The Compound and Friends - Adam Parker Returns

Episode Date: January 19, 2024

On episode 126 of The Compound and Friends, Michael Batnick and Downtown Josh Brown are joined by Adam Parker to discuss: economic conditions, the 2024 market outlook, earnings growth, why buybacks don't help value, growth stock ideas, and much more! Thanks to Jensen Investment Management for sponsoring this episode. Learn more at: https://www.jenseninvestment.com/ Check out the latest in financial blogger fashion at The Compound shop: https://www.idontshop.com Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Josh Brown are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. Wealthcast Media, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here https://ritholtzwealth.com/advertising-disclaimers. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: https://ritholtzwealth.com/podcast-youtube-disclosures/ Learn more about your ad choices. Visit megaphone.fm/adchoices

For my bar mitzvah, my cousin, who was always a little bit, eh, he got me a pair of Larry Bird game-worn sneakers that were signed by him. They were like the old black Converse. And I was super psyched until I realized they were a size 10. And I was like, Larry Bird's a big dude. I don't think he wore a size 10. He's like, these are game one. I'm like, dude, don't bullshit a bullshitter. The signature looked real, but I don't even buy that. Big Bird fan, but the guy was six feet tall.

Size 10, I don't think so. I wear a size, I'm a size 12. Yeah. And a half. Do I go, am I putting these on? Where are my muffs? These would be good for outside. I might have you slide down just a little bit

so you're closer to the mic. Okay. Rocking the mic. So are you following, are you following the Nelson Peltz versus Disney stuff at all? Not really. So Disney put out a formal filing. Basically saying, this guy Nelson Peltz has met with us 30 times. He never says anything.

I think, like, he just wants a board seat. He's an ideas guy. No, but he isn't. That's the thing. like, he just wants a board seat. He's an ideas guy. No, but he isn't. That's the thing. His idea is give me a board seat. Like, that's his... In other words,

he's not putting forth any strategy or any competing idea for Disney. It's just like, give me my board seat already. And, uh, I don't know.

So they formally rebuffed him. So he went on TV today. He went on CNBC. And, uh and he's not he's not going away so they're gonna have the proxy vote

this spring it's gonna be a lot of fun the stock is looking less terrible stopped going down for now he has the former

CFO from Disney as he wants two board seats I think one for him and one for this guy who is the CFO from Disney. He wants two board seats. I think one for him and one for this guy who is the CFO. And that's like their demand. And he doesn't own enough stock himself.

He has the guy that sold Marvel to Disney, Ike Perlmutter. He has that guy's shares. And that guy has a lot of stock. So it's going to be a fun one. You have any experience with these guys? You ever deal with them back in your day? We do a lot of work now for corporates and law firms and boards when there's an activist situation.

Mostly, it's about some capital use, like should they do an accelerated share or purchase? Should they do a spin co? Often the activist wants no spending. So if you're a healthcare company, you either have to do R&D for a new product or SG&A to market what you have. If you do nothing, sure, you can print two good quarters on margins, but then the business is probably starved going forward. So often what we'll do is just come in and say, OK, here's a group of stocks historically that looked like this one. How did they toggle their R&D spend or their marketing spend and which ones had a better EV to sales or whatever? So we just kind of give them the empirical data to give them advice about what to do. They want to know which stock went up,

which one had the stock price that went up the most? Yeah, which was like the better spending path to generate value. I was reading your spinoff work. That was good stuff. Oh, thank you. Yeah. You're the one. I'm the one. Someone got clicked on it. Who brings you in, the company or the investment bank that wants them to do something because they'll get paid for doing it? Yes. Both?

Yeah, law firms, boards, friends on boards, CFOs, IR. And then we can be proactive. Like if we know there's an activist that's gone in, we can go to the corporate if they want help or even we work with some of the activists too. For us, like I don't want to say I'm – I don't care, but it's clinical. Like here's the data. Here's what it shows. Is there a distribution of outcomes? You're like a court witness.

So you're not giving necessarily opinions. You're giving data? I give my judgment afterward, but it's supported by the data, right? You're not – a court witness is hired by one side or the other, but so are you. Yeah, I'm not, yeah, but I'll, I'm not like involved in the same thing on both sides or anything.

It's just sort of like, okay, the, there's an activist, there's a, a RemainCo and a SpinCo. The RemainCo's

got the activist and, and that activist wants no spending. So the board of the RemainCo will hire us to sort of

give them the evidence of what to do. I don't know why. I just thought – you know, I've seen it in my cousin's video, ladies and gentlemen, of the jury. Yeah. All right. So they'll bring you in and say, okay, forget about the opinion on the right strategy. Give us the numbers. What would be the right thing to do by the numbers?

the numbers, what would be the right thing to do by the numbers? If you're paying $15 million to one of the big investment banks for a divestiture fee and $4 million in legal fees to one of the five firms that dominate that, for me to charge a fraction of those numbers and empirically give you the data that supports doing something, I'm a really small percentage of the bill of material. So the advisory business for us is great. If your combined legal plus IB is $18 million and I charge $100,000 for the expert analysis, it's great business for me, but it's such a small percentage of the bill of materials for the deal and it helps them get confidence that I'm not maybe biased data from the investment bank giving advice or I have an agenda to get the transaction done. When you explain that business to me, what's the deal with this? Are we having some snacks or what's going on? It's depth.

What is this? It gives the table dimension and depth. and some X or what's that? It's depth. What is this? It gives the table dimension and depth. You can't have a YouTube video where a third of the screen is a brown table. Okay.

Okay. Okay, Michelangelo. I thought it was related to how fat I was looking at from this angle or something. Yeah. Also, we're going to fill it with wings. In GLP-1, you won't need this after we're all out of Zempi. So it gives the table depth, and we're going to fill it with lemon pepper wings.

Yeah, right. So when you told me that business that you were in, what did I say? I said, stop doing everything else. Be the advisory quant. Right. Because I don't think that exists. How many guys like you are running around who can do those research reports with the credibility you have to give corporate boards direction? Not a lot.

Yeah, I think the two things that we're doing that we're trying to amplify my background are, one, risk work. So we've signed dozens and dozens of nondisclosure agreements with buy-side firms, long-only, hedge funds, quants, whatever, who send us their portfolio to do custom risk work. So a lot of institutional investors will have services that do the risk, VARA, Axioma, mortgage semi-fund services, if they print, whatever. And so they pay us to kind of come in and say, OK, what do you see as the real risks? We can be more nimble because- They're taking existing portfolio and they're saying, Parker, what are my risks? Yeah.

What do you think the risks are? Also great business. Yeah. So that's a great business because, you know, I, you know, if you're the CIO of the fund, like maybe if I work for you, I'm a little bit nervous to kind of like really slap you with what I think the risks are, but I, they're, they're kind of paying me to be objective. Yeah. I want you to do well.

That's interesting. They want you to find an analyst that works works there doesn't want to rock the boat uh but you're like hey you paid me so here's what i think yeah it depends on the culture but i'd say in general um you know i i my only goal is to help and so i could say look this is what i see i can think if rates rise you're going to get killed they're all sequel this is the thing that hurts you or these names because sometimes happens culturally josh like you let's say you decide you run a big fund and you're like you know i want to lighten our tech exposure. I'm a little worried about it, right?

I say that every day. You go to the tech PM and you say, give me your least three favorite names because you don't want to, you know, sort of disenfranchise the person who's been working hard picking the stocks. The problem is those three least favorite names might not be the three least risky, right?

