Barron's Streetwise - Oracle and Oil Refiners. Plus, Pyramid Scheme or nah?

Episode Date: August 21, 2026

Jack answers listener questions and refutes dad joke allegations. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Can you feel that excitement in the air, Emily? It's electric. What do you think that means? This is a different kind of episode right now. What do you think is coming up here? I don't know, but I'm nervous and excited. It's crap, my timer went off. Hold on. Not really. Timer for what? All right. That killed the suspense, but folks, it's a listener question special, all right? with a guy who forgot to mute his phone. Come on.

That was the thing we didn't see coming. We've got four top shelf questions. What are the topics we're going to be covering? I know one is Oracle, and we're going to hear from a Barron's pal about that one. What are the other topics? We're going to be talking about potential pyramid schemes, oil crack spreads,

and you try to dodge the dad humor allegations. Well, that's not a, that's a separate matter. But yeah, let's get into it. Emily, who should we start with? I understand that we have a how and I'm a how. So maybe, but this one is a first name how. Yes, we're going how for how for our first question. So he says, hi, Jack.

I have enjoyed listening to your podcast since COVID. I'm about your age, so I enjoy your dad humor. Let me just point out for the record. Well, I appreciate that. And I don't want this to sound like sour grapes. Dad humor, that has a specific meaning. Those are, if you're out there telling groaners, am I telling groaners? Is that what's happening here?

If you're a dad who makes jokes, those are not automatically dad jokes. I feel like I'm shouting into the wind here. Maybe we should just continue. How was reading an article in the Wall Street Journal entitled Earnings Forecasts are on steroids? And he says that a handful of companies, Alphabet, Amazon, and Navidia, had their operating income boosted 6.9, dang it, 69.2 billion by an obscure accounting rule, which made their other income, normally a minor item, increased quarterly earnings in the entire S&P by 12%.

Now, how is an index fund investor and is trying to stick to that, but how worried should he be about the rise of the entire index from this obscure but huge boost to earnings? Thank you, Howe. You mentioned a story by our friends at the Wall Street Journal. I think the one you mean is from June 29th by Spencer Jacob, and it is indeed called earnings forecasts are on steroids. Here's the issue that it talks about. A publicly traded company can own a stake in a private company. Companies like Alphabet, Amazon, and Nvidia, they can invest in companies like Anthropic and Open AI. And those private companies, we don't really know how much their worth until they have their next fundraising event. And often at those fundraising events,

we learn that they're worth a lot more than they were the last time they raise money. And so when that happens, the publicly traded companies that hold these stakes will mark up the valuations. And that can count as a gain for earnings. And that, as the story points out, has given a big boost to S&P 500 earnings all year. So you ask if we should be concerned about that. I think so. Anything that's providing a one-time boost to earnings like that, it raises the possibility that if we're saying that the S&P 500 is, let's see, 21.7 times this year's projected earnings, that's a little bit higher than its long-term average. But maybe it's even higher than that because maybe the earnings themselves are overstated. Overstated might not be the right word here. Let's call it

flattered. Flattered in a way that might not last. And there are some other observations that go along these same lines. I pointed some of these out in an April story in Barron's called the stock market is more expensive than it looks. One of them is profit margins. They are incredible right now. They've recently been about twice as high as profit margins have been on average since the end of World War II. Now I know that sounds like a good thing and it is. The problem is that historically profit margins have been mean reverting. They tended to come back to their average. Maybe that won't happen this time. Maybe we've entered some new era of everlasting profit nirvana, where margins are structurally higher. I say that a little tongue in cheek, but there really have been some structural changes. Companies are more asset light today. But there are other factors that don't look that sustainable. Corporate taxes are pretty darn low, and we're running a big fiscal deficit every year. Some future administration might want to deal with a deficit by raising taxes. Usually when profit margins are very low, high in an industry, it attracts new competitors. And they come in with lower prices and margins

