Chit Chat Stocks - Investing Power Hour #81: Netflix Can't Stop Winning; Analyzing Bank Earnings; Mortgage Rates hit 8%

Episode Date: October 22, 2023

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Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. This is the Chit Chat Money Investing Power Hour number 81. We'll have to do a countdown to number 100, which I think will be, what would that be in four or five months? Something like

that. I'm joined as always by Ryan Henderson. My name is Brett Schaefer, and we're talking whatever we want to talk about in the investing and finance world today. So Ryan, how are you doing? Earnings season has officially started and we're getting back to the fun time over the next few weeks here. Yeah. It gives me something to read in the mornings when we got those before market earnings, but it's always so frustrating when you own something, you're excited for the earnings report you wake up and it's like the uh you just know it's an underwhelming report and you're like god what one's that is did that happen already to you no but i was a little more optimistic about allies earnings

maybe we can discuss that what you're optimistic on maybe we can go through that sometime this episode i know we have some notes on that but anyway yeah the uh it's uh it is a fun time it's busy season and netflix has reported tesla's reported ally which we own has reported banks in general airlines all banks airlines i'm trying to think if there's any other big ones that we've missed i feel like netflix usually kicks things off yeah at least for tech they're always the first one netflix and tesla i think what's interesting i think tesla does it for marketing purposes which is pretty smart uh but both of them yeah they're always first i think it's just the auditor's stuff right do we get stuff out first nah i have no idea i'm not sure really not

sure um yeah other than that it hasn't been that newsy i guess you know what we should have kept up with have you followed the unity crisis at all what's been going on there yeah maybe we're doing a little read up there all i saw was that the ceo was fired and they tried something with the gaming community about some sort of fee but besides that i don't know so unsurprising given that guy's track record he's a very you know i i don't think he cares what we have to say about him because he's very rich man but he didn't do he hasn't done a good job at all at he didn't do a good job at all at electronic arts and he certainly didn't do a good job at unity so maybe that's bullish for the business but if i remember i kind of keep a decent eye on unity and the stock is just permanently

at an expensive multiple yeah that that guy if i remember correctly john riccatello he's been paid quite well for someone who has not a great track record in the industry he must be a great like salesman like must do a hell of an interview with those like executive interviews yeah i guess he should thank the fifa franchise or ea sports fc because that really carried him we have a comment here from tyler and for anyone listening we do these live thursdays so if you want to join hit up the youtube page but if you're listening obviously you can just do that as well they come out sunday mornings but it says asml and tsmc reported semiconductors as well are always early which is interesting i said asml's bookings were

down 70 which makes sense given the cyclical issues so interesting time for that industry like not move that much yeah i think that was pretty much what people were expecting so it's kind of nice when expectations are like that i will say before we get into a topic we have two interviews out today most people are going to be listening to this on sunday but it's thursday well we have one of them's ours one of them's from our friend one we have one uh an interview out on short selling with upslope capital george oh i'm going to pronounce his last name right levatus right ryan yeah i believe so runs a small long short fund uh you know he's very personable he has a great presentation out we went through a whole thing on short selling

how to do it correctly misconceptions you know how to do it without blowing up your book and stuff like that and why it can be very beneficial and then also john rotanti on his new podcast the J-Row Show, released his second interview with Dan O'Keefe. Hopefully, I'm getting that name right. Yes. Okay, good. And that's on wherever you get your podcast. We may cross-promote that on our own feed shortly, but you should go follow his feed for all his interviews with some of the top people in the investing world, basically people that we can't get on our own show, which is why it's great to go listen to that as well so follow that that's jro show let's get right into it though ryan i'm sure we'll have some people commenting and asking some questions but

what do you want to hit first let's do netflix netflix had a pretty solid quarter they i think the stock was up like 16 or something after after the report so really good quarter basically beat on every single important tracking metric that they have, maybe what stood out to me is they bought back $2.5 billion in stock this quarter. I didn't think they'd be repurchasing so quickly. They have a $10 billion authorization. It's not a small amount of stock. they got to offset that against some of the stock-based comp, but this management team

is probably, I would say, top five public markets. Yeah. At least the gap between them and their competitors seems like they run circles around all of the media competitors. They throw stuff out there. I think what the most genius play was, was to tell everyone that you didn't do advertising and you didn't do, or don't do advertising and don't do, you have to have your own content or something like that. I forget what all the other things they were like putting out into the universe in the 2015 to 2020. And they forced everyone to make an uneconomic decision with that. And now they're saying, oh, we reversed our decision. But I feel like it was actually a little bit of trying to throw things out there

that the competition will make some mistakes because it seems like a lot of people lead off of Netflix. A lot of people are adding these advertising tiers now and they're doing quite well now. Yeah, the other thing I find interesting is it seems like they would have pissed off