And so it helps to be like, okay, great. Culturally, you told them to sell that. But if this happens, you know, F wonk is going to be get killed or whatever name is in the fund that's got the risk. So we do it more like on a risk. How do you sort of maybe best implement what your concerns are? Right, because sometimes maybe it's position size. Sometimes it's leverage. Sometimes it's not the name itself, but the way that you're trading it.

Or replicability, not to get too nerdy this early. But maybe there's a stock that has 70 other names that trade just like it. And so I don't need to own a huge position in that because I can spread the risk across a lot of other names. Or maybe it's like there's nothing like it and then I better be right or there's outsized risk per unit of capital. We're going to get into that today. And John looks like he's ready to go. We're ready to go? Let's play.

All right. That was all warm-up. I like it. I didn't even know. She's getting the blood flowing. I always have an on button. There's no... 126, what's up?

Welcome to The Compound and Friends. All opinions expressed by Josh Brown, Michael Batnick, and their castmates are solely their own opinions and do not reflect the opinion of Redholz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Redholz Wealth Management may maintain positions in the securities discussed in this podcast. Today's show is sponsored by Jensen Investment Management. Josh, I like my investments like I like my cars. Go on. Quality. Oh, I would agree with that. Jensen has been a quality-focused

equity shop in Oregon for the last 35 years. I do love Oregon. Well, we all do. But what's important about Jensen is this. They're not looking for short-term return chasers. They are looking for investors. Count me out. Okay. They are looking for investors who are seeking long-term risk-adjusted returns. There are periods of time where quality is in favor and periods of time where it's out of favor. They don't chase low-quality stocks in 2021. They stick to what they do. They're disciplined. I'm a quality guy. Okay. Jensen runs three strategies, US large cap quality, US mid cap quality value, and global large cap quality. Quality is quality. And if you know, you know. And if you want to learn more,

you go to Jensen with a J, investment.com. That's jenseninvestment.com. I'm so excited to be here today. Ladies and gentlemen, welcome to the Compounding Friends, the absolute best investing podcast in America, according to my sources. My source is Nicole. You agree with that? Yes? Hell yeah, dude. All right.

We're going to have an amazing show. To my right, I guess you're to my right if I'm leaning this way, Adam Parker is the founder and CEO of Trivariant Research, a U.S. equity-focused boutique research platform. Adam was the chief U.S. equity strategist at Morgan Stanley

from 2010 to 2017. Well done. And is a frequent contributor to CNBC. Adam, welcome to the show. What was the order of Morgan Stanley, chief strategist? Who was before you and who was after you? Mike Wilson, the current strategist, is the one who came in right after you.

Came in right after me. Tom Lee was J.P. Morgan. Right. Who was before you at Morgan Stanley? Briefly, the well-known person was Henry McVeigh. Okay. Henry works at KKR and should be on your show if you can get him.

Okay. Call him for us on your way out of here. I will. Okay. And with Adam and I, our son, Michael Batnick. Oh, come on. Get lost. I mean, a little bit.

A little bit son vibes. All right, listen. This is going to be a great show. Adam, I've been dying to ask you, really since before the year began, we haven't heard from you in a while. Right. I catch your appearances on TV.

They don't give you enough time. They don't give anyone really enough time that's TV. What is going to happen this year? Last year, I think it's fair to say a majority of people who follow the economy and the stock market for a living were just completely shocked. We could all kind of agree. All right. So we get over the shock and now we're in a situation where inflation is falling. Earnings are growing. Can that continue? Did we just like get out of jail free card assuming the Fed doesn't make another mistake? I think the skew is to the positive for this year.

So it's a yes. I do. OK. You know, I could tell you because we just did our outlook a couple weeks ago. I don't understand why the big bulge bracket firms do theirs in November and then they already are wrong before January 1st. I don't want to have to change my view of the year before the year starts. So we do it early in the year. We see what the consensus is out there and then you can sort of see – I hate romanticizing.

I'm contrarian. Like you got to actually know what the consensus is and then figure out if you're different or not. And some things you are, some you aren't. I think the positives would be one. I think the average company can probably have gross margin expansion. OK. And if you believe that, you should probably on average be bullish. I can walk through a semester on why.

Is that simply their input prices are coming down and they're not lowering their prices? Yeah. I mean that's definitely one of the four or five reasons. I mean look, costs are wages. They're materials and they're not lowering their prices? Yeah. I mean, that's definitely one of the four or five reasons. I mean, look, costs are wages, they're materials and they're depreciation and none of those things are getting worse. And so the answer, the pricing and mix would be the other side of it. And I think, you know, the costs are going to turn from headwinds into left headwinds or tailwinds for the average company. Chipotle is a great example. So we learned that food at home, grocery store stuff, it's coming down. I went to Chipotle before, those prices aren't coming down at all. A lot of companies are going to be able to maintain

the prices. And so that should be good. And you've already seen over the last six months, so the median stocks, gross margins kind of plateau. And the analysts are forecasting a decent number of them will have gross margin expansion. I think about 70% are supposed to have gross margin expansion. Now, analysts aren't great at calibrating. We all know that. But they're pretty good at knowing whether margins are up or down. I think they're right like three quarters of the time. So I think we'll see with logistics costs and some geopolitical stuff.

But I think costs can come down. Let me ask you. So that's one of the three points on why I think the market could go up is that gross margins could go up for the average company. Let me ask you how good you feel about costs coming down though, because before we leave that to the next two, because if I give you that the labor market, uh, is loosening somewhat, maybe not every industry, but just like generally, all right, I'll give you that. Uh, energy costs have been okay.

Give you that food costs, whatever, you know. Whatever your inputs are. Insurance, reinsurance. I mean, the rates at which business insurance, property and casualty, every type of insurance you could think of. Health care costs. It's like worse than 2021. Health care costs, I was also going to throw out. So there are still costs that are rising way too quickly. And these are important costs for businesses. I think that's true.

I mean – but it depends on the business, and that's why I always kind of parse my words with the average or median company can have gross margin expansion. I don't think it's all of them. I just think it depends on your costs and your margins. costs and your margins. But for most businesses, take like industrial or machinery, semiconductor, their cogs are depreciation, materials, and labor. And I think, like you said, Bloomberg Commodity Index, how you think about materials generally should be better. Currency could help if they're international. Labor wages are inflating less. Productivity is growing. What about borrowing? The borrowing issue affects lower quality balance sheets, small caps on a relative basis. And that's why they ripped when financial conditions eased in November and December.

They probably won't incrementally ease. And so it's less maybe. I think what you got there was multiple expansion. Now you need to see the earnings side come through to merit. You don't have to worry about borrowing costs for the S&P 100. It's not a huge thing. This will be a dismissive statement that I'm sure there'll be some comment on. But like S&P 500 companies don't really go bankrupt.

