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Laszlo Birinyi believes this could be an epic bull

Wall Street research legend Laszlo Birinyi believes this seven-year bull market has much further to run and could even rival the multidecade bullish period that began back in 1982.

"The conventional wisdom is consistently wrong," said the unabashed bull in an exclusive, in-depth sit-down for CNBC PRO with Mike Santoli. The president of  Birinyi Associates went through historical examples of when investors and the media consistently got the timing of bull and bear markets wrong, becoming too pessimistic at the wrong times.

With other Wall Street strategists much more dour than him and the media bemoaning Brexit and other concerns, Birinyi thinks this is happening once again and the run has much further to go.

In the wide-ranging conversation, Birinyi also touches on:

  • How to tell when the end of the bull is near. 
  • What the small investor doesn't realize about Wall Street. 
  • How Mike Bloomberg helped him revolutionize market research in the 1970s. 

PRO subscribers can also read the entire transcript of the exclusive interview below.

MICHAEL SANTOLI:

Laszlo Birinyi is a renowned investor and stock market analyst. He's the founder and president of Birinyi Associates—that's a firm he founded in 1989. It does money management and equity market research. Prior to founding that firm, he was at Salomon Brothers for many years, also a longtime contributor to the original "Wall Street Week program.

He joins us now to discuss his investment approach and current outlook on the markets. Laszlo, thank you very much for being here. Maybe we could just start at a very broad level-- and how you found your way-- well, to Wall Street, and also your particular way of observing the markets.

LASZLO BIRINYI:

Well, I started off in the back office, and got intrigued by what was going on in the trading room, and worked my way into the trading room. And my whole background is that of a trader. And I think that's somewhat of a unique perspective. And-- in nineteen-- seventy-six-- Michael Bloomberg asked me to join Solomon Brothers and fix what was broken.

And, so, I had the  unique responsibility of sitting on the trading desk, not really responsible for trading and sales, but helping the traders make money-- interacting with customers, and giving us ideas about the trends of the market and understanding the market.

MICHAEL SANTOLI:

Interesting. So, what did that experience tell you? So, this trader's perspective helps in terms of looking at the-- sorta the-- the real-time activity in the tape? Or what-- what was it that really?

LASZLO BIRINYI:

Well, one is the appreciation of the market itself. I think that's-- the one thing we've gotten away from. But I learned very early that the market-- has pretty much (UNINTEL) a lot of things. And you have-- well, our job to find out what it was.

And it also-- it helped you become-- very efficient. Our firm is extremely-- f-- focused. Because we don't deal in the possibilities, the probabilities. We think of as the traders, yes or no, up or down, black and white. And as a result-- we're lean. And-- I think we come to decisions more quickly. And we get rid of a lot of the extraneous information that flows.

MICHAEL SANTOLI:

Sure. So, you're focused in on, I guess, what you've determined-- tends to matter-- for-- for an investor-- I guess most essentially. Early on, it was a lot about money flow, right, so just basically trying to pick up-- the-- the real-time supply and demand for a stock or for stocks in general. Is that something that is still effective? How did that-- how did that used to work?

LASZLO BIRINYI:

It used to r-- ticker tape reading. And it was extremely effective. In fact, it was-- it was the strongest fundamental tool I ever devel-- I ever found. Unfortunately, with high-frequency trading, ECNs, and the like, all that's goin' by the wayside.

But we still look at the market. We still paid a lotta attention to-- to it. I think one great example might be-- I like to talk about is-- is-- 1912-- I mean, sorry, 2012. The market was up 12%, 13%. Whirlpool was up 140%. Sherwin Williams was up 80%. Home Depot was up 49%. So, economists and strategists talked about interest rates, housing, construction areas. The market was telling you that everything was fine. And, so-- we didn't have to have a discussion about when will the Fed raise, you know, the economic circumstances the-- the market told us everything we needed to know.

MICHAEL SANTOLI:

So, the-- the market told you that those stocks most important for housing recovery in those cases, that-- that was--

LASZLO BIRINYI:

Which also--

MICHAEL SANTOLI:

--that was basically a green light?