a lot of customers over the last year, right? They revoked paid sharing. They launched a new ad supported tier and they're like, well, you don't have to have the ad supported tier, they raised prices on the premium tier which i think having the ad supported tier enabled them to do that and there was there was one other thing i can't remember but it still they have such a tremendous amount of memberships and eight percent of market share in in tv in streaming tv

today the us behind only youtube the other part is you've got a lot of players in the industry who can no longer just run this mod the netflix model they can't just have their own content on their own app because it's proving not to be profitable they're not winning consumers they're not winning eyeballs they're not winning subscribers so they're going to have to license their content out because that's the major asset that they have to the winners like netflix and we're seeing that now where i imagine netflix is getting pretty dang good rates on shows like suits which just came to the platform the big hit shows i think ballers was an hbo show that they're licensing to the platform i don't know if that'll be that big but it the the scale is affording them more and more

opportunities. I don't know. I think about this quarter and I'm like, Netflix didn't really have any hits, like any massive hits in the US, let's say. I think 40% roughly of the revenue is US based. It didn't have any huge hits, yet the churn doesn't seem to be there. It feels like one, which is just the default like you have to subscribe you gotta have it it's on everyone's must have list well I don't have it

but you don't share majority of people do what you don't have you don't do the pay sharings plan no one's the the one I'm using they haven't stopped yet so well I think if it's who's is it a roommate

it's I I don't know it's someone that like it's it's it's not anyone i know so it's just been logged in on my tv yeah interesting because i remember hearing something that like if you go to the wi-fi of the home account the you're you're not considered like a guest or whatever yeah like you have to do it once a month so i think that's the one way to avoid it just bring your TV over to whoever's host account's house to log in.

I think what's interesting is that they haven't, with the password sharing, they haven't done it fully yet. It's like slowly rolling out. I don't know if they're doing it randomly or by accounts that have the most views or hours watched, so they're most likely to re-up or something like that. But I think the most interesting part is that given the ad supported tier, which I think is $7 a month, but either way, pretty cheap. That's giving them much more room to raise prices on the premium tier without thinking that they're going to sacrifice a bunch of revenue. So I'm sure

they just run the numbers and say, hey, we put it up to this level, $20 a month for the highest tier or whatever it is. We know given the data that we have that some people will leave fully, but a lot of them will go down to that advertising tier and actually be just as profitable. But then for the people that stay the 90 of people that stay with the full tier the premium tier that's going to be revenue accretive they're a little aggressive with pricing uh you know as compared to some other streaming services maybe some of the music streamers as well and i don't know if that's going to bite them in the butt later but clearly they do have the room to do that and they're executing because of that the advertising tier has been key key to unlocking that yeah i've been thinking

about like some of the like what are the long-term risks with netflix and it's hard to really point to any like glaring ones but it feels like they're being very aggressive with pricing and they're either pissing people off or they're gonna have to peel it back a little bit but obviously they have better data than we do on that stuff so it i'm sure they know what they're doing the other thing that i thought was exciting they're getting into live sports they're going to do their first live sports event with formula one which kind of a good supplement to survive it's a fake live sports event but i guess that's fine to test it's a live event let's say is it not live sports i believe it's formula one drivers golfing so it's like a little reality tv type deal

Oh, it's not. I thought it was a race. The other part is they are getting into AAA games. Did you see this Wall Street Journal article that they've launched? Yeah, they've been in this. Yeah, I mean, it's been like a year. They've been researching, or not researching, developing, hired some people, yeah.

For AAA? Yeah, I believe. I mean, yes, that came up again, but it's been a while since they've hired people. I thought all the acquisitions were mobile-based, But maybe they, I don't know. Do you think they can succeed in AAA if they just do like a spinoff of Squid Games as a game? That's a tough question.

With that kind of leads, you said it's hard to see a long-term risk to the business. And I think over the long term, this probably is a 10, 15, 20-year risk. So something that may be unpredictable and not something to worry about as an investor until you kind of see some of it showing up. It is just the, in general, people switching away from TV watching into using their phones more and gaming. And that trend has been around for a while, but obviously it hasn't hurt them yet, but it's something they're probably considering. And that's probably why they're investing in games because they see the data that everyone else sees that more and more people are spending time on video games and phones and not watching

any tv type stuff or you know legacy model of a tv type stuff which is what netflix really runs and they're investing in that i worry i think there's a lot of uncertainty there but it's probably smart to dip your toe in the water i can't remember where i saw it but i i think it was the mark zuckerberg interview on joe rogan but he talked about he how astounded he is by the amount of people that still just watch tv that with all these other computing devices a huge percentage of the time whether it's passive like someone's on their phone watching tv or actually engage tv has just withstood the the test of time yeah that's why it's a long-term because i mean but the trend is moving down it's it's a slow and steady decline but