fall. In some pockets of the stock market, profit margins are much higher than they used to be, in part because of consolidation. Airlines are a good example. There are far fewer than there used to be. It's not easy to just start up an airline and grow it to national scale. So maybe margins there are sustainably higher than they used to be. You can make the same case for cell phone service, autos, and especially for the AI hyper-scalers. There aren't many companies that can spend that kind of money to build out data centers. So maybe profit margins can stay above average for many years longer? I'm just not sure. I'll give you one last contrast to pay attention to, and I've talked about this before. It's the difference between earnings and free cash flow. The biggest economic force in the stock

market right now are these giant companies spending all that money to build AI data centers. that money does not subtract from earnings right away. It's treated as long-term investments. Companies are allowed to deduct it little by little from their earnings over years. But the money received as a result of that buildout, the money going to the chip companies, for example. All of that gets counted right away as earnings. So if we're counting all of the money on the receiving side and only some of the money on the spending side, it's going to make earnings look better than they really are.

I said a moment ago that the S&P 500 is 21.7 times this year's earnings forecast. It's 33.6 times the free cash flow forecast. To my mind how these are things that go along with what you said. Maybe if earnings are on steroids, they're going to deflate down the road. Like a TV wrestler who used to have a chiseled chest but then got saggy and now has to wear a unitarred. That wasn't one of my best metaphors. All right, that's on me. If that happens, it could leave the stuff.

market looking expensive and stocks could fall. But the question is how what do you do about this? I just think it's too difficult if you're if you're thinking about selling out of the stock market because you're worried it's too high. I think it's very difficult to get the timing right on that. The problem is I can point to multiple times over the past decade where I looked at similar concerns and I said, well, I don't know how much this market can keep rising and it has. There's a big risk that you sell too early. There's also a big risk. that you buy back in too late. If you're someone who is close to needing to spend the money that you have invested in stocks, then by all means, sell some stocks, raise some cash, keep your money

safe so you don't have a big decline in the value of your portfolio right when you need it. But if you're a long-term investor, I think the thing to do is just to make sure that you're properly diversified. Do you have enough in bonds, especially now that yields are up? Do you have some overseas stocks? Those are cheaper than stocks than the US and they've been outperforming this year. I took too long in that one, Emily. I know. I'm going to be faster from here, I promise. Who do we have next? We have a favorite of the show, Ace from Space, and he actually recorded his question for us. Friend of the show, let's hear from Ace.

Hello, this is Ace. I'm once again in your space. I recently learned about the Gulf Shore 3-2-1 crack spread, and how, if I understand it correctly, it basically is correlated to, the profitability of turning three barrels of oil into two barrels of gasoline and one barrel of diesel. How can I use this crack spread to help me invest more profitably? Thank you very much. I look forward to listening to your response. Thank you, Ace. You've got it exactly right about the crack spread. That's a term used to talk about the profitability of turning crude oil into refined products. Another term for refining is cracking. I talked about this somewhere in the distant past, it works a lot like making booze through distillation. You take advantage of the fact

that different products will evaporate at different temperatures. The 321 crack spread refers to the theoretical profit margin of turning three barrels of crude oil into two barrels of gasoline and one barrel of distillate. Gasoline is like among the lightest stuff that comes out of crude oil. Distillet fuel is somewhere in the middle. That's your diesel fuel for big truck. heating oil for homes, kerosene and jet fuel and marine fuel. I'm looking at a chart of the 321 crack spread and it is up a lot this year. There are a bunch of reasons that crack spreads are up. There have been a tax on oil refineries. We've had shipping disruptions. We have very strong demand for jet fuel right now. This has been great as you might

imagine for oil refiners. Villero Energy, that's a big one. That stock has returned 117% so far this year. There are ETFs of oil refiners. Vanek Oil Refiner's is one of them. The ticker there is crack, C-R-A-K. And that's made 60% this year. But Ace, your specific question, I believe, was how do you use what you know about the 3-21 crack spread to make money in stocks? And the answer is, I don't really think that you do. I think this falls under the category of one of those things that's fun to learn about, but not necessarily something that you can turn into profit. It's kind of like what we were talking about before with margins for the overall market.