Okay. I mean, obviously, that's a, you know, one or two can happen in a crisis. You had three banks last year. But like in general, they don't. So you're really talking more about stocks 1,000, 1,500 where, you where they're waxed higher and it hurts them when rates rise. But it definitely doesn't affect United Health. Let me clean that up for you. They do go

bankrupt, but long after they've ceased being large caps. Yeah, they've exited. Like Sears was not in the S&P 500 for a long time before it became what it became. Totally. And by the way, that's one of the reasons it's kind of hard to beat the S&P is they kick out inferior companies and add good ones. And so it's a managed index. Yeah. So Adam, I want to go-

So you're giving me the right pushback on the gross margin point. Like, sure, if your cost of capital goes up and you have a lot of interest expense- What are the other two? All right. So we got that. What are the other two reasons? Yeah. So one is margins. Two is, and this is always hard to see, but like longer term investors who do like cross asset are always bearish on equities because if earnings, I think earnings could grow five, six, seven, eight years in a row. I think there's a chance that you'll be sitting here in the middle of your thing and they're probably higher in 25. And then at 25, you're like, yeah, they're probably higher in 26. And so just like in 2011,

when they grew to 2019, like if there's no reason why earnings are going to collapse in the next five, six years, equities are of course going to be better than owning bonds over that period, right? So that's – if you start getting confidence that earnings have kind of troughed and could grow in a lot of areas, that could also be bullish. It's hard to forecast out in the future, but I don't see any reason. I don't see – look, this cycle is different than when – the last or third reason is generally you're going to get front-end accommodation.

Whether it's as much as in the price or not, the Fed, the BOE, and the ECB are all saying they're probably going to cut. So I think if you and I have learned one thing in the last 50 years of collective analyzing things, fighting the Fed is not a particularly good idea. So like this bulk case very simply is – It was last year. Huh? Fighting the Fed was a good strategy last year. It was? Yeah. They were trying to slow the economy or slow the market, but it didn't work. I meant fighting the accommodation, not the tightening. Yeah. So I think the simple case would

just be margins are going to go up for a lot of companies. Earnings will probably grow for a while and the Fed's probably likely to be accommodative and that cocktail could be good. I think the harsh pushback would be, one, China looks directionally bad and getting worse. And so economically sensitive business there could be bad. Two, valuation. Well, you got quantitative tightening on the balance sheet, not on the front end, and maybe that is a liquidity problem.

Three, I think the US consumer is slowing. How about four? That's consensus. The market was up 26% last year because the market is expecting these rate cuts in the soft landing. If you don't get one or two of those things or less good than expected, then maybe we give some back. I hear you. I don't think you can show that empirically as well. There's plenty of years where the market goes up a lot after it went up a lot. Totally. All right. So I think that one is harder. It resonates with me.

I think with everybody. And that's – this is like a – I don't mean this to sound – well, that's why maybe the first three days of the year it was bad. You know what I mean? Like everyone knows it ripped for no reason in November. But like I'm not – if I look out six or 12 months, I have less data to support that. I get it. It resonates. But I'm not sure I would go back and look at 95 years of S&P returns and say every time it was up above 10, I sell it the next year.

You know what I mean? That's not my argument. No, no, no. That's just what people would say. No, I agree. I agree. And it could be right by the way. It's like you never –

We'll find out. We pulled a bunch of your charts from that awesome paper that you put. No, let's just use this as a jumping off point. Okay. So you wrote, a bottoming economic activity gauge and loosening financial conditions are typically positive for risk-taking. So you've got two charts.

This is Trivarious Proprietary Economic Activity Gauge. And you show when it's increasing, when it's decreasing, and when it's sort of without trend. And this is sort of a no-man's land, but it troughed, right? Yeah. What's in here? So what we do is we download about 170 variables from Bloomberg, and we create a bunch of gauges. These are two that I thought looked directionally positive.

Economic activity is stuff like city surprise, leading economic indicator, small business optimism. And that was going down all of last year while the market was working. Correct. Correct. And the reason I do this is twofold. One, to try to have sort of an unbiased gauge of what's happening. I've learned when you're on the buy side, what you realize is you don't know when the trough is at the trough. It's very easy to go back and tell you what worked from the trough to the peak 20 years ago. I can analyze that. But when I'm in the trough, I don't know what it is. And if you're being honest, and what I've learned is it takes about six weeks. I'm about six weeks. I'll tell you six weeks after the trough when the trough was and six weeks after the peak when the peak was. So if you're going to implement a strategy,

you have to be honest when you run money like you guys and say, all right, I'm going to be late implementing it, and I'm going to ride it over the edge and it still has to add value. Otherwise, it's stupid and I shouldn't do it. It just creates churn or whatever. So one reason is honestly where I am. And the two is I think you guys know this, but we build like quant models to predict stock return and we always advise like long knees and short toes. In some regimes, the models work great. So like with financial conditions on the right, when they're easing, I cannot pick banks winners from losers at all.

Why? Because the bad ones do better than the good ones. So it's one trade. But when it's tightening, I want to take my gross exposure up and be long and short a bunch because the model works great. It's really able to separate winners from losers. So I can use this as a gauge for when I should increase my gross exposure, to use that vernacular. So for the people listening, like net means am I long or short the whole industry. Gross means am I picking winners from losers market neutral. The model works great picking winners market from neutral when financial conditions are tightening. So I want to measure that and then implement that as a gross exposure advice.

So there's a couple reasons why I do it. There's a bunch. There's probably 15 signals in each one. I don't have off the top of my head memorized. In this first chart, though, what's obvious to me is that there aren't any real false, like every one of these rallies in economic activity, they don't roll over after bottoming. They persist for a little while.

And that's probably because the economy itself doesn't turn on a dime all that easily or very often. But financial conditions do. And I didn't want to create a signal where I was calling my biggest investors who are long-term investors. Every investor is a different story. Hey, it got worse this month.

Hey, it got better this month. So it had to show confirmation. If it's a weekly signal for me to change it, I think it has to be 15 to 20 last weeks it had the same direct. It had to show some persistence because otherwise, a friend of mine who explained this to me,

he's like, you're walking your dog around Central Park and your dog's going to chase butterflies and piss on trees or whatever. And when I ask you where you are, I don't mean like where the dog is. I mean like are you on Central Park South or Fifth Avenue? You want confirmation. Yeah, like where am I like holistically, not like every little perturbation. The guy that invented that metaphor, that's the economy versus the stock market. Yeah. The guy walking the dog is the economy.

High frequency data point economist. Right. Right. That guy was a mutual fund manager, Ralph. I want to say Ralph Wagner. Okay. Um,

and I think he had a career, you know, he wrote me a letter cause I use that analogy on TV. Nice. And he goes, I really appreciate using the analogy, but I don't know. I don't want any credit, but I want you to know where it came from. And he goes, I really appreciate using the analogy, but I don't know. I don't want any credit,

but I want you to know where it came from. And he sent me the column, and I think he wrote columns from like the 90s. That's pretty awesome. I might be using his last name wrong. I don't get nice letters. I only get like, you pronounce this word wrong with your Boston accent or whatever I get. Let me say one thing, though.

I don't get my own letters. They are filtered before they're given to me. Oh, my God. Oh, curated letters. What a diva. I said some word that I had no business trying to pronounce on TV wrong. I can't remember if it was ebullient and I said it ebullient or

what it was. And this guy acted like I was, you know, like I was post, you know, the horseshoe scar on my head. He really crushed me. John, can we throw the chart back out? Lobotomy, post-lobotomy.

So what's interesting is that economic conditions were contracting for – the Fed did what they had to do. Economic conditions were contracting. But when that bottomed, look how quickly financial conditions loosened. Do you think that a lot of the loosening that the Fed was going to do has already been done for them? And then maybe they're going to be less likely to cut however many times it's priced into the market? So one, my track record for calling the Fed is poor. Two, the firms I've worked at, their track record is incredibly poor. Three, I don't understand why they do stuff like buy mortgage-backed securities when the housing market is on fire in every MSA in America. So like I don't know.

