Pershing Square Capital Management Founder and CEO Bill Ackman, a billionaire hedge fund manager with a net worth of $4 billion, is known for his strategic investment bets made by timing the markets.
Ackman previously made a 100-fold profit by hedging his investments using credit default swaps after predicting an economic shutdown resulting from the onset of the COVID-19 pandemic. He also pocketed $200 million from shorting U.S. Treasuries in October.
Given his impressive track record of timing the market, heeding his predictions might reap significant returns. Ackman predicted in late November that the Federal Reserve would start slashing the federal funds rate as soon as the first quarter — before the Federal Open Market Committee's (FMOC) last meeting in early December.
"We're betting that the Federal Reserve is going to have to cut rates more quickly than people expect," Ackman said on "The David Rubenstein Show: Peer-to-Peer Conversations." "That's the current macro bet that we have on."
Ackman's predictions came true after the Fed unveiled a dovish stance during the FOMC meeting, with Chairman Jerome Powell stating that the current macroeconomic indicators "could just be a sign that the economy is normalizing and doesn't need the tight policy," according to CNBC.
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Some of the biggest stocks that could benefit from slashed rates are as follows.
Tesla
Elon Musk has long conceded the disadvantages of keeping interest rates at record-high levels as they eat away at the affordability of electric vehicles. With most people living paycheck to paycheck with significant credit card debt, Tesla Inc.'s TSLA vehicles seem to be a pipe dream, even with tax credits.
“I think there's still quite a few shoes to drop on the bad credit situation. Commercial real estate, obviously, is in terrible shape. You know, credit card interest rates are usurious with over 20% interest rates, which over time becomes extremely punishing,” Musk said during an earnings conference call. "So, you know, the auto industry is also somewhat cyclic. People hesitate to buy a new car if there's uncertainty in the economy.”
As geopolitical tensions continue, Musk expects auto sales to remain under pressure, as the automotive industry is cyclical. With the Fed expected to cut rates soon, market sentiment is improving, and the demand for electric vehicles is expected to rise.
Alphabet Inc. GOOG, Google's parent company, is Ackman's biggest portfolio holding, valued at approximately $1.2 billion. Ackman also holds 4.35 million of Alphabet's class A voting shares, valued at nearly $570 million as of Sept. 30.
Alphabet has been struggling compared to its Magnificent Seven peers over the past year, as the company lagged capitalizing on the artificial intelligence (AI) boom. The company's generative AI platforms have failed to garner momentum similar to Microsoft Corp.-backed OpenAI's explosive ChatGPT platform.
But Google has been making aggressive investments and is in acquisition talks to regain a competitive advantage. As interest rates fall, Alphabet's financing costs will drop, boosting its return on capital.
On Dec. 6, Alphabet introduced its state-of-the-art artificial intelligence model Gemini AI, highlighting its advanced ability to analyze diverse forms of data, encompassing video, audio and text. Before this, Alphabet had committed nearly $500 million in funding to Anthropic AI, a company dedicated to creating a generative AI platform to compete with ChatGPT. Alphabet is also discussing acquiring Character.AI, a swiftly expanding startup specializing in AI chatbots.
Caterpillar
Caterpillar Inc. CAT is one of the largest construction and equipment companies in the U.S. and a component of the Dow Jones Industrial Average (DJIA) Index. Caterpillar shares have surged over 22% year to date to hit its all-time high of $293 on Dec. 19. The industrial stock outperformed the benchmark DJIA index's 13.3% returns so far this year.
Industrial stocks have historically benefitted from lower interest rates, which spur construction activity in the economy. Analysts expect Caterpillar's revenue to rise 6.4% year over year to $16.23 billion in the first quarter of 2024.
Caterpillar is also a prominent dividend aristocrat, as the company raised its annual dividends consecutively over the past 30 years. The company pays $5.20 in dividends annually, yielding 1.82% on its current share price.
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Image: Bill Ackman. Collage created using photo by Center For Jewish History, NYC on Wikimedia and engin akyurt on Unsplash
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