LASZLO BIRINYI:

Well, also, by inference, interest rates. So, I mean, these are the kinda things that-- that-- that we still look at. And-- I think it's most people-- today without the ticker tape-- who have gotten away from looking at the market.

MICHAEL SANTOLI:

So, does that by extension mean that the market doesn't have periods where it-- sorta gets it wrong or is distracted or-- or misled by-- by headlines, for example?

LASZLO BIRINYI:

Not really. Historically, we've found that-- and consistently that-- 80% of the market is made by 20% of the stocks. And when money flow is dead, and again we can't do it today, money flow is has very little highlight, 20% to 25% and kept us all on track.

MICHAEL SANTOLI:

So, you're essentially trying to stay in tune with-- with those stocks that are working with that subset of the market that seems to--

LASZLO BIRINYI:

Well, which are gonna work, which was m-- even more important.

MICHAEL SANTOLI:

--going to work. Yeah. All right, so, what c-- what could be the clues that it's g-- that they're going to work?

LASZLO BIRINYI:

Well, again, you know-- in the old days we could read the ticker tape. But there are things like how does it react to news. One stock that we've done very well is Boeing. Now, a c-- few years ago when Boeing came up with the new Dreamliner and stock of $70 a share. The Dreamliner wasn't working. Sales weren't picking up. The batteries were burning.

I think Japan Airlines or JAL, you know, (UNINTEL) planes on the tarmac. Stock didn't move. The stock was $70 through all the bad news, the cover stories, the stock was $70. (UNINTEL) and I said, "The market says don't worry about it."

MICHAEL SANTOLI:

And in terms of-- I guess trying to-- to decipher-- a broader-- forecast, or at least what you anticipate for the market as a whole (UNINTEL) you've been, you know, pretty bullish through this whole period here. We're at new all-time highs today-- in the-- in the S&P 500 this week. How are you arriving at something like that? Where do you-- where do you kinda boil things down and say, "I believe the trend is gonna be up"?

LASZLO BIRINYI:

It's two things that I think are s-- s-- we focus on a lot. And the first is history. We look a lot at historical precedences. And I think one of the mistakes that we've made and a lotta people have made in this-- in this situation is they look at the average market, or the typical market. There is no such thing. So, we determined very early that this was gonna be a market like 1982 and 1990. And we said-- but as far back as '09 and '10, "This is gonna be protracted, durable, and long lasting," and so forth.

The other thing that's been very helpful in this market is dissecting the negative. We've had so many negative stories, but if you push back and you take them apart, you find out they're fairly redundant. With-- one of the things that we do is unique is we save old magazines, we save articles. We make fetish of it. We have a database of it. And just to give you one example, this is a newspaper story that appeared in the New York Times talking about how bad things were. Unemployment was 10%.

What was the market doing here? The market was going up. We had a new president. Auto sales were down. This is from nineteen-- October 1982. And you could take the same news from eight years ago and just change a couple of numbers and the names. So, we have-- a whole stack of, actually, books of historical events and the like. And we forget that we're worried about the same things now we worried about in 2010, 2011, in two-- in the middle of-- in June 2010, w-- people were saying, "The market's fully valued."

MICHAEL SANTOLI:

Yeah. Well, so, this goes back to October 1982. As we, of course, now know that was at the very, very beginning of, you know, the longest and greatest bull market. You think that the one that we're currently in that's, say, seven years old right now is similar to that one in the sense that it could last that long, it could be that-- that rewarding?

LASZLO BIRINYI:

Absolutely, and for another reason. Another thing that we do, which I like to think is unique, is we do in-depth studies. And a really disappointing characteristic of Wall Street is Wall Street doesn't do too much research on the market. You just wanna assume everything.