it's definitely not something that's like oh it's going to show up in three to five years no one's going to watch tv anymore it's probably more of a 15 to 20 year risk which netflix given the transitions they made in their business model over i think what two or three big ones they've made they've they've actually they've been able to say okay we're going to make sure to prepare for any of these risks that we're seeing on the horizon that might not show up in 10 years but we're going to make sure to investigate and hopefully try to mitigate any of that which is smart but gaming is definitely bringing some uncertainty to them because i think they said they're investing a billion dollars total on an annualized basis into games now and clearly they're not going to

get that return yet but that seems like a good number that they can right it's not going to overwhelm the business or overwhelm the income statement but it seems interesting seems like seems like a good good number to to try to build up this muscle yeah i i love the way they go about kind of expense management and just laying out like this is how much we're going to spend this year on creative content whatever it is if you know if we get cash flow and in excess of what we're expecting whatever send it to buybacks the if you if they were to have a successful i guess this would be a third act because streaming was kind of a second act for them if they were to have a successful third act what do you think it would be live sports

triple a games or mobile games oh i don't know if live sports is a success it would be considered a third act but i in the near term that's definitely the one that's going to show up because with gaming i don't think it can be meaningful until the cloud gaming stuff makes sense until yeah i don't i just don't think it can be meaningful but i mobile gamer triple a it's really hard to say because a lot of people watch on their ipads and on their phones with netflix but they've been investing in trying to make it how do i describe this like games that work on tvs phones and tablets and can like use your either phone or some sort of controller type thing to play the netflix games

because it's not attached to a console so they don't have the nice usability of being an xbox player a nintendo player or a playstation player or even a pc so uh but in the near term it's definitely live sports yeah i agree and a lot of people kind of cringe at the thought of live sports being an aspect of the business because it's kind of fickle. We're seeing it with ESPN now and we're seeing it really across the whole streaming universe here where you're bidding for these live sports rights and it's kind of a toss-up as to whether or not it'll be really profitable for you. And then in the end, after the contract's over, they come back and they take all those economics away. So for any profits you had, they just offer a higher contract next

time. So most people don't like it, but I think if you can supplement it where it's almost not necessarily a loss leader, but it doesn't have to be your main profit driver, it can really be value accretive to the offering. So Netflix, for example, if you're offering live sports, even if they're not profitable purely on the live sports content, they can increase the prices on their plans probably with the introduction of that and they're making money across their original content so i like the idea of them getting into live sports obviously doing it kind of slowly is probably the right way to go instead of pulling like a youtube approach and just buying what was it uh a sunday ticket so google can do that but i don't think netflix

has the capacity to do that so i would like to see them do it gaming i i kind of fade their gaming chances yeah or i mean they can make games that people play but i fade the ability to get a good return on on say if the spending on games is the invested capital getting a good return on that yeah i listened to that strauss zelnick interview by the way i just have a hard time getting excited about any games publisher like it's just most games like most games have a lifespan you know and you can be profitable and even strauss said this like almost all games will eventually go away he said maybe grand theft Dotto will survive over time if we take care of the asset, but most games over time will go away

and you really just have to come up with a new hit. And some companies are really good at doing that, but it's increasingly competitive. I don't know. Me, I get worried about- You're very pessimistic. You were telling me that EA Sports FC was going to be down and the numbers, they're up. So maybe you're too pessimistic here. True. I was pessimistic about EA. I will say- The overall industry is growing again, so that's helpful. So maybe there was – we've had a rough two years or so. Yeah.

I think I underappreciate the fact that EA, FC, or FIFA, whatever it is, that brand just has, I would say, 90% of their users are just, I'm going to buy it every year, plain and simple. So as long as you can kind of attract around the edges and add new purchases that way, they're going to be fine. The part that I was right about, and I don't think it was like this bold claim, the name change had zero bearings on demand for the game. I still get people confused about that, how they're like, well, FIFA should come back and offer them and EA should take something. But there's nothing that FIFA offered that was anything valuable to the game. So there's no way EA is going to go back.

The only reason they were worried about losing the FIFA name is because the brand had built up over decades. And now they realize that sales are actually up because FIFA actually restricted them from marketing flexibility, from in-game stuff that they could do. Yeah, there's no way they go back. And FIFA made a really bad error there. We had a comment from Tyler, who is leading the chat on a one-man show today, says sports lowers churn, which makes, yeah, I agree. You can't really think of it as a profit driver, but a churn reducer. It's really, really great at reducing churn if you get the diehard fans.

And he says, Netflix needs to wait until churn is a bit higher and then introduce live sports to reduce the churn rate, increases the lifetime value to customer acquisition multiple by increasing the lifetime of a new user. yeah i mean if you lock in ryan as maybe listeners are surprised you're one of the uh let me say the few mls you and your family that watch the mls on a consistent basis for a good reason you have good relationships in the in the league and uh you're going to be a subscriber on apple tv for the next 10 years right yeah as long as that i think it's another seven years on the contract but the uh i will say mls season pass surpassed a lot of the estimates apple tv had

i can't remember the exact number but i'm not yeah not the only family out there that that has one but i think that shows the dtc model and streaming with sports can work because it unlocks that under 40 fan base that's not going to pay that cable bundle anymore and netflix can probably i wonder how they're going to do it, but yeah, I think if they introduce that, that'll give them even more pricing power. Yeah, I bet Netflix has looked at Apple TV and thought, because

Apple TV kind of had this bit of a sporadic approach, where it's like, we're doing some original content, we're just going to throw live sports on top, we're going to do some limited series, and it seems to have stuck.

