Feb 20, 2024
Manufacturing in the U.S. appears to be experiencing a slowdown. The Institute for Supply Management reported a manufacturing purchasing managers index reading of 49.1% for January, marking the 15th consecutive month of contraction within the sector.
“Shark Tank” star Kevin O’Leary argues that the issue isn't so much a slowdown in manufacturing as it is a reduction in capital expenditures.
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“Better to look at it, Larry, as a CapEx slowdown,” he suggested during a conversation with Fox Business’ Larry Kudlow, when asked about the manufacturing downturn.
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He elaborated on the broader economic context, stating, “If you think about what's going on in 60% of the economy, and I'm always an advocate for small business, those companies — five to 500 employees — they're having a hard time borrowing money and part of it's the regional bank story you've been following for two years now.”
O’Leary noted that his own companies are particularly concerned about the high costs of borrowing. Due to regional banks’ reluctance to lend, they are forced to turn to the gray market, which typically comes with much steeper interest rates.
“So if terminal [rate] right now it's 5.5%, they're borrowing at sort of nine to 11%,” he detailed.
He argued that these elevated borrowing costs directly impact businesses' ability to invest in or amortize new machinery, which in turn, is reflected in the manufacturing sector's ongoing contraction.
Another banking crisis?
According to O’Leary, we haven’t seen the last of regional banks failures as of yet.
“Every couple of months, you get another regional bank story. And I can guarantee you that loan book is shut down most recently here in New York Community Bank, same story that's happening in 4,000 other locations around the country,” he remarked, pointing to New York Community Bancorp (NYCB), which saw its stock plunge about 50% following significant losses on its commercial real estate loans and subsequent downgrades.
O'Leary has been raising concerns about banks since early last year. Anticipating future challenges, in this recent interview, he stated, “I think in the months ahead, we'll get more failures of regional banks around office space and commercial real estate.”
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Where O’Leary made his biggest gains
Despite these grim forecasts, O’Leary maintains a positive stance towards the stock market. During the interview, he disclosed that he’s “staying long stocks,” citing limited opportunities in fixed income investments.
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Furthermore, O’Leary said that he’s “incredibly bullish on the economy.”
Still, that doesn’t mean he’s buying every stock on the market.
“My biggest gains have come from mid cap stocks — a subset of the Russell 2000,” he said. He explains this success by noting that a significant portion of the market is speculating on a potential “regime change” in Washington within the next 24 months. This speculation, which he said has “at least a 50/50 chance,” could lead to a transition to a less regulated domestic economy, which is expected to favor companies that generate all their revenue within the United States.
He highlighted energy as a particularly intriguing sector, stating, “You deregulate, including energy which is selling at a huge discount, you want to be long now before the market figures out regime change, because look at what would happen just to energy.”
The energy sector has indeed been an overlooked place compared to the broader market. Over the last 12 months, the Energy Select Sector SPDR Fund (XLE) has seen an increase of 1.44%, in stark contrast to the S&P 500's substantial gain of 24.29%.
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Jing is an investment reporter for Moneywise. He is an avid advocate of investing for passive income. Despite the ups and downs he’s been through with the markets, Jing believes that you can generate a steadily increasing income stream by investing in high quality companies.