We know margins are high. Well, high stock prices are to reflect that. What we need to know is what's going to happen with margins next. That's a difficult thing to say. To know what's going to happen next with crack spreads, you'd have to know about what's going to happen with refining capacity. Are there going to be more drone strikes that will take refineries out of operation? What's going to happen with shipping?

what's going to happen with travel demand. You have to make a lot of calls on a lot of things to get that right. And you're trading against people who do that for a living. Now, one option is just to invest in oil refiners. When you do that, you get professional management. You get people who run those companies whose job it is to do their best no matter what conditions are out there, no matter what happens with margins. I think that's a fine idea for a long-term investor.

The only thing now is those stocks have run up a lot this year, so you have to be careful. I think in General Ace, there are a lot of things out there that I like to learn about that are fun to know, have to do with business, but don't necessarily make me money as an investor. But if you decide to invest there, I wish your luck and thank you for your question. Emily, anything that we should add on this subject before we take a break? The only crack spreads I know about Jack are in Majong. Explain. So in Mahjong, there's a bunch of different type of tiles, and one of them is their characters. and then for short, they're called cracks.

So if you have a great crack spread, you might have a great hand. And if you have a great hand, you win. And if you win, you get to pick who brings the chicken salad next time. Okay, noted. Is that with raisins or never? Oh, never, Jack. I know that's a thing, but I just, I really can't abide by that. I'm sorry, I even ask.

When we come back, we have a question on Oracle. That stock has been all over the place. what's happening, what's next. And I'm going to call in some help. We're going to hear from my pal, Adam Levine. He's a senior technology writer at Barron's. That's next after this quick break. Welcome back.

We have a question about Oracle from Kyle. We're going to hear that question in just a moment. Let's hear part of a quick chat I had recently with Barron's senior technology writer, Adam Levine. Emily, don't you even think of making a joke about it? I'm just so impressed that he's able to be able to be able to be. able to write about tech and also being the lead singer of Maroon 5. Now, you can't see somebody, he's heard that a thousand times before.

So you can't make that joke to Adam. But you can make it to other people behind his back, right? Which is what we're doing now. Okay. I think it's a flattering comparison. That guy's got pipes. I mean, the other Adam. Our Adam, I haven't heard him sing it.

Okay. Let's get to that conversation now. I want to ask you about Oracle. You are the, you are the Barron's senior technology writer. you're the guy to ask a question like this. We have something from one of our podcast listeners. I'm going to read it to you. This comes from Kyle.

He says, I've been listening to the streetwise podcast since before I was old enough to have my own brokerage account. I wanted to ask you about your thoughts on Oracle. There was a lot of optimism about the stock in June, but now the stock is at less than half of its June 1st high. And analysts are divided on where it's headed. I'd appreciate any wisdom you have on the cause of this drop, what it's, means for the rest of the AI stocks and whether it might be time to buy the dip. I'll just say, Adam, that my sense of Oracle, this is a company I always remember being a database software company. And as such, maybe it was the kind of company that could have been a potential AI victim,

but it seemed to have transformed itself into an AI arms merchant by going in on all this spending that we've seen on data centers. Tell me if I've got that right. And you can pick it up. from there about what's been going on with the stock. Yeah, that's the beginning of the story, certainly. They have been doing the Microsoft Playbook for several years ago, since like 2020-ish, and moving to cloud-based software and renting out servers in the cloud. And this whole process gets supercharged by AI, the part about renting out servers in the cloud. And here's the thing, though.