With the live sports, I think they may have gotten bailed out a little bit by Messi, but the live sports work, people don't necessarily look at it as just like, this is where I go and get my TV shows. It's just an app where I get my content. So if it's live sports, if it's TV shows, it doesn't really matter. I think Netflix can kind of follow suit here where even though people associate Netflix with TV shows, I don't think it would be that hard to make the jump to live sports. Prime Video has done it as well. They were pretty successful with it, I'm guessing with Thursday night football.

Yeah. The, I think it underperformed a little bit, but I think that's to be expected given the age of the football fan base, the American football fan base. Here's one question I have though. Netflix loves to have the one subscription and everything out of the subscription.

So they get the, as everyone likes to talk about the wholesale transfer pricing. do you think they would be smart because the the tricky thing about sports is that there's diehard fans and then people who don't care at all do you think it would be smart for them to do a la carte if they get into live sports you think you should go i don't think the a la carte model really ever worked all the car no i'm not i'm not saying a la carte on uh this wrong term like for sports basically the apple model with an extra subscription if people want to watch the league or the games yeah yeah i think that's a fine approach um i don't know

what the economics are like on that at all if if messy didn't come to the mls i worry i'm curious if apple would have like been profitable on the mls season pass so my guess is not i think that would work but i would say just like bundle it in just make it a part of it yeah especially the advertising growth i think the advertising relates a lot to this because the reason that sports can work is if you're very good at advertising so if you have those two combined i feel like they're going to have to build up that advertising stuff first see how good they can get with it and then say, okay, maybe the return here can be much better than a linear TV provider trying to buy

these sports rights. Okay. Well, I don't want to talk about Netflix the entire show, although it's fascinating every quarter. They're such a good business. Let's move to another topic. I have some interesting things on the banking industry. So we have bank earnings. They're always first. And it's very interesting because you, well, we see it all the time online. Someone will throw up a chart of some loans getting written off and the chart goes up just a tiny bit. And they're like, it's over. The consumer is dead. What I wanted to look at it and try to go through some of the slides from the industry from three different banking companies or banking-esque companies, and that's Allied Financial, one I should disclose that we own, follow fairly closely,

Discover Financial, which we just did a not so deep dive on, I thought was fascinating. uh right we did discover yeah yeah during the the buyback month and then bank of america one of the large banks you know what i always found interesting before you get into the net charge the i love the people that look at they want to be the like i called it guy before the bank goes under with like and they always don't really know what they're looking at with these bank earnings but they, especially now that there's been like a couple bankruptcies, I think you see a lot of these accounts where they're like, oh my gosh, look at these loans that are underwater. And it's like, okay, Bank of America, for example, they've got a lot of loans that are underwater. But if

some small business or whatever wants to expand some operations somehow and you lend them money at 5% or 4%, you're not sitting there thinking about, well, maybe they do, but it's underwater, I can't sell it. You're just going to hold it to maturity. I mean, these are held to maturity assets. And then the other part is theoretically, yes, if all the deposits left, you would have to sell those but not every bank of america depositor is sitting there like analyzing these every quarter like yeah i gotta pull my cash out because of all these loans that are underwater yeah people love posting that and it's that that meme that gets used of from the movie where the guy like yells out something and then he does the see nobody cares thing uh the guy that played newman in

seinfeld but yeah let's get to i thought it was interesting all the slides they give on net charge off so first i have one on ally i don't think it's really worth it to share the screen here because we just have a few numbers but if we look at uh yeah ryan's a big share the screen hater but i like it the uh i like i love when people do it on other videos but the if we look at the ally they're an auto lender so basically used in new car loans and their net charge off rate for the third quarter of this year was 1.85 that's up from one percent in the third quarter of last year and then maybe i'll go through some of the other numbers here they have also with ally Their 30-day delinquency rate is 3.85%, up from 2.93% in the same period last year.

And then if we look at Discover, their 30-day delinquency rate basically did the same thing. We went from 2.1% in 2022 to 3.4% in 2023. If we look at Bank of America, their health and maturity valuation also went down to negative $131 billion. As we said, Bank of America is probably fine But if you look at their net charge-offs It's a bit different It's much smaller

But again, the trajectory is still climbing higher Which means These are loans that they Wrote off In the third quarter of 2022, 0.2% Third quarter of this year, 0.35% I'm not sure If that was a subsector

For the slide I pulled But generally, their charge-offs are going up as well Um, provisions for credit losses at bank of America went up from 900 million to 1.2 billion. I think generally you see these and you're like, okay, the loan book is deteriorating a little bit. Right. And people get concerned and they're like, okay, well, what if this just continues forever? Right.