So, we publish studies. This is a 60-page study we did about a year and a half ago, When Will the Fat Lady Sing? You know, how can we tell when the bull market's coming to an end? And all the conventional wisdom is consistently wrong, you know. A couple of-- maybe 15, 18 months ago, your (UNINTEL) were starting to do better. People were worried. Because your (UNINTEL) showed people were getting defensive, and if you get defensive you're end of the bull market. Not true, right. At the end of a bull market, people get euphoric, you know.

In ninet-- in the 2000 experience, technology was up 37% in the last six months. So, we do these in-depth studies that when you look at things that people worry about, like multiples and the like, you find out that it's not quite as consistently useful as you think it was. In fact, I think to us, one of the great variables that people don't understand is sentiment. And that's one of the reasons we continue to be very s-- positive.

MICHAEL SANTOLI:

Yeah, I mean, sentiment-- certainly in-- in the last years-- of this bull market has been-- it's been a tailwind in the sense that the public has been very skeptical, and investors in general have been fearful about maybe a re-run of what happened to them in-- in 2008, 2009. Is there not a sense, though, that-- that-- that that kind of thing could just be-- sort of a long-lasting change and move? People point to demographics. So-- in other words, is there a r-- an explanation--

LASZLO BIRINYI:

Well-- it's--

MICHAEL SANTOLI:

--for the negative sentiment that it's not going to be bullish?

LASZLO BIRINYI:

--it's interesting. Because one of the major firms has made a very bearish case of a fact that the public has taken $70 billion out of mutual funds in the last six months. And this, to me, is one of the great weaknesses of Wall Street. If they did a little bit of research and found out that the public took $100 billion out of mutual funds the last six months of 2012, and they put it into bonds, they were 200% wrong.

The stock market went up 30% and the ten-year bond went down 8%. And people don't look back and-- and research things. And-- we've probably seen 100 articles over the last seven or eight years about the fact that the-- cap-adjusted PE was expensive and yada, yada, yada. I have not seen a single one that told me yes, it's at 23 or 24 times. But it got to 40 times. So, we-- we just have this-- we're always looking forward and sometimes havin' to be aware of what happened in the past in--

MICHAEL SANTOLI:

Yeah. In the-- in-- in the late '90s, certainly got up to 40-- also, you know, it's-- it's also amusing that-- I mean, whatever you might think of the sectors such as consumer staples, which have been a favorite, and people love dividend yields and talking about how they're expensive, well, the-- the kind of favorite stocks of-- of the, what, early '70s got to 40 times, right. I mean, those nifty 50 stocks, right. So, there's no saying what the ceiling is, I suppose.

LASZLO BIRINYI:

Again, we-- we just-- we don't really look back. We don't really-- recall it, you know. In so many of the comments we're making about things like (UNINTEL) whatever, we made the same s-- things four or five years ago.

MICHAEL SANTOLI:

You mentioned a couple times 2012 as an interesting kind of echo-- with what's happening today. That was anoth-- that was the last time we made record lows in treasury yields, right. So, you basically had this similar dynamic of for some really, people rushing towards bonds and away from stocks, afraid that we were gonna have this trap door. Does that mean that we can be treated to another version of 2013 upcoming?

LASZLO BIRINYI:

I wouldn't go that far. Because-- I still think that valuations have some merit. And-- I think-- but I think that we can grind higher. The issue today, of course, is, you know, which ones. And what we're doing more-- is we're making it more event driven. 'Cause there's no more bargains, there's no more cheap stocks. So, we look very closely (UNINTEL) earnings and the like and see if anything's changing there.

MICHAEL SANTOLI:

You look for a specific catalyst, in other words, for--

LASZLO BIRINYI:

Yes. Yes.

MICHAEL SANTOLI:

--for individual-- yeah. Gotcha. I guess the other-- pushback I wonder if you get, which-- in terms of sentiment, in terms of how the-- the-- the-- the general public or investors in general are feeling is that it strikes me that 2007, we didn't necessarily get everybody feeling as if they were greedy and euphoric and all into stocks. Was that an anomalous end of a bull market? Or-- were people greedy in other ways? I mean, how did that play out in your view?