So stipulate. We're all guessing. But that – and – The Fed doesn't know what they're going to do either. And I don't do that for a living. And if you search my website for the word Powell, it says zero search results. doesn't know what they're going to do either. And I don't do that for a living. And if you search my website for the word Powell, it says zero search results. Given that mountain of caveats, I don't think they can cut six or seven times before January 25 or whatever's in the price

because that would, what I think I learned is that you need full employment and stable pricing. And I don't think the unemployment data are going to deteriorate at a rate that's going to merit that much accommodation on the front end. And I think part of – if I'm right, directionally, and it's two or three or less, I think it's because history is not helpful. The last three cycles were TMT crisis, global financial crisis, and COVID. This is not yet – I totally agree with that. Anywhere in one of those things.

Yeah. Right. So now you could take those three. You could create composites. Yeah. What are you doing? It looks nothing like this. You know what that is?

That's like when a little kid, you give them a paint set and their first day of finger painting or whatever it is, it's every color mixed together. It's just mud. There's no information. We do a lot of data analysis. Sometimes you have variables where it's a one if something happens and a zero if it doesn't. And then you tell people the answer is 0.5. You tell them it's something that could never actually happen. I think that's a little bit of the problem of using these three things and saying they're relevant.

And that's what every quant struggles with is what historical timeframe and regime are relevant for you to analyze. And therefore, if the future pans out. There's no analog for that. There's no analog. That's why I don't think they're going to cut as much as what's in the price. You have the bulls saying, we're going to get seven rate cuts this year. I don't think that's bullish. I think that's bearish.

Time out, of course. Why are they cutting rates seven times? Are you serious? Okay, fine. But whatever. That's the bulls saying, the Fed's getting easier. Okay, fine. Then you get a CPI that's a little bit hotter than expected okay it's not seven it's six right okay then you get a

retail sales number that's 0.6 right that's way hotter than expected they say okay it's still six cuts but they're not gonna do the first one till may okay they're gonna go may and then every single meeting after that and you know this how so so why even play that game? So look, one of the dumbest things that I accidentally started when I worked at Morgan Stanley was the phrase bad is good. OK? And when you sit there and you have the biggest firm, it gets distributed. And I was, oh, bad news is good. And I think that's right early.

When were you saying that? A European financial crisis. Why was bad news good during the European financial crisis? I was terrified. Because it was a pending accommodation, right? As soon as Draghi said, I'll do whatever it takes, it was the biggest risk on Signal ever. And it was hard to see in the moment because you felt like- 2012 was incredible. And then you started getting all those QEs. So, okay, bad news is good. I think people think that that's always the case. And I've been arguing a lot with investors like, I don't know. It could just be like good news is good and bad news is bad.

Like why does it always have to be good is bad, bad? I never believe good news is bad sustainably. It could be for like two trading days. But that – I think if the economy is good, it will be good for equities. And if it gets bad, it won't be good in a linear line toward the accommodation. And I think that's where like – What if you were right? What if you were originally right as a young man and bad news is good

in a crisis? Outside of a crisis, bad news is bad. That's what I was going to say. I think that's right. That's fair. That's right. That's I think what we're saying.

Bad news is good if you're in a bear market and the market rallies on bad news. That's when it's good. Yeah. Outside of that. Yeah. I think if you have a problem,

they need to stop it. Sure. But if it's just sort of like things are slowing from the highest nominal GDP in our lifetime, and why would they do rapid fire accommodation? Well, there's one reason why they would do it

because they claim that their target is 2%. And if you do get 2% this year, which who knows. But you need full employment. You have to have an unemployment problem. If they cut six times with full employment. Yeah, we have pretty good employment. And then they're going to create another bubble. The markets, the IPO window is going to open wide up and asset prices are going to go nuts. And we're going to be right back to where we started.

You know, my, yeah, could be. I'm positive. Yeah. I'm just kidding. No, it could be. I just don't know how to calculate what they do. I know that through my career, I haven't found economists all that helpful in terms of – I think it's good to like, OK, see where I am and understand. But in terms of like predicting anything, because I think the stock market predicts the economy and not vice versa. So you'll find out in what, four or five months, how the GDP was last year. Well, if the stock market's predicting the economy, we're not having a recession this year. Right. Let's talk about the consumer. And if it's predicting it in China, they might be. And I think those are the ways I look. And that's kind of consistent with how I think about it. So the consumer is the economy. It's 70%

of nominal GDP. Adam, you wrote an aggregate, the magnitude of the consumer slowdown will likely be the key macro story for this year. As short of a precipitous economic collapse, industrial activity appears to be close to bottoming. What are we looking at here? So these are the other two gauges that you guys pulled out, and we have a bunch of these. The consumer one, anticipating Josh's question,

is more like wages, jobs, retail sales, credit card delinquencies, consumer confidence, like consumer-related stuff. And the industrial one is more like wages, jobs, retail sales, credit card delinquencies, consumer confidence, like consumer related stuff. And the industrial one is more on the right is more a combination of activity, industrial production, ISM, rig count, auto SAR, and then also logistics like drive-in rate per mile and like stuff that's getting moved around, you know, kind of trucking and cost. So I'm trying to like isolate the industrial part of the economy on the right and the consumer part on the left. There's no question. If I gave you the job right now, yo, go back to your desk and tell me how the consumer is doing.

I think you're going to say decent shade, absolute return, but declining. You're seeing that from slow pickups in 90-day credit card delinquencies and that kind of stuff. I don't think it's collapsing. I just think it's slowing from like a pretty hot rate. I think that's fair. Bank of America showed that their spending was 10% year-over-year in 2022, 4% year-over-year in 2023. I think if we get that again in 2024, that would be pretty good. So the consumer is fine.

I don't think anybody would say they're on fire, but they're fine. It's just not 2021. It's fine. Yeah, that's right. Yeah, that's right. And that's my view, and that's why I think I'm directionally positive. There's no divergence here. It just looks like it's degrees.

These look like the same chart. Maybe said another way, like it was at an all-time high on this. These are normalized scales, so think of them as like Z scores or whatever. So you were at like an all-time high when they pumped all the money into the economy on the helicopter money post-COVID. So the consumer was on fire and they were spending like crazy and that's why inflation went through the roof and that's why it was- What's concerning about this chart is it never ends other than in negative territory.

Yeah, and the problem- So that's- What do you mean? It doesn't stop short. Once it's going down, that's it. It's going negative. A couple in like 2011 to 17- But it's only to 96.

A couple in 11 to 17 and it's only to 96, right? Because we didn't have all the gauges. But I think it's hard to tell because I don't think – I think about the consumer like as an income statement. So the number of – the revenue in that analog would be number of people working time, number of dollars per hour. The wages times employed total is still pretty good. So just savings, they can – when you add it all up, your personal income growth, some of it looks okay to me. I don't see the consumer as likely to tank.

This might be a dumb question. Does spending drive the economy or does the economy drive spending? In other words, if the economy slows down because people are getting laid off, then obviously they'll stop spending. Absent that, they're not going to stop spending. Yeah, it's probably access to borrow is like number one, like demand for loans, like the ability to borrow because like so many people live on access to being able to borrow. But we saw credit – consumer credit pull back, right? And still the economy powered on.