We're just going to take this, this quarter and it literally extrapolated. And yeah, that could definitely work. but here here's what as maybe someone who tries to look at these businesses a little bit closely and see what management is saying it seems like or it doesn't seem like this is what they have been guiding to and it seems like instead of a okay deteriorating consumer or deteriorating lending environment we're seeing a normalization i it could because this is just getting back to pre-COVID levels? Because during the pandemic, we saw unbelievable loan performance just given that everyone was getting protected. Yeah. I'm not surprised that there's

this adverse reaction. A lot of people are concerned. Net interest margins have certainly compressed to levels that were lower than what people would have expected the normal going right to B. So I think management has said they expect long-term to have 4% plus net interest margins. Then this year they said we'll have three and a half, and then it's coming down to probably 3.2, 3.3 by the end of this year. But it's in such a weird period right now because the interest rate spike, I think it's better to just take the long run approach. So like you said, it's kind of normalizing. There's that quote where it's like, I've seen the future. It looks a lot like the

past, just a little bit longer. I think the reality here is you're going to get net charge off rates that are in line with the historical average, which is right now, it's not that far off. It's slightly higher maybe than the 2017 time period, but these are cars. At the end of the day, these are cars. People pay for their cars because they have to. It's one of the first loans they pay. I think the net charge off rates over time will be very similar to what they've done historically. And if that's the case, Ally is going to be just fine. Yeah. And the banking in general, it seems like they're well-capitalized. It's a much different thing coming into the 08 recession. And yeah, there could definitely be

a recession, but the banks or these lenders like Discover Financial, stuff like that, are still generating very solid returns on equity. And if they're depressed for a few years or even just a year, it seems to me like a multi-year depression of return on equity and a really tough period for the banks is already getting priced in. And the discussion question I have is with interest rates potentially at a plateau where the Fed is kind of saying that they may raise them again, but probably not. They're going to keep them at this level and hopefully see what happens over the next year.

And you never know, though. Do these banks, financials, lenders look attractive? Because honestly, if they go through, I still think you can, as long as they stay in intact. And even someone like Bank of America, a large one, even if they go through a rough multi-year period, I still think over this next decade, as long as their relationship with their consumer or whoever it is, whoever their core customer is stays intact, I feel like they are going to crush the market. Yeah, I agree. And especially with a lot of them are building up reserves right now. If the multiples don't come up and things look okay on the asset side,

they're going to be able to buy back too coming out of this. And that'll provide another buffer and a little bit of a growth to earnings per share. The thing that I'm constantly reminded of every time I look at a bank's quarterly earnings, especially with the big banks, is that these things move slowly. Like the financials move slowly. If, especially for like bank of America deposits were down 3% year over year, they offer like 0.01% on their deposit.

No, it's low. I mean, it's rising. It's rising. It's up to like, but they can choose. They can choose.

And a lot of the people just don't want to switch. I mean, they have for, okay. For example, ally offers four and a quarter, right? Something like that.

Bank of America offers these really low rates on your savings accounts and people aren't switching or only 3% of deposits have left. And probably a lot of that is from cash just coming out of people's accounts. To me, it tells me that they can just wait on their health and maturity assets, write new loans. They're going to be fine. That interest margins might be tight for a little while, but I think they can pick when they want to choose those to raise their rates on the savings accounts, and they're not going to be too – the growth is somewhat in their control, and it's just going to take time. But yes, I think these are in a good position. Maybe that's why the multiples come down, is people are just like, I don't want to

wait three years for net interest margins to come back up. Yeah. And it might not be three years, It might be less, but yeah, it could be a multi-year period here, but as a bank, and generally, when we're looking at companies, we focus on cash flow and we think kind of return on equity and book value is not that useful and maybe overused, but with banks it's obviously extremely useful. I mean, Bank of America is trading at, according to Coif in here, 0.9 times book value. And I'm thinking, can you putting up returns on equity at whatever they're doing, they're going to do quite well unless you think they're going to trade at 0.5 book value, but then they

can take out a ton of the float and then Buffett's the big buyer and you'll just own the entire thing. But yeah, I think it's quite interesting. We'll see. If there's a global deflationary credit bust, then things are going to go bad for a lot of these companies. And obviously, you can't just put your entire portfolio in these things, but it seems like a normal recession, a general run-of-the-mill recession, is very priced into a lot of these things, especially someone like Discover. Yeah, I agree. And just kind of judging by personal experience, it doesn't feel like,

I don't know, it feels like the economy is in a fine place. Like employment is really good. And I think as long as you have low unemployment, maybe there's not going to be as much purchasing activity or a little less consumer spending, but people are going to be able to pay off their loans in general. Remember the banking crisis? The one from like six months ago? Yeah. I'm saying that as a joke. It wasn't obviously a crisis.