LASZLO BIRINYI:

Well-- f-- for-- for one thing, th-- that was-- market was one of the few markets where earnings are even better than the m-- than the market. And what we see was the weakness of the banks. And I think that-- that was sort of to us a critical issue.

We wrote a piece at the time called The Next Crash. And we didn't-- I never really anticipated it being as bad as it was. But we did get outta the banks. And we shorted the actions of the banks-- pretty well. But unfortunately, we got stuck with the other stuff.

MICHAEL SANTOLI:

Right. I guess one interesting thing, too, is w-- how we s-- how are we to think about this period we've just exited if, in fact, we've exited it where we went a very long time where the S&P 500 c-- was-- was in this-- this range. You had a severe correction. You had internal bear markets, however you wanna characterize what happened to the majority of stocks being down 20%. And now, we've kinda broken out of it, at least tentatively. Did we just have a bear market? Does it matter what we call it, in terms of investors?

LASZLO BIRINYI:

It's-- it's surprisingly similar to the '90s. If you go back to the '90s, and first of all, it was a s-- it's fascinating if you go back and read some of the old-- especially-- especially papers, the magazines, rather than Wall Street. And in the early '90s we were worried about multiples. We were.

Because-- in the old-- in the '90s, we were-- still had the old idea of a 3% dividend yield, you know. Once you got below that, you know, we hadn't really gotten too worried about it with the multiples. And, so, in the early '90s, there was a lot of concern about-- you know, or there wasn't enough concern about-- about that. And we went-- we went per-- we had periods in the '90s where t-- all this was long with even less volatility. So--

MICHAEL SANTOLI:

Yeah, 1994, for example, right, where it was just flat and--

LASZLO BIRINYI:

And we had the-- you know, the long-term capital and the Russian debt problem.

MICHAEL SANTOLI:

'98.

LASZLO BIRINYI:

So, I think the parallels are there. Now, I am not of a belief that you lay one on top of the other. But what I am saying is that people point to what's happening now and say no. I say, well, it was yes here. So, it could be yes here, too.

MICHAEL SANTOLI:

No, it is very interesting you make that point. Because right now, I think that the tendency among people is to look back at the entirety of the '90s and assume that everyone was happy and satisfied with the economy and everyone f-- kinda was on board with the idea that the market should be doing what they were doing.

Whereas in reality, the early '90s was, like, the original jobless recovery, you know. You had people complaining about the-- the-- the pace of economic growth, that it really didn't feel right, you know. So, I-- to your point, it did seem as if all along the way-- there were these reasons given to-- to doubt what the market was doing.

And-- and-- and Alan Greenspan's "irrational exuberance," of course, comment came in 1996, right smack in the middle of-- of-- of the bull market. So, does that mean that you give yourself permission or client-- let clients say don't worry about the Fed, don't worry about a lotta the other macro stuff that's been consuming everybody's attention?

LASZLO BIRINYI:

That's what we've been saying for six years, has b-- you know-- again, we're w-- we think the-- the market will-- as it did in other times, it will sort of-- we'll start to see some weakness, we'll start to see stocks not rebound after bad news. We'll start to see the kinda things that-- that (UNINTEL) sell-offs in the afternoon, for example. And-- the one thing that I'm-- not real happy about is a lot of people now start talkin' about 2,400 and--

MICHAEL SANTOLI:

For the S&P 500?

LASZLO BIRINYI:

--you know-- yeah. And-- and, "Something's happened here, so now let's all be excited." And we were lookin' the other day (UNINTEL). And-- five or six technicians were all getting-- jumping up and down. But if you go back to February, the same technicians in the rally would say, "It's a good chance to get out."

So, you know, we-- you know, we keep-- one of the things we do, too, is we keep track of things. We draw up charts like this. This is a chart of the Dow, what people were saying, not the Dow theory, but what Dow theorists are saying. And when we draw these charts, we find out a lotta things that-- we forget about, you know.