The richest group of people which drive like half the total spending are – I said that on TV today. Pretty good. I said it on TV today. on TV today. I said it on TV today. There's this really perverse thing going on where this rapid increase in interest rates after 15 years of zero rates,

all of a sudden, we now have a third pillar to the wealth effect. It made inequality worse? No. I'm saying it's defeating the Fed's purpose. Housing is really important for the wealth effect, obviously. It's the most important asset to the most households is the value of the home. Okay, that's one. Two is the stock effect. Obviously, it's the most important asset to the most households

is the value of the home. Okay, that's one. Two is the stock market. We got 401ks at record highs again. Okay. Now you got a third wealth effect. Holy shit. I have $200,000 in the bank and look how much income it's throwing off. I feel rich because of my home. I feel even richer because

of my stocks. And whoa, my bank is paying me. If you take these high net worth individual guys. So now you take that upper, that upper income, not even the top 10, the top 30.

It's a tightening with stimulative. The only way they can slow the consumer down is by cutting rates, I'm convinced. If you think about, if you think about the big networks,

the big private networks that have, you know, two trillion plus dollars, like that group, you know, the few of them, I think they report this data, you know, $2 trillion plus like that group, you know, the few of them, I think they report this data, you know, the average financial advisor is mid-60s and their average client's

late 60s, something like that. And so there's a lot of folks in that cohort who have $20 million, right? And they spend, you know, four or 500 grand a year and don't want to dig into the principal and live for the rest of their life. And so all of a sudden, they kind of might have benefited from the greatest two-way street ever, right? For the 20, 30 years they needed to accumulate wealth, the stock market was basically a monster. And now they're able to kind of capitalize and live off the interest-bearing portion of the principal without taking much risk. So they might win.

You might look back and be like, yeah. This has happened before. If you watch Smokey and the Bandit, or you watch Cannibal Run, I forget which one it was. Or Bone Tomahawk. No, no, no. You watch the Burt Reynolds 24-hour... You watch the Burt Reynolds oeuvre of the early 80s.

Cannibal... How do you spell oeuvre, by the way? Who do you think is listening to this podcast? My grandparents. Smokey and the Bandit. The point I'm trying to make is in the early 80s, there was a wealth boom. Is that a tilde on that? Stop flexing on us. There was a wealth boom in the early 80s. And interest rates were at 20%.

So it should not be lost on anyone. We had Lifestyles of the Rich and Famous came along in the early 80s. We had this massive boom in obscene wealth i remember this guy maybe 15 years ago he tried to pitch me on um whole term insurance okay okay and he was using the whole trailing performance of long-dated bonds argument where it was like locked in from you know 80 80 80 to 2010 as if that was going to be the go forward return. And it was like, it was like, he didn't realize that like he was brushing back the pile leaves with like the deepest hole in the least possible when he was pitching me that product.

I'm like, I'll buy term, get out of here. Give me 20, 20, your time. Get out of my face. My point is,

it's like the, it's a rate. It's a, it's a rate. My point is, it's not a guarantee that you could slow the consumer down, especially the wealthy consumer, just by raising the rate, the

level of interest rates. You can slow the low-end consumer down when you don't give them access to borrow. That's why I said that. 100%. You have to give them access to credit. So if that dries up, financial decisions tighten a ton, that's why things slow because then they can't access it through credit cards that tighten up or have bad vintages or through, you know, home equity borrowing,

you know, that kind of stuff. No, it's funny. Paradoxically, I made that joke earlier, but I think I'm turning serious on this. If the Fed does ease and they lower rates, people who have money in money market funds are going to feel like they're tightening. It's like, wait, what the hell?

I was getting 5%. Now you're giving me 4%. Yes, that's my point. Wait, by the way, when you see news, they're going to open a Louis Vuitton hotel on the Champs-Élysées. It's shaped.

It's literally shaped like a Louis Vuitton trunk. What the hell are you talking about? You're dropping these names. Nobody knows what you're talking about. On the who? Adults are speaking. I know. Sorry, I didn't wear my suit today.

I know exactly what he's talking about. So when you hear that that hotel is, it's not even open yet. They're building a massive new hotel store. It's full for six months. This guy's talking French. Le Champs-Élysées is like the Fifth Avenue of Paris. Yeah, I'm sorry. Connecting from Arc de Triomphe down.

Unbelievable. It's where all the fancy stores are. Look at this. You hear that this is like booked six months. Duncan, do't have any idea what he's talking about? I'm sorry. He does.

I know the brand. I've never heard of this hotel. It's new. It's new. It's new. That's why you haven't heard of it yet. You shouldn't have heard of it yet. Well, this stock is like one

that a cult stock that a lot of people follow and pay attention to. My point is the people that are booking this hotel, they are not borrowing money. Correct. Okay.

And that's a big driver and then the rest is access. This is important distinction. The people that are filling up the Caribbean are not borrowing money to do it. I have a friend that we send each other the most absurd CPI things from traveling around the country.

I travel a lot to see folks and we send each other funny stuff, pistachios or 19 bucks at O'Hare or whatever. He sent me one the other day. This was at the St. Regis in New York. Hand squeeze, 100% pure Valencia orange juice, 25. Stop. Where?

St. Regis in New York. Oh, you're kidding me. 55th and 5th. Hand squeeze. For what, a gallon? No, I think it's just an OJ for breakfast, 25 bucks. That's amazing. That's the current CPI leader in the clubhouse.

We have to eliminate people that pay $25 for an orange juice. Not your friend, but whoever's doing it. He did not get it. He did not get it. He just photographed the menu. Who is ordering that? That's an expense account item. You're not paying for that yourself.

I mean, when you factor in, and I wrote this back to him, when you factor in the 20% gratuity and the 8.875% tax, you're around 31. How could you be bearish equities if motherf***ers are paying $25,000 for oysters? So you're in the $3 to $4 an ounce range? Time out, though. Valencia. It's like gas. It's like gas.

Does that mean it's from overseas? Valencia? Is it Spanish? Is that why it's so much? I think it's a region in California and in Spain. Where's Valencia? Is that orange from California or from Spain? Let's bring it back. I think it's just a kind of orange. I think it's just a kind of and in Spain. Where's Valencia? Is that orange from California or from Spain? Let's bring it back. I think it's just a kind of orange.

I think it's just a kind of orange. Oh, it's just a type of orange. But I think originally from Spain maybe? I don't know originally. Good. Yeah, good work. All right.

So Adam, Adam, dovishness. That's a good chart. Dovishness means higher price to forward earnings ratios, particularly for growth stocks.

I was a little bit confused when I first looked at this chart, but explain it. All right, so the left chart shows the black staircase. It's just the Fed fund futures. I'm sorry, the Fed fund rate, the front end. And so it moved in March of 22 and kind of staircase up. And then the other lines, FF12, 24, and 36, those are Fed fund futures 12, 24,

and 36 months from now. How do people see and perceive rates one, two, or three years in the future? And what you saw is they were very anticipatory of the first initial movement of the front end. And I think that really mattered. The right side shows for those statistics geeks that are listening. So the statistical relationship or T-statistic between the price to forward earnings for growth stocks and the perception about rates. And it was highly negative, meaning when people thought rates were going to go up, multiples got killed. And you saw that in late 21, all the way through 22, et cetera.