I think the rule of thumb is that when all the people that are bearish and doomers on everything, and it's just them being doomers on this one thing, and they're just spreading it around online and writing all this stuff up on that generally faded. That was the most overrated thing I've seen in a long, I mean, okay, we're not that old, but it's one of the most overrated things I've seen or overrated events in investing because everyone is just going back to the great financial crisis and looking for those telltale signs when we're way too prepared for that type of stuff to happen right now. Everyone's focused on it. So we're going to make sure it doesn't happen. That specific type of event doesn't

happen again. And the funny thing is, especially looking back now, that Silicon Valley Bank was an outlier. They just made some bad decisions. They made all of the worst choices. They banked for companies that were not cashflow positive. In a lot of cases, probably didn't have crypto companies. They had a lot of concentration in terms of their depositor base and they took interest rate risk. That's the worst possible formula. They did all the things you wouldn't want to do in a potential bubble. yeah and i mean you look at most of the other banks there's really not a lot of situations like that maybe there are out there in terms of regional banks but most of these big ones i don't

see the concern um just i don't know the funny thing is they haven't really repriced like the a lot of the a lot of the regional banks or some of the banks that i've looked at they're still not that far away from prices they traded at after that banking crisis yeah people are still concerned about yeah the interest rate stuff i think it's got to be the 10 i get this a little bit outside of our expertise and it's kind of trying to read the tea leaves but i think it's because of the 10-year is rising a lot and people are concerned about that or the yield excuse me on the 10 years rising a lot, but who knows? And yeah, famous last words, but I think a lot of that is priced in. And whenever we talk about banks, so many people are like, oh, I never touched that

black box, black box, can't touch that. And there's some of the best performers ever. There's a reason Buffett loves them. I think it's a good opportunity to go look at some of these things and yeah don't put your entire portfolio into one financial you're not buffett but i i really do think there's some of these look very attractively priced yeah so let me let me run this by you ally financial one of the fastest growing over the last 10 years one of the fastest growing banks out there if i'm not mistaken From a depositor? Yeah, sure. Yeah, from a depositor base. 4.7% annual dividend yield. You're getting just under

US treasury returns on the dividend, which seems very much there to stay, and probably continued growth. Yeah. I think they have the capacity to double the dividend within five years. If they want to, they'll have the capacity to. If they have the capacity to, I would encourage them to just buy back. But yeah. Well, that'll allow them. It's a self-fulfilling prophecy because it'll allow them to raise the dividend per share.

But yeah. Anyway. All right. Well, Tyler talked about Microsoft needing to acquire EA. What did you think? So we kind of are past the gaming section, but Microsoft officially closed on their acquisition of Activision Blizzard. Do you think that was money poorly spent?

Yes. I agree. Yeah. Yes. Yeah. Well, it's still high of a price. i think xbox no maybe if they just innovate the hell out of the cloud gaming market they can win here but playstation and nintendo and pcs are steam you know pcs general there

they do much better they do much better and i don't know why that would change i don't see the synergies like i don't see how especially after all this talk about having to license it out and not make it exclusive i don't see how it's benefited being under xbox's umbrella yeah they somehow think that the games are going to improve because they get rid of this sexual harassment thing which obviously they should try to get rid of it but it's not gonna just magically make the games good i mean i get pain 15 20 times for activision just purely on the belief that the earning stream will grow, but they paid more and I don't see any synergies. So it's hard for me to imagine where, I think if Satya Nadella knew the process that they were

going to go through, probably a ton of legal fees spent trying to get this through and where gaming would trade for the next year he would have said no yeah yeah well he could have gotten it for cheaper uh say we weren't about bobby kodik but he is very good at timing uh yeah sales buybacks stuff like that although probably it was a little lackadaisical and some other stuff that's pretty bad okay other topic i want to hit. Did you see the 30-year fixed mortgage hit 8%? Here's a tweet from Lance Lambert, a real estate analyst, good follow across all the social platforms. The average 30-year fixed mortgage rate hits 8% for the first time since 2000, taking into account mortgage rates, incomes,

and home prices. October 2023 stands out as the least affordable month for US housing this century. So we are wrong that home prices were going to, mostly wrong, because let's say they kind of stagnated, right? So we thought they were going to fall a decent amount this year, given the affordability issues. I think they're off their peak if we look at new home prices, but not very much at all. Where does the housing market go from here? Because it seems like as the mortgage rates keep rising, it's kind of a rock and a hard place thing. where affordability gets worse, people stay within their current situation, supply gets restricted. And I don't know, are they going to just keep going until something

breaks here? Seems interesting. Well, just to be clear, I'm looking at Fred right now. Average sales price of houses sold for the United States at the end of Q4, 2022, The average sales price was $553,000 today. It's $495,000. So it is off by 10%. Yeah. Is that all or new average sales price of houses sold? So it's not, it's yeah.