MICHAEL SANTOLI:

So-- so, Dow theorists are those who-- who say that they follow the old-- Dow theory about the Dow Jones Industrials and the transportation average and things like that--

LASZLO BIRINYI:

Yeah, and w--

MICHAEL SANTOLI:

--the original technical analysis?

LASZLO BIRINYI:

--and we do charts like this, of this. And you get some perspective. And the fascinating thing about this whole idea is the source. And who gave me the idea? Joe Granville. And this saves us an awful lot of time. And it just tells us that when we hear these alarms, we go back and look at historical precedences and say, "Well, didn't work then. Why should it work--"

MICHAEL SANTOLI:

And he was a st-- he was-- sort of a student of social psychology in a way, right, in-- in addition to--

LASZLO BIRINYI:

He-- he actually did a lotta very good work. Well, he was-- he was ahead of his time.

MICHAEL SANTOLI:

Interesting. So, h-- you know, how about the U.S. market and-- and the fact that it's outperformed such a great degree? Is that another re-run of-- of the late '90s, in your view? Or is that significant at all?

LASZLO BIRINYI:

I tend to think not so much. I think, for one thing-- I actually had the-- responsibility of creating the Solomon International Index. So, there was a time when I was very much aware of what was going on in the world. I'm not so much aware today. I don't know the dynamics. And I just don't really look at it. (UNINTEL PHRASE) management operation, we just focus on the U.S.

MICHAEL SANTOLI:

Okay. So, you did-- do some-- a piece recently, which was interesting. And you sort of referred to it a little bit in terms of-- the elements that are typically in place at the end of a bull market. So, what ought-- what should we be looking for, whether it's the kind of sectors that have been in favor or-- or other types of behavior?

LASZLO BIRINYI:

Well, I like to facetiously tell people my phone starts ringing, you know. But, you know-- a lot of th-- your-- your colleagues won't talk to me because I keep telling them-- ch-- chiding them for writing these negative stories. But-- you-- you wanna-- look for large headlines. I mean, it's fascinating-- to us to see when you have a really bad day how big the type is. And then, on a really good day, you know, it's on page C8, you know.

And-- and we start to see that. And when you start to see the anecdotal stories about (UNINTEL) or the FedEx driver or these kinda things. And you start to see people rationalizing the moves. Now they're still fighting 'em. They're still reminding us of, you know, multiples matter. And they're still bringing out all these metrics, and not enough stocks at new highs and whatever, and the up-down volume, and the like. This is the kinda things.

And-- and they're not cl-- you can't cl-- quantif-- necessarily quantify it. A lot of it is-- and I think our-- our s-- experience is by watching and looking. I mean, I can't emphasize enough, you know, looking at the market every single day.

MICHAEL SANTOLI:

Yeah. It might not be an area of your focus, but in terms of rationalizing the move, I wonder if people could argue that-- with the recent lows in treasury yields, I f-- I feel like you had a lotta people rationalizing why we were there at 1.35% or something like that on treasuries. Because they had this long bull market. And-- and levels that people thought were important before were crushed. And, so, I don't know. Maybe that's-- the kind of thing you would look for at the end of a bull market, then.

LASZLO BIRINYI:

You know, we've-- we've had that-- conversation for five years, you know. Five years ago, I was asked s-- to speak at the society in Boston, how do I explain the difference between the two markets. And I said s-- sometimes they both wanna go up.

MICHAEL SANTOLI:

Yeah, in terms of the stock and bond markets, yeah, it's just n-- no-- no fixed relationship, I guess, right. So, what would you say-- I mean, we've hit on some of this already. But what would you say are some of the-- the common mistakes or blind spots that individual inventors tend to have when it comes to the market?

LASZLO BIRINYI:

I think my experience with individuals is they think the stock market is a salad bar. And they wanna get a lot of different inputs, and then they'll go make their own salads. And they don't realize how hard it is, you know. I've been doing this for longer than I care to. Well, I need to. But I work harder now than I ever did. There's just so much more to absorb. And-- I-- wrote a piece a couple of months ago c-- suggesting that one of the problems with-- with this business is that we don't practice investing, you know, like doctors practice medicine.