You lived it. Right. And then earlier this year, around March of a year ago, it stopped mattering. Relationship changed because people thought, all right, we're probably closer to the end of the cycle than the beginning. And so it no longer mattered and people got incrementally hawkish. So it just was a way of kind of statistically dimensioning that perception about future rates can meaningfully impact the multiples for companies, particularly growth stocks. In 20 – at the end of 21 and 22 especially, when interest rates moved higher,

growth stocks got killed and vice versa. Do you think we're past that, where interest rates are not the single biggest driver for equities? The relationship is still statistically

significant and negative today because those black dotted horizontal lines on the right side are the band of statistical significance for those of you hearkening back to your

stat 101 days. So it still matters. I think if they got much more hawkish and kind of came out with a clear hawkish message, it probably wouldn't be great for equities in a couple-month view. But also, it's always changing which stocks it's hitting. So on the recent rip in the 10-year, utilities have gotten destroyed over the last week and a half or so. Exactly. This was the growth universe. When we do all the risk work for people, that's where we're really careful. We look at the correlation of every stock to a Fed fund futures because what I don't want people to do, especially hedge funds, is be long growth stocks with a negative correlation to interest rates,

short melting ice cube utilities, slow growing stuff that has a positive correlation. And then if somehow rates move the wrong way, they get crushed on both sides of the book. We said those correlations are not static. We talked about that when I was on your show a couple of years ago. And the reason I just remembered as I was talking live is I used the phrase Texas hedge. And that's what you titled my addition because you're Texas hedged if you're kind of having- Meaning you're doubling down. Yeah, you have that outsized bet. You're putting on an exposure in the wrong direction,

both sides of the book. So I think you have to, when you make that point about utilities, you have to be careful that in your portfolio, you're not exacerbating that rate bet all over the place. So if you don't like utilities because a lot of them are indebted and they're exposed to refinancing risk or whatever, then maybe you have to own staples that maybe also trade around rates but are cheaper or have less negative out. Well, you have to kind of be balanced about how you think about beating the S&P because otherwise you're just making a huge interest rate bet. And if you're right, great. And if you're wrong, you kind of get annihilated. You know, there is a universe in which we have almost no rate volatility at all this year.

No cuts and not a lot of movement as a result, at least in the two-year. We've seen some volatility early on. It would be bullish for equities if they did nothing and just kept threatening for accommodation in the future, I think. Because then you would just... That means the data are good enough economically

that they don't need to do it. And you can dream the next was accommodation. It's my point about the correlations not being static. They change. So here's the 10-year ripping higher. Here's XLK ripping to an all-time high.

And what's XLK? XLK is this technology ETF. Okay. I was talking- Or the Qs. Basically, similar exposure.

I was talking to somebody- Sorry, here are the Qs. I was talking to somebody who was saying that who was saying that if you have that push and pull and you just – we had massive rate volatility over the last three years. Sorry, that chart I showed was a rolling six-month window between the relationship and multiples. Like it can change for sure. Yeah, that's what I'm saying.

It changes. I think the problem is if I do like a one-month window, then I just get a lot of spurious stuff. So I'm not sure what the length is. For sure it changed. And a year ago, the right call was we're close to the interest rate cycle ending, and therefore I should be bullish on equities. Everyone else thinks it's down in the first half and maybe up in the second half. So you should be up in the first half.

Like that was the correct call. And part of it was saying that we're toward the end of the interest rate cycle. I think we're in that same period now. You can't argue that we're likely to hike way more than we're likely to cut. So since I like that skew, then I'm willing to wait for them to cut and maybe cut less than what's priced in. To me, that's bullish. But not to beat the source to death, but in the first half of last year, we saw massive increase in the 10-year, a huge run. And guess what?

The NASDAQ 100 had the best first half of the year, I think, ever, as interest rates were skyrocketing. So those relationships are not set in stone. Of course not. If they were, then nobody would need a cross-asset view. And I agree. But that's because, in my twisted brain, generally, when the economy is good, the 10-year yields should go higher. It's like indicative of a stronger economy. Why was the market good last year?

AI. One, you had the biggest upward sales revisions of any major company ever in NVIDIA. Two, the bear case in earnings did not form. All the bullish bracket firms were out with a 180 earnings number, 190, and it didn't happen. Earnings didn't really go down

from February to the end of the year. We had three consecutive quarters of earnings declines and that was it. Yeah. And it was all in the second half of the 2022 and early 20. Right. So, so it didn't, it didn't, the bear case didn't materialize. And, you know, and then also like people said, we're closely in the rate cycle. And so they can dream that the, the, the harshest part of the tightening is over. And that, that's kind of all, all it took. And then I think as CPI moderated, you know, the margin dream got better again. So like, I'm not saying, it's hard to have a year like last year

and say it'll be just as good this year. So, you know, the other day on air, like Scott asked me, are you incrementally bullish? And so I reacted to the word incrementally, like, no, you can't be incrementally bullish because incrementally means I think we're going to be up more

than we were last year. But am I still skewed to the positive? Yeah. That's the parsing. How did he like that response? Generally, he loves what I say. Okay. Agreed.

Me too. All right. This is yield. If the economy slows but doesn't hit a recession and interest rates slowly continue their path toward a normal yield curve, we could see materially higher equities in 12 to 18 months. This is your chart. So this is earnings. You say base case earnings grow to $237 a share, which would be 7.2% growth in 2024. $252 a share in 2025. It's another six and change percent. Right. The bottom-up consensus, that would be below the bottom-up consensus of 245 going to 274.

That's a wide gap between you and the consensus. What do they see that you don't see, do you think? These are the bottom-up, if you're showing this slide, these are the bottom-up

sell-side consensus estimates, not mine. I'm just kind of... Bottom-up is all of the analysts covering all of the stocks. This is the sum total of their expectations. Every single one of the 500 stocks. This is not you versus other strategists.

We take the median estimate, bottom-up every analyst, and we say, what did you get for that company? We add up all 500. We go back and type for it. So it's very – yeah. Bottoms-up is when you take a glass of alcohol and empty it down your mouth. Bottom-up is a jelly bean jar and the guesses of like thousands of people. And top-down is what like strategists do where they where they say, okay, the economy is doing this. And so I think earnings will be a few percent above or below.

It's like it's not like at the company level. So we have like a long – so let me answer your question directly. Forward earnings data, meaning these kind of estimates from analysts have existed since 1978. from analysts have existed since 1978. On average, in January of each year, analysts' bottom investments were 14% earnings growth in the average year, and the actual has been seven. So there's a long path of downward earnings revisions as their second half of their optimism typically doesn't unfold. It doesn't happen the way they forecast. The stock market obviously goes up a lot during years where there's downward revision. So the first point I would say is it doesn't really matter if there's

downward revision to the bottom of best-miss. What matters is, do you think earnings are going to be higher in absolute terms next year than this year or this year than last year? That matters more. So I think there's going to be earnings growth in 24. Just not as much as the bottoms of consensus. Yeah, just not as much as the bottom of consensus. And there was not much earnings growth. I mean, it looks like it'll be, we'll see when we get the full Q4 numbers in. Looking flat, right? Looking like flat as you review the current. It's 0.8% bottom up, your earnings growth.