They have this giant backlog now, about $640 billion multi-year remaining performance obligations. But almost half of that is one contract with OpenAI. And so the short answer to the question is the company has become, in some very large degree, a proxy for Open AI. And sentiment on Open AI is down. And people worry about whether Open AI will fulfill their end of a $300 billion contract, because they don't have $300 billion right now. Open AI is the company with ChatGPT. It's really, for most of us, it's the first time we started paying attention to AI when you had the arrival. The public sort of launch of the chat bot back in I think it was November 22.

I want to say. And everyone got very excited starting then. So this is the company that we associate with AI. So what's the problem then if this is a proxy for OpenAI? What's the concern about Open AI? Well, it's sort of twofold. One is their main competitor, Anthropic seems to have leapfrog them. And Anthropic who came at it saying,

we're going to go for enterprise customers first, and Open AI say, we're going to go to consumers customers first. And Anthropics path turned out to be the right one over a course of years. And so they've sort of leapfrog them. But both of them. The right one in the sense that they're making money, it's more, it's more. It's more lucrative. You know, this is all chatter and rumors and stuff. You know, both companies are headed towards IPO. So there's stuff that there's selectively leaking. Anthropic may even have an adjusted operating profit already, which I'm pretty confident though, but AI doesn't. And they may IPO first. And so there's this two-way competition that it looks at least for the moment that Anthropic has leaked frog them. But both companies charge a lot

of money. And the bigger threat may be these open weight models, most of which come from China, which are free to run on your own hardware or use a cloud service that runs it and it's much cheaper. Save a lot of money. Tell us what that means, open weight model. That means there's several Chinese companies that do this. They allow you to download the model, run it on your own servers, and instead of using the models that come from OpenAI and Anthropic, which are very expensive. So the threat is twofold.

One is Anthropic seems to be leapfrogging them. And secondly, they're both under threat from the whole. whole market getting commoditized by these Chinese models, which are subsidized by the government, the Chinese government. Okay. Now, that brings us to the second part of Kyle's question, which is, is it time to buy the dip? So these are these big concerns concerning Oracle. The price is cheaper than it was. Well, at one point, it looks like shareholders were up close to 30% this year, almost 30%, and now they're down 25%. So, okay, it got more expensive than it got cheaper, but you're getting it for less than it was at the start of the year. Is this the time to buy or are these concerns too serious? Please frame your answer in the form of absolute certainty, if you would, please. Look, I think it's a well-run company. They have a lot of pressure. They have negative free cash flow. People are getting tired of that and that's going to keep up for a couple of years.

And it was a company that was very cash generative, no? It's just that they've gone in so big on this AI spending. Yes, exactly. The CAPX is crazy for a company their size. It's less than, say, Microsoft and Amazon and Google, but still very large. And they're running up more debt and they're selling equity. They're probably going to sell equity. They've already registered for it.

I wouldn't touch it just because it may go up, but it's like it's so unique right now in so many ways. They got the software, and we could talk about the software portion of this. I think they're a software winner in AI myself. But Cloud's going to become 70% of the business. In the good scenario, cloud just outweigh is going to outweigh software by so much that it won't matter in the end. Adam, I could talk to you about this stuff all day. I could talk all day, too. We got to do this again soon.

Thanks for answering Kyle's question on Oracle. Talk to you soon, buddy. All right. Great. Thanks for having me. Thank you, Adam. Emily, we have time. Not really because I know I've gone on too long. But let's say that we have time for one more quick one. Who do we have? Who are we going to squeeze in here right in the end of this episode? This is from Beebe and Shell. And they have a question. That's two people, right?

Allegedly. Okay. We have no way of knowing. I mean, it's not the last name is not Anschel. It's B.B. and Shell. Okay, good. BB and Shell would like to know what you think because there's a lifelong friend of theirs who has an investment opportunity for them that sounds too good to be true. They trust his motives but feel skeptical about the validity of this opportunity he's talking about.