There's less homes being sold, but yeah, I think Burry called it like watching a plane crash, a slow plane crash. I think it's just going to take a ton of time. People are getting bad quotes. People are just moving less. And unless they have to sell, they're not going to sell at significant loss. I bet my guess here is that people moving in and out of jobs is probably a lot lower too. And people are kind of just staying in place now because they don't really have another option it either if home prices continue to go up from here at the worst affordability in 23 years i think that would be very concerning because that means only the really wealthy are

able to afford it and either everyone's becoming renter or we're gonna have a homelessness crisis yeah no i saw that for our area and i think it applies to a lot of other areas too the average income which i guess you could do combined if you want you know if you're a couple the average no sorry the income needed to afford it was either the median or the average i think was the median the median priced home in the seattle area was 215 000 a year and the median income. And again, I think these are medians, could be average. The median income in the Seattle area is like $100,000. So quite the gap, right? Yeah. There's a comment here from Fake Alias. He says, literally everyone I knew has been saying home prices will crash. That made

me question if and when it'll happen with the world watching and expect it. Yeah. But I think it can still happen. Just because people are expecting it to happen doesn't mean it can't. Like, I just, if you look at it on a very, like, home-by-home situation, my, whatever, someone's house, a neighborhood, let's say it's marked at a million dollars, and no homes around it have sold in the last two years. They still believe their home is worth a million dollars. Yeah. The moment one sells at a 25% markdown, everyone else's home is worth less. I think that's going to happen more and more over time. And eventually people will have to move not opportunistically, but because they have to. So I think it slowly comes back. Prices slowly come down. And like Birdie said, it's like watching a slow plane crash. yeah and if you look at those zillow history things which can be very interesting

the you see someone have a home for a while and then they list it at a very high price let's say ryan's number one million dollars but the eventual sale price is like 800 000 but with the the so that should say okay in that neighborhood prices should probably be down by 20 but given that no one, we're at the record low or record low over the last 30, 40 years of home sale activity. We're not seeing that happen as quickly as it might, which leads me to, I don't know if this is just a take, it doesn't really affect anything, but I think if mortgage rates go down by a little bit, honestly, if they go back to 3%, that'd be wild and housing prices might go up.

But if they go down a little bit, I think housing prices fall quicker because that unlocks activity. Yeah, that's interesting. That's probably accurate. I don't think there's anything wrong with home prices falling 20% to 30% from their 2022 peak. I think it would be healthy. I don't think anyone's really hurt by that. well they're well the people that are selling them yeah and i think they'll be fine most of those people can't afford to like have that happen right their life's not going to be ruined if they

have a million dollar house and it's going getting sold for 800 000 and they have full equity in it you have to maybe you have to downgrade your next home purchase but i'm sorry yeah these poor yeah these poor young people can afford a place to live i think it's a sacrifice you can make all All right. I have a very interesting chart as well. This is a bit of clickbait. I think maybe we can debate whether it was clickbait or not, but it got a lot of views. So congrats for getting the Elon Musk dollars over at SX from this account. Here it is. And I'll show the chart after I read it. The PE ratio of the Magnificent 7 now sits at 45. At the peak of the Nifty 50 bubble in the 70s, the average PE ratio for the set of mega caps was at just 41. This also puts

the magnificent seven at the worst equity risk premium than what was seen in the nasdaq 100 at the top in 2000 for anyone wondering that magnificent seven are the giant technology companies that have hit a trillion dollars in market cap so nvidia tesla meta alphabet amazon apple microsoft and is that all of them you say meta apple amazon alphabet the did you everyone knows people first of all i gotta say magnificent seven sounds a lot cooler than fang so i say i've been using them a lot in articles yeah keep with it with the magnus magnificent seven so if you see this shirt here is this accurate yeah it should be because now here's i'm gonna have one more note here for the listeners

the p e ratio is up to 45 for these seven companies if you look at the other 493 in the s p 500 their earnings ratio looks to be just under 19 so right around you know not not too crazy here's what i think these charts get a lot of clicks but i think they are misleading one i think we should nvidia and tesla are clearly at extreme valuations and if those two trillion dollar company right it's not the end of the world is that the average multiple or is it the weighted average as like a percentage of like uh like if it's the average multiple between the magnificent seven but in most of the weighted average like s&p 500 where it's like market cap weighted

it might are you asking whether it's market cap weighted or just taking the seven numbers and adding and then dividing by seven uh i don't it doesn't have the second details here I don't know. I don't know what it is, but either way, I think this is misleading because, okay, yeah, NVIDIA and Tesla are extreme valuations, and the expectations on those companies are very, very high. And then second, Amazon's trailing earnings look terrible, and I think this number goes down over the next year or two. yeah this number can go down quickly without the stocks going down quickly look tesla's down 10 today and qqq is i think flat at least as we're recording that's what i'm okay so if you strip out nvidia and tesla from the average earnings multiple it's probably more

