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Liam Dalton, CEO And Founder, Axiom Capital Management

Wed, 03/10/2010 - 9:17am
Adam JohnsonAssociated Press

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<Show: BLOOMBERG TV>

<Date: March 10, 2010>

<Time: 9:10>

<Tran: 031005cb.550>

<Type: SHOW>

<Head: Liam Dalton, CEO And Founder, Axiom Capital Management>

<Sect: News, Domestic>

<Byline: Betty Liu, Jon Erlichman, Adam Johnson>

<Guest: Liam Dalton>

<High: Liam Dalton, CEO And Founder Of Axiom Capital Management, Betty Liu, Jon Erlichman And Adam Johnson About Defensive Stock Behavior>

<Spec: stocks, cap and trade>

(This is not a legal transcript. Bloomberg LP cannot guarantee its accuracy.)LIAM DALTON, CEO AND FOUNDER OF AXIOM CAPITAL MANAGEMENT, BETTY LIU, JON ERLICHMAN AND ADAM JOHNSON ABOUT DEFENSIVE STOCK BEHAVIOR

MARCH 10, 2010

SPEAKERS: LIAM DALTON, CEO AND FOUNDER, AXIOM CAPITAL MANAGEMENT BETTY LIU, IN THE LOOP, BLOOMBERG NEWS JON ERLICHMAN, BLOOMBERG NEWS ADAM JOHNSON, BLOOMBERG NEWS

09:15

BETTY LIU, IN THE LOOP, BLOOMBERG NEWS: Well, with stocks at their highest levels over the year our next guest says it is time though to get defensive. Liam Dalton manages over a billion dollars at Axiom Capital Management, and he says he's feeling a bit defensive as stocks sit near their highest levels of the year. Liam, great to have you back.

LIAM DALTON, CEO AND FOUNDER, AXIOM CAPITAL MANAGEMENT: Good to be here.

LIU: And we just said that so why are you defensive?

DALTON: Well, defensive meaning gravitate toward quality and away from the lower quality issues which really led the rally from the March low. You look for imbalances in the market and how they get basically corrected, and the market as a pricing mechanism does a great job of that. But coming off a gigantic bust related to credit and then a big boom and a re-pricing of equities, what we have now is probably the big imbalances have been drained out of the market. So we have more of a trading range environment and that's what we've seen since the beginning of the year.

LIU: And we heard higher quality yesterday also from Keith Wirtz, higher quality meaning what, meaning who?

DALTON: Well, remarkably names like Microsoft, JP Morgan, Pfizer, these stocks are trading at very low price earnings multiples which suggests that they really haven't been owned or priced upward to the degree that some of the other lower quality, say small cap, mid cap highly indebted companies, which are more levered to improvement in the real economy.

They've had their run. These stocks still look like they're relatively under owned and relatively cheap, which I think is a good combination.

JON ERLICHMAN, BLOOMBERG NEWS: Liam, can I ask you the flip side to that? What is a low quality stock or at least the definition of a low quality?

DALTON: I think you have to immediately go to the balance sheet to see the heavy levels of indebtedness. When you think in terms of that you think in terms of companies that have very cyclical earnings flows, very cyclical cash flow streams that are vulnerable to a slowdown again in the economy, at which point the valuations could really contract again.

So that could be multiple industries, but typically not consumer staples or things like that which have a relatively stable cap.

LIU: Well -

ADAM JOHNSON, BLOOMBERG NEWS: Well, are there a couple that jump out? Some you don't like?

DALTON: Well, we're a long short, you know, as far as how we run our money and so we don't like to promote our shorts so much. But we will tell you that most of the ones that we see are in the cyclical industries and not in the consumer staples or more stable areas of the market.

LIU: Right, because I was going to say put another way, I mean, what are the ones that have gone up that you think are definitely going to be down this year?

DALTON: Well, that once again, goes to mainly small cap, mid cap ideas in the economically sensitive sectors because we just don't think there's going to be a whole lot of real growth in the economy. So we think capital's going to now reposition and look for steady streams of cash flows and earnings and that would bring us right back to those large cap, high quality names that we think are well-priced.