We're very casual about it, both in the professional and the amateur level. And it's-- it's hard work. And there's a lotta people who don't realize that some of these publications come out on weekends, you know. And the-- the-- you know, work week stops on a Friday, you know, at 5:00. And things that we do, begin going through newspapers and clipping out salient stories.

I still read novels about-- the market and finance, j-- not because they're-- they're good, but sometimes there is an idea, sometimes. And you still have to work at it. And I don't think people realize that the-- the disadvantage they're at if they think they can do this all-- as a sideline.

MICHAEL SANTOLI:

Sure. You know, it seems as if-- I don't think it's because they decided it's-- you know, it's-- it's too much work. But it-- but obviously, the long-term trend has been for investors to say, "Oh, I'm not gonna try to beat the market. I'm not gonna try to figure the market out. I'll just buy index funds." Is that a rational choice? Does it really change how the market operates?

LASZLO BIRINYI:

I know-- I think the problem is-- my problem with that is you're outsourcing your financial life. I mean, people-- talk to me, they're gonna retire, now they're gonna go to the gym twice a week and they're gonna take at least a w-- one-mile walk three times a week and they're gonna outsource their financial life.

That's-- now you have-- have a chance to get a hold of it. And I think that, you know-- I wonder how many people on February 15th this year who last year put their retirement into index funds and how they felt on February 15th when all of a sudden, and there's nobody to talk--

MICHAEL SANTOLI:

Down 15% or something.

LASZLO BIRINYI:

--to. And there's nobody to talk to, you know. And-- one of the disadvantages we have in our money management operation is the clients know that we're there. I was very gratified this year that nobody called. Nobody called, you know. They knew we were there. So, that's an advantage to having somebody who's working on your behalf.

MICHAEL SANTOLI:

And, you know, you talk about how it's-- this-- it's harder than ever to-- to-- to keep up and process that amount of information. Is that because the-- the-- the dynamics of the market have changed so much, or because things have become more complex, or just because, you know, there's-- there's more being produced.

LASZLO BIRINYI:

I read a new book by Michael Thomas called The Fixers. And he said something-- he wrote something very interesting. He says, "The problem with the internet is that it's given a lotta people who had nothing to say a place to say it." And one of the things I tell individuals when you're reading research or commentary, avoid certain words like "could," "should," you know, "maybe," "usual," "average," or whatever.

And one of the things you can always ask yourself when you're-- investigating is where's the beef? What's-- you know, what's the conclusion? What do I do? Don't tell me the market's topping out. Don't tell me that industrials look good, all right. Where's the beef?

And if there's not an investment conclusion, and as a result we probably don't process 80% of what goes-- what comes through, what we see. Because as soon as we see "I think" or "probably" or "it could be" or whatever, you know, there's no beef. And-- I l-- one of the things (UNINTEL PHRASE) our work, we'll put it on tables. We'll say, "Okay, here's the last X times it happens." There was a major firm who said a couple of weeks ago that six months before election s-- markets tend to top out and go down. It's not a hard calculation.

MICHAEL SANTOLI:

Haven't been that many elections.

LASZLO BIRINYI:

It's not that hard. It was wrong. Right. But there was-- you know, they didn't put a table out. They didn't say, "Here they are." We did. And we said, okay, "(UNINTEL PHRASE) but here they are." And that's-- we don't-- people don't expect-- they-- they should expect more of us.

They should say, "I wanna see the X-ray the doctor's looking at before he tells me to, you know, have an operation." And I think we have to realize that the-- that not everybody you're talkin' to is really knowledgeable or an expert investor or skilled or whatever the comment they would like to introduce them as.

MICHAEL SANTOLI:

Sure. All right, look for the beef. Thank you very much, Laszlo--

LASZLO BIRINYI:

My pleasure.

MICHAEL SANTOLI:

--appreciate that. For CNBC Pro Talks, I'm Mike Santoli.