting lots of good opportunities because of the volatility.

ZACK GUZMAN: Yeah, and I want to get into those opportunities in just a second. But just one more question on the stimulus front since you mentioned it could be worth about a 5% pop here. I mean, the latest update we got yesterday was that Republicans and Democrats would get back to the negotiating table with House Speaker Nancy Pelosi resuming talks with Treasury Secretary Steve Mnuchin.

But when we think about what they're proposing here, it sounds like what Democrats are going to be pushing for is still far higher than what Republicans and even the White House-- we know President Trump has been pretty forward in pushing for more stimulus here. It's still above that $1.5 trillion mark that he wants.

But it seems like sides are still far apart. And the closer we get to the election, the closer we get to dealing with the Supreme Court nomination drama. It doesn't seem as though there's a lot of optimism that we would get a deal. So absent that, I mean, it's just the idea of the Fed being this accommodative that we've seen from them. Is that enough maybe as a catalyst here to push forward and see this rebound you're talking about?

DAN NILES: Yeah, I mean, the Fed, by the way, is not accommodative right now if you look at their balance sheet. I mean, their balance sheet actually peaked on June 10 at $7.2 trillion. Their balance sheet's now closer to $7 trillion. So, you know, obviously the balance sheet's at a high level. But they had $3 trillion in stimulus in about four months, and then that sort of petered out.

And so we've talked about that was the reason back in August, early September, we said, look, the market could come in pretty quickly, because in 2011, 2015, 2018 when the Fed balance sheet also leveled out, you had very dramatic drops of double digits in very short periods of time. And by the way, that's what we've seen just now. So that's why I think you need to get the stimulus from the government to get this thing moving up.

And that's why, you know, in a tweet we put out recently, we said, you know, we're positioned for a small move just because the market went down so fast. But, you know, our view is we do get a stimulus package. It would be to put our shorts back on and to fade that, because at the end of the day, you know, this comes down to fundamentals and valuations which tell you the market's extremely risky at these levels.

And you're going to have to go through the winter. You're going to have to go through a spike in cases of flu and now obviously COVID. And you're going to have to deal with that. And that's not going to be very pleasant, especially after this massive ramp you had in the stock market. And you have a lot more retail participation.

So and a lot of these investors haven't been through a massive correction that have gotten involved recently over the last few months, as they've been sort of stuck at home. And the stock market sort of become entertainment to some degree. And there's a lot of leverage being used too. So that just magnifying a lot of these moves.

So even if we do get a bounce, to be clear, you know, our goal is to put shorts back on and to fade that bounce. And that's why, as I said before, we're trying to be nimble. We're still sitting on some cash in the fund right now because of that.

ZACK GUZMAN: Well, let's talk about those individual names that you do like and you do like in this environment right here, because we've got an interesting update in one of those sectors that you've been looking at for a while here. I know that DraftKings has been on your radar for a while.

And when we look at maybe some of the business moves in that space, it was interesting to see the announcement here, as William Hill was looked at from Apollo and Caesars here, saying that they did have bids and proposals from those companies here giving a boost there to the overall sector. I mean, I know you like DraftKings and Caesar.

Caesars, the mood, by the way, on that company off their March lows. It's just incredible to see here of more than 700% the rally there. And you still like that name. I mean, talk to me about what you see in the gaming space as that might become something more accepted here as we move along politically.

DAN NILES: Yeah, I mean, I think if you look at the way you make a lot of money, it's catching a trend very, very early. And so in May of 2018, the Supreme Court essentially overturned the rule that prohibited online gambling. And so what you've seen since then is state by states going through and legalizing it. And now with COVID, obviously, you've got massive state budget deficits. And so all of these states have accelerated their plans to legalize it.

So you've got about a $400 billion market. That's growing at about 10%. But only about 12% or so is online. And so you should see this accelerate going forward, especially as you have some of the four biggest states in the United States which have not legalized this starting to go through that process.

So I think this is the very early stages. And that's why, you know, I own a basket of these names. I mean, we talked about DraftKings back in May. But, you know, we own that one. We own Caesars. We own [? Pen. ?]

And so, you know, we own a grouping of the ones that we think are some of the best positioned to benefit going forward. And, you know, this market could easily on the online side be up 10x over the course of the next five to seven years. So that's why we're so bullish on that space.

ZACK GUZMAN: Yeah, and we saw both of those names catch a boost here too when they announced a partnership with ESPN, as well, on their platform kind of gaining some access to all the fans that frequent a lot of ESPN properties there. So that was some interesting news in that space as well.

But another interesting thought from you. It caught my eye here too when you look at one of those companies, these streaming companies, traditional studios moving into this space and really becoming a focus, we've seen it with Comcast and the launch of Peacock. They've gotten a lot more attention for those endeavors too.

JP Morgan also out with a note on ViacomCBS talking about how the streaming upside could be bigger potential here for that company than the continued declines in paid cable. Talk to me about what you see there, because they boosted their price target by $5 or $35 a share here. So what are you seeing in terms of opportunity at Viacom as well?

DAN NILES: Yeah, I mean, I think we start off this discussion talking about the potential for more downside in the market obviously from here. And so what you're always trying to do at least from my perspective is find the least risky way to participate in potential upside and then still have some downside protection.

So if you look at Viacom, for example, they traded at 7 PE, and they have a 3.3% dividend yield. And to put that in perspective, the S&P is at a 25 for PE and has a 1.8% dividend yield. But what makes Viacom interesting is that they have this streaming asset underneath it that people aren't really that focused on.

And if you look at streaming for CBS All Access plus Show Time, that's $1 billion in revenues this year that's growing about 50%, 50. And if you look at their overall streaming assets, which includes Pluto TV, which is the number one ad-supported TV service out there with 27 million subscribers, and then you add the digital ad revenues on top of it, you've got about $2.2 billion in streaming revenues growing nearly 40%.

And to put that in perspective, Netflix is growing about 23%, 24% this year. They're trading at 8.4 times sales, not a PE times sales. If you use that against Viacom's revenues and then you apply a low 4 to 5 PE against the rest of their business, you end up with the stock being worth $30 to $40 versus kind of the $30 level that it's sitting at today.

So it's a interesting way between the dividend yield, the low PE, and the fact that business is rapidly changing for investors to look at this and go, yeah, you know, on top of Netflix and maybe playing Roku and some of these other streaming ways to get to stuff, you know, CBS is kind of interesting. And, you know, unlike in Netflix, which is still going to be burning cash flow next year, you know, I think CBSViacom, they're going to have about a 20% increase in cash flow to over $1 billion-- $1 billion and a 1/2 or so.

So that's a fantastic way of deleveraging that balance sheet as well. And so those are all like, parts of it. And if investors go to my website, danniles.com, they'll see, you know, a write up I did where it's got more of the details around it.

ZACK GUZMAN: Yeah, I know. I mean, it's one of those interesting names and very different than Caesar's, as we pointed out there, a year-to-date rally to come back to where they are-- still down about 30% when you look at ViacomCBS. So a little bit of value there.

But Dan Niles, always appreciate you coming on, especially when we're dealing with a lot of this market chop. Satori Fund founder and portfolio manager-- appreciate you taking the time again.

DAN NILES: My pleasure, Zack.