LIU: But you're still positive on financials, though?

DALTON: Well, financials yes, which would include something like a JP Morgan, Bank of America or even Citigroup at this point. We think that based on how those securities have been re-priced, they're still too low relative to their normalized earnings, and we know that the credit contraction at the end of a big credit boom has a sort of a negative long- term impact on the ability to rise, but we still think they're too cheap.

JOHNSON: Now, let me jump in. We're going to bump up against a commercial, but if you look at some of the small cap banks, Genworth Financial, Huntington Bancshares, they're up 40 percent. Can you make the argument for the small guys? And I know we've got a commercial coming up here.

DALTON: Yes, I don't really think that's where the good risk-adjusted returns are now. It's possible that some of them may even be buyout candidates, but the balance sheets just don't give you the security that you get at the larger and large mid cap level.

LIU: Okay, Liam, hang on because we're going to talk more about that. But also about regulation and hedge funds when we come back and look at some of the funds that aren't doing such a great job at hedging their bets, and marking the 10th anniversary of the burst of the tech bubble, a look back on history here In the Loop.

09:18

(BREAK)

09:23

LIU: Well, Liam, you run a hedge fund, what do you think?

DALTON: I mean, to a large degree to simplify things, hedge funds are typically levered somewhat to the long side of the market. So when they're just referring to some of these large funds not performing so far this year equities really haven't performed so much since the beginning of January.

LIU: Right because they've been long on them.

DALTON: That's correct. So it's a long-biased industry because you just can't get your allocations on to the size you need on the short side unless you're trading in things like, you know, futures and other esoteric vehicles that are unrelated to equities.

But credit and equities being two very deep pools are typically long, so when you see returns, and just slightly, it's really not reflective of anything other than just the markets rejiggering themselves.

LIU: So do you think politicians are misinformed?

DALTON: You know, I think there's always a danger that politicians will overstep and create too many regulations that might impede the ability for markets to operate freely and people to operate freely in them and that would basically mar really the appearance of true price movements.

So when we rely on price movement to look at things as future indicators, which the stock market is, that has a very deleterious effect, and it creates sort of a false impression of how vehicles are actually moving when regulators come in and enforce too many regulations.

ERLICHMAN: Liam, when you start hearing people talk about speculators or speculative interest in, I don't know, oil or gold, how do you approach that? Do you say, oh, a lot of people moving into that trade. I don't want it.

DALTON: Well, you always want to be aware of these sort of imbalances that we referred to before because, you know, the market is really a function of supply and demand. So if everybody's onboard a trade and the level of expectation is for that trade to continue in that direction, anything that changes regarding perception can make the trade go the other way.

And that could be very painful, particularly in the case when one's levered with that trade. So it's all about expectations in these vehicles and as a manager of money you really have to be aware of how's the market positioned.

JOHNSON: Now let me ask you, you say you like the large cap financials. Is it possible that more regulation, just getting it back to basics, is actually a positive for these guys?

DALTON: You know, I think it could be because in the instance where they're too levered in maybe some other prop areas and it could cause a big problem for themselves. I mean one of the core principles was that these guys were so smart that they wouldn't do anything to inflict damage upon themselves.

And that proved untrue because they were chasing return on equity and earnings per share instead of looking at what their risk metrics were -

LIU: Right.

DALTON: - and what the risk factors were. And I think if you can dampen that down and prevent anything systemic from happening in the future, then that portion of regulation is a good idea.

LIU: Do you - I'm just curious, do you buy the argument form banks that regulation's going to cost them more?

DALTON: Any level of regulation probably does cost them more and the reason is is that you have to surround it with a sort of larger compliance effort. You have to focus more on rules. You have to create bodies within bodies to determine are our, you know, policies effective relative to what the regulations are? So any rules typically imply that you're going to have to surround that with a support network.

LIU: Okay. Liam, great to have you with us. Thanks for stopping by, Liam Dalton of Axiom Capital Management.

09:26

END OF TRANSCRIPT

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