He recommends that they invest $10,000 in a company that uses AI technology to trade cryptocurrency. He tells them that he consistently earns between 15 and 18 percent monthly and has accumulated approximately only 200k in profit, much of which he has been able to withdraw from the investment-linked account. The company has very slick promotional videos, but they think that he is part of a high-level pyramid scheme. They can afford to invest in $1,000, but they don't want to invest in something that doesn't make any sense. What do you think? Well, B.B. N. Shell, thanks for coming to me with this question. I'm going to call BS. That's right, bologna sandwiches.

because the numbers to me aren't numbering. Let me walk you through about, let's see, three to four red flags that I'm seeing. Start with a return. It's preposterous, okay? 15 to 18% monthly. I'm not going to tell you that no investment has ever earned that much. Some have for a while.

But there's no way there's an investment out there that is reliably earning 15 to 18% a month. 15 to 18% a year would be, far-fetched because there's a big difference between saying what something has done and what something does. And they're giving a range that is so narrow 15 to 18 percent. In other words, they want us to believe that there's some investment out there that returns this much money with very little volatility. That's the key. Something like that doesn't exist. That's how Bernie Madoff got caught, by the way. That's what raised red flags there. It was that the guy never seemed to lose money. The returns were so

consistent. It was implausible. And that's what's happening here. here. Another red flag is that I'm going to assume that the details are murky here, right? Your friend's saying, well, we're using AI and cryptocurrency and, you know, those are just two kinds of things where it's difficult to ask questions about the very specifics of how it works. Another red flag is that your friend wants you to invest in and he's got a specific dollar amount in mind. Why $10,000? That's not how it works. If someone's got a great stock idea and they own it and they tell you about it. They don't really care whether you buy it.

They're not telling, hey, you got to get into this thing. You have to put $10,000 in. That should be setting off warning buzzers. Because I tell you, if this thing really returns that much, and if you want to put $10,000 into it, first of all, please, I beg of you, do not. But if you really wanted to do that, here's a safer way to do it.

Put $100 in the thing. If it returns that much a month, you'll have $10,000 in about two years and eight months. And then you can just let it ride. Propose that to your friend as a solution and see what he says. Then you can put the other $9,900 into something more plain vanilla, like a low-cost stock index fund. I think your instincts might be spot on.

He might really believe that he's recommending something that does this well because that's what he's been told. By the way, slick promotional videos on YouTube, you mentioned, investments that can return that much over short bursts, don't look like that. They don't come with promotional videos. Let me tell you what they typically look like. One of two scenarios, and they're both stocks. Let's forget about options or leverage bets or stuff like that.

One is a deep value stock that's just disgusting to look at. It's like if you buy this thing, before you tell your friends that you own it, you want to wear a paper bag over your head. Nobody likes this stock, deeply out of favor. But you have reason to believe that it's going to think. turn things around and it does and that can lead to big gains over let's say I don't know maybe years doesn't go on forever the other is a growth stock and we're talking like the mother of all growth stocks we're talking about getting in early on in video or something like that and early on it looks like

hey this thing has gone up too much too too too fast and how can it possibly keep going it looks overpriced right here and it just keeps going and going and going but opportunities like that don't come with promotional videos and there's no one telling you you have to put $10,000 in. So I think this one's the easiest question we've had this episode. That's it for us. I want to thank Ace and Kyle and Bebe and Shell. And who's the other one, Emily? And how. How could I forget about my own last name? It's Howe's first name. If you have a question for us about finance, investing, go ahead and send it in. It could be on a future episode. Just take it. put it on your phone, use the voice memo app. You can send it to jack.how, that's h-o-u-g-h

at barons.com. If you've sent a question in, you haven't heard it yet, remain hopeful. We've got a bucket of these things, right, Emily? Bigger than last week's 60-pound honey bucket from Costco. Oh, you're going to send people scrambling to hear about that at last week's episode. Okay, you can subscribe to the podcast on Apple, Spotify, YouTube. You can leave us a review. Thanks and see you next week.