But there was a lot of dispersion. Totally. So that's that top number in the 2023 column for S&P, where it says 0.8. It's the two numbers above the green, highlighted 27. That's where, that's sort of the total S&P earnings bottom up for this year. We still have, you know, a little bit for the listeners, a little bit of the Q4. So all the growth, all the growth came from three sectors, consumer discretionary,

communication services, and real estate. That surprised me. And a lot of the losses came from energy, which had a 30% decline in earnings, at least projected for the year. Healthcare and the stocks there got killed, and materials. All these stocks looks like shit, especially materials and healthcare. Yeah, so these are the year-over-year earnings growth numbers. So, you know, the estimates, which are almost fully baked here, three quarters in.

We don't have Q4 numbers for everything. We don't have the Q4 numbers yet. But they are – they were quite bad. Obviously, the oil prices and copper, et cetera, came down a lot. And I think the healthcare is probably the most surprising just because you had some COVID hangover stuff on the drug side. Pfizer, Moderna, killed. But the healthcare services businesses generally have pretty good pricing power. So I think – What are some of those names?

UNH is the biggest- It's a great stock. Yeah. They had a little bit of a cost issue earlier this month where they got it to medical costs. But like I know as someone who has a small business in New York, like they have incredible pricing power over me. Yes.

Look at this. What are you going to do about it? Dexcom and Tuva Surgical looks like at an all-time high. So Dexcom and Tuva Surgical, those kind of companies got like a little bit of a weird GLP sell-off like in the summer where, you know, somehow people were going to,

you know, be thin and never need healthcare procedures again. We said to fade that on this show. We never bought into that narrative. Yeah, for me,

the most obvious one was Brown Form and a Coca-Cola. Ridiculous. Yeah, there was a day, I think, what's the day the bond markets

closed up Columbus Day? Here's Coca-Cola. I'm pretty sure I said there was a day, I think, what's the day the bond markets closed up? Columbus Day? Here's Coca-Cola. I'm pretty sure I said there was a screaming by, did I not? If you look at that V, we wrote about this on October 7th, which was the Columbus Day. That's the bond guys don't work and the Yakut guys do. That thing traded below 20 times forward at Coke. And you

looked at it and you're like, should have bought it. Like, that's a pretty good brand. And then they put up like 10% growth constant currency. Like, it's not like it's a shrinking company. Yeah. And, and then the other one that I think is funny is Brown Foreman.

So like, I wrote this thing about Jack and Coke. Like you're telling me that, you know, there's going to be no Jack Daniels and no Coca-Cola consumed. Like you want to bet against the U S consumer. Go ahead. Don't do it. As if Coca-Cola hasn't adapted before diet Coke, literally Coke, You want to bet against a U.S. consumer, go ahead. Do not fade the U.S. alcoholic.

Don't do it. As if Coca-Cola hasn't adapted before. Diet Coke. Literally. Coke Zero. They sell water. Like, it'll be fine. Coke Zempic.

It's coming. Yeah, they could put it right in there and then, you know, tighten it up for your, you know. Adam, let's talk about where the earnings growth is going to come from. Yeah. You have a slide. The biggest companies have strong earnings growth. I love this.

I love this. Let me just read this for you, Adam, or for the audience. The biggest 20 companies in the S&P 500 have significantly higher net income dollars and earnings growth than in 2020. Any pre-COVID comparisons are silly. I don't think people know this. So a 10% miss in 2025 earnings expectations

would still yield 2X the net income dollars in 2025 versus 2020. Holy shit. And that doesn't count the buybacks. So if you go get earnings per share, it'll be even higher. I think what's happening is people were saying six months ago, COVID was a weird thing. It was a bubble. The government stimulated it in. Let's just pretend it didn't happen. We'll go back to 2019 and we'll compare earnings to 2019. And that's how we'll get – I think Q4 2019 earnings were $43 a share for the S&P. So you multiply by 172.

So people are throwing a 180 earnings number out when they were bearish in the middle last year. And, hey, I'm negative on equities. Earnings are going back to 180. Not with $25,000. So I took the biggest 20 – I put the biggest 20 companies. I said, okay, well, here's your 2018 net income dollars. You know how much net income dollars they earn. Here's your 2020.

I have every year, but I couldn't fit it in the chart. And I said, all right, they're supposed to, these are the biggest 20 companies, Apple, Berkshire, JP, whatever. Here's the net income dollars. And here's what the analysts think it'll be in 24 and 25. Holy shit, look at Apple. So it's 796 million, I'm sorry, billion in 2025.

That's the net income dollars of the top 20 companies. Of the biggest 20 companies combined. Okay. So it's, you know, 0.8 trillion. This is why you own stocks.

And then you look at the 2020 numbers, there were 382. So 382 times two is 760. So if they miss by like a decent amount, it's still twice as much net income. You can't get these companies out of the house. Back to 2018,

2020 numbers. How is it possible that this collect, are they't get these companies back to 2018 numbers. How is it possible that this collect... Are they the same 20 companies? Yeah. Okay. So how is it possible these 20 companies have gone from

$340 billion in profits a year to $800 billion? They're really good. Because it's a five-year growth rate. In five years. You double, like, it's 15% per year for five years is how you do it.

But they were already gigantic. It's really incredible. Come on. I mean. Yeah, pricing, you know, power, moats, technology. I'm blown away by this. Apple, for example, forget about Apple. Let's use Home Depot.

So Home Depot was 11 billion in 2018, 13 billion in 2020, and projected to do 16 billion by 2020. Actually, do you know what's the one that's crazy? Visa, because that's crazy? Visa. Because that's literally spending. Yeah. That's actually tracking the economy.

$11.2 billion. They grow 15% per year. To $20 billion. Visa grows 15% per year. It's not a conspiracy. I think the one that you want to look at is NVIDIA. No, it's not. Listen, Consumer Study, a bank from America, was 40... Wait, where's NVIDIA. No, it's not. Listen, consumer spending at Bank of America was 40... Wait, where's NVIDIA?

Give me the number. 2018. 6 billion to 60 billion. 6 billion to 60... Yeah, it's f***ing normal. Consumer spending at Bank of America was 35% higher in 2023 than 2019. So, look...

We spend more money every year. I guess the point is, like, these guys are so big that even if they miss by a ton, you're going to have way more earnings. Just it's, it's hard. So the bulk cases are not these guys, but that's why I said at the beginning of the show, like the average company can show some margin expansion. Yeah. And nobody's pricing that in, these guys are immune to CPI, like, right. It's the average guy who sells- Higher CPI literally helps them raise prices even faster.

It didn't matter. It killed the profit margins of the other companies. So to the extent that CPI continues to moderate, you'll see a higher chance for margin- Chardon, next one. We got it. Adam, talk to us. We've got your margins chart.

There's a great story in here. Okay. So we're looking at, you said the median company's gross margins have bottomed. Yeah. And yeah, so this was part, yeah. Look at that mega. Talk us through this, please.

Yeah, so the left side just shows the median company's gross margins. So you can see got killed. 48% was the high in 2020. Kind of like 42, 43. Dropped the trough. And so look, it's always hard to call, like this is definitely it because you can see some squiggles and down previously. But it's not like it just went up one month.

It looks like it's been kind of flattish to maybe slightly above the low for six months. But the right chart is the more interesting one. And then the right one is the mega cap companies, which are basically on a 25-year trend of somewhat slightly higher than those margins. And the right is a little bit pinched in the scale. But margins got killed for these guys. The non-mega caps. Yeah, the non-mega caps. Do you happen to have the next slide too or did I?

I don't. Which was that? I don't think so. Okay, it's okay. The next one actually shows that relationship between CPI and the non-mega cap margin. So you can really see it was like strong. It's just significant. So that's part of the reason why I told you up front.

Like I think maybe it's bottomed. Maybe it's bottomed. I want to do something on stock picking with you. Yeah. You put out a note on pairwise correlations. And let's talk about the tech sector. So you break it down into like 12 subsectors. Yeah.

You point out there's- You got that? We just did that. Yeah, we got it. You guys did that today. You guys are on it. This is a- I told you this-

You're over your operational improvement. We come prepared. I told you this... You're over your operational improvement. We come prepared. I told you this was the best investing podcast in the world, right? When I was on, whatever it was, 18 months, two years ago, the game was not this tight. Dude. This is elite. You guys have gone...

The listeners and the viewers... You guys have had at least 15% net income growth per year. You guys should be stock 21 on this. So you made a really interesting case here that a lot of CIOs, especially bottom-up fundamental focused CIOs, they will tell you, you know, I don't worry about the macro because either it doesn't affect my stocks or even if it did, I can't quantify it.

I'm a cold-blooded stock picker. I only do bottom-up stock picking. Right, right. So you said, well, you may not care about the macro, but the macro cares about you. And you're looking at correlations between stocks within all the sectors, but the tech sector in particular. You think CIOs do need to pay attention

because at certain times, there's going to be a lot more or less correlation between the names in a given group. Yeah, so what we're doing here is we say, if I know if the market's up or not, if I know if growth stocks beat value, if I know if large stocks beat small, and a couple other factors, how much of every stock's return is going to explain? So if the market rips and growth beats value and large beats small, I can explain like 70% of Microsoft's returns on a given day.

So you can't tell me you're a cold-blooded Microsoft stock picker and you don't care if the market's up in growth, value, and large beats small, because that's- That's most of what's happening with the price. That's ridiculous, right? So we measure that logic for every stock every day over time. And we try to help CIOs sort of say, all right, if you were starting a tech fund today, where do you have a better chance of deploying resources to generate alpha? And where is it more of like a macro call or like a risk management call that you want

to kind of make the portfolio strategy? So that's kind of what we do. So when we look at it, we say, OK, where is the level of company-specific risk? Did it go up or down? Where's the versus history to try to help people? And we have it at the name level. So what this chart shows on the left is just that actually the blue line in tech is slightly below the market ex-tech, the top 3,000.

So that's not intuitive. Tech guys think they're cold-blooded stock pickers, but they're kind of just as macro as everyone else. But what are you looking for? A lower number or higher? CSR is- If it's higher, the company specific price is higher, then that's a place that you want to craft your trade if you're like a stock picker.

More opportunities for alpha. Of course, you could separate yourself from others. Something is company specific still matters. But if it's like pretty low, so tech is, it's half to sort of 70% company-specific. So it's not like it's the worst sector. I'm not saying that. So you have semiconductors and semi – They're the most macro part of it, which makes sense.

And semi-materials and equipment. You're saying those are 35% CSR. They're 50%, 52% now. So like half's macro and half's company-specific. And that's in the 35th percentile versus their history. So it's a little bit lower than average. But the point is just that you can't say – no semi-annuals would say, I don't care about macro at all. I only do stock picking because there's a cycle.

Stock cares about you. Now, in application software, you mentioned specifically that that's an area where if you get the company right, it's really going to make a difference relative to the other companies in the group. So we show like four or five different things like this, company-specific risk is one of them, to assess the alpha. And at the summary point of that, building a crescendo of excitement to get you to the edge of your seat, is that application software is an area where you probably could use a bottom-up stock picking analyst. edge of your seat is that application software is an area where you probably could use a bottom of stock picking analysts. Because I think last year was a good example where I don't have the numbers up front, but I think something like 41 of them beat the market by 20% or more and 58 application software companies lagged by 20% or more. So like somebody who's a software stock picker shouldn't be able to say, oh, it was like a tough market for me to find alpha. Like maybe

they were just bad at it because there was tons of names that beat or lagged by 20. Obviously, if the market goes up 40, it's hard to make absolute money shorting stuff. But if you short stuff that goes up less than 20 and you long stuff that goes up more than 60, that's a cocktail for success. So I try to focus people across the whole market, including in tech and specific. We have a tech strategy product, but where they should deploy resources. And a lot of it, I think what was really interesting in the tech part, my own view, is that when I looked at the names that were most company-specific, like most idiosyncratic, you look at the names among large caps, and it was like Dell, Hewlett,

Intel, Cisco, Micron, Oracle. I thought, wow, these are old tech. The stuff that's the least Shopify. And rates move, and they move. So all of a sudden, you're like, all right, everyone who thinks they're focused on new tech, there might be some use for the old tech because they're a little bit more idiosyncratic. They're doing spinoffs. They got VMware. They're doing deals. So there's some more idiosyncratic stuff.

And they have low correlation relatively to the newer tech. So maybe that's a better tech strategy. Find one or two of the old ones you like that have something idiosyncratic to go on top of. So I think that was a little bit – novel sounds grandiose, but it was kind of interesting to some of my tech guys who were reading it. Because when I do tech strategy, I don't go in and go,

oh, there's software stacks in hand. That's too fundamental for me. No, they've already done that. It's more the portfolio strategy. They've already done that. Right, right, right. You said something similar, banks versus insurance. You're right.

We dropped. Turnovers and penalties will kill you. We got to water down. It's okay. John, this chart, banks versus insurance from Adam, you guys put this up over the last couple of days, and you're pointing out that this is not just a tech thing that you're tracking. Yeah.

What do you think is behind this? What's the reason for this is a huge separation between the performance of banks versus insurance stocks? I think, look, I mean, we have some clients that are financials PMs, or if you're a large-cap value PM, and financials are a big part of your index. And I think it's hard because the stocks are super correlated to each other and just feel like it's one-way rate bet, and it's hard to separate. So a lot of times people say, well, maybe I should want a couple of insurers, and they'll be a little bit defensive. And so it's still a little bit high correlation in

absolute terms, but they've come down a lot. I think it's because in that risk on trade, some of the lower quality banks went up a lot and the insurance companies didn't participate as much. And so if you're looking out going forward, you could say, all right, well, maybe I can find some insurance that have pretty good risk reward. It's not exactly the same bet as the regional bank. So it's a little bit like financial strategy, trying to find – because I'm always worried of just – at least I try to be honest. Maybe you just want to own all of one low-quality stock, and if you're right, you'll make the most money possible.

But that's not a great risk management approach for – so I think we try to track these sort of changes in correlation or when they're changing and say, OK, that could be a little bit of defense. The word correlation is tricky, not to get on my professorial soapbox. But like the problem is like you want correlation when things are good, right? And like you could go up 2 percent every day and you could go up 6 percent every day and you have a correlation of one, but I'd rather be you, right? So like it's misleading a little bit when things are good. You just don't want it when things are bad. And so that's why you have to sort of- Everybody wants to be correlated to whatever's going on.

That 2020, the COVID spike when everything was just going down, down every day. That's wild. Yeah. And that was hard to play. It was hard to play defense. And for sure, financials were not the place it would be. Buybacks. John, can you skip ahead? Are buybacks good for shareholders? not for value stocks? Let me read you and then you'll react to it. We would have guessed that buybacks would be a good strategy for value stocks as it can often be a meaningful source of earnings per share growth for that cohort. However, there is virtually no subsequent performance differentiation among value stocks for big decreases or increases in shares outstanding over a