like 25 or 30 times if amazon earns what they can earn which i guess this is speculative it down a lot quicker too i mean apple amazon alphabet and uh meta and i'm blanking on microsoft those make up like a ton in the market cap weighted s p 500 index and they have the lower multiple so i this might be accurate whatever it's crazy but i don't think it has any bearings on how the s p does from here yeah i think it just shows how extremely valued nvidia and tesla are yeah or under earning potentially i guess you could say if you like it also nvidia barring any really unforeseen changes here they're going to earn substantially more over the next 12 months than they did over the last 12 so yeah it i don't know i would

say fade that chart good clickbait though yeah i i don't know if i would entirely fade it because even if you take that out they're probably training it if you kind of try to normalize or do some sort of forward thing or even just exclude tesla oh yeah i'm not probably training yeah like they're all training in a very expensive multiple and i think if you have a lot of exposure to those companies only maybe except for the ones we own those are those i mean i i yeah don't worry about them the uh i i worry about having exposure to them uh in general just because they've done so well although amazon versus i think it's been the worst performing of the magnificent seven so yeah we got a comment here what would that chart look like if we use

forward pe again i would very different i'm guessing i mean tesla is going in the wrong tesla's going the wrong way so that could be like a big hurt there and also amazon may not you know improve that earnings ratio nvidia could be at a a cyclical that's just over earning right now who knows but i don't know if the 45 number makes the same amount of sense versus the nifty 50 which was like 50 stocks not as dynamic not as like there weren't some that weren't making any money just for some one you know one year reason and i don't think you should take that and say oh i got to sell my magnificent seven stocks although i i would guess they underperform over the next five years equal weighted let's say the whole magnificent seven equal weighted magnificent

seven over the next five years sure let's okay let's strip out nvidia and tesla so you've got microsoft apple amazon google meta right those are the those are the five yeah do those beat the market those are the markets so i guess that's a stupid question those do better than the rest five percent returns annually no no i think you can still say it doesn't beat the market it's not the entire market it's like 20 25. the i would lean towards beating honestly i would lean towards beating the market yeah i agree if i had to make a choice with with microsoft i always think man it's expensive

but it's like i would pay a pretty good premium if i could just buy microsoft office I don't know. I don't know. I'm not in love with that business anymore. The thing is, unlimited price and power, man. It's just... People have... There are so many organizations that are just built on Excel, obviously.

I know that's kind of common knowledge, but no one's going back and converting all those to Google Sheets. you pay what microsoft makes you pay maybe it's also maybe they've been pricing people up we talked about that yeah that's true but you know we've talked about the resume moat where it's like if it has to be a part of your resume it's got a moat i don't think anyone has a better resume moat than microsoft because literally every single application is proficiency in microsoft office like you need to have that as qualification um it's such a lame one too because it's like are you intuitive yeah whatever have you ever

made a spreadsheet can you just yeah yeah they're so simple too like powerpoint like it tells you exactly where to go what to do anyway the uh plus with chat gpt you can probably could probably just make them for you now if they get those integrations going the i i just worry about the growth of that just given that new people i mean the growth of drive versus that is pretty normal versus free users i know and i'm saying like the lock-in's strong but the who else would pass the resume mo who who are the top ones autodesk adobe uh Uh, the, so systems Bentley systems, all the engineering ones, um, trying to think of other software ones, uh, the HR ones, I'm trying to remember their names, but stuff like that.

Yeah. Yeah. Oracle's probably in there. Um, Oracle for sure. Yeah. Oracle for sure. And then the cloud stuff for engineers, AWS, Google cloud, Azure. Yeah.

Oh, you know what I noticed too? Workday is like, they got every corporate company by the, you know, somehow they got them all. It doesn't make any sense. Oh, Salesforce. Oh, that's true. They're in there. My friends that use Salesforce hate it though.

I'm living in this all day. It's terrible. Yeah. Salesforce is interesting. You know who I like there is Adobe D. they kind of did they they don't own canva do they about canva people are worried about canva yeah i like canva that's a damn good platform it's a good business model freemium yeah i like it i guess that's true i don't you know i haven't paid them anything so it's a great platform don't pay

them anything i think well i think they learned it's the same strategy google drive is doing to Office, which if you look at that, okay, well, it's not going to kill Adobe, but it can wiggle its way in and maybe hurt them a tiny bit. Yeah. Well,

we've gone an hour. Yeah. Thanks to Fake Ilias and Tyler for joining the chat. Thanks for the questions. Did we miss anything big today? We didn't talk Tesla earnings. Yeah, that's all right.

no clickbait this time uh margins are going down i guess that's really that's really all it is there you go we discussed them okay let's hit the disclosure we are not financial advisors anything we say on this show is not formal advice or recommendation these go live thursday mornings but you can listen wherever your podcast player is apple spotify or youtube we are general partners at arch capital and clients may hold securities discussed in this podcast thank you everyone that joined live and we'll see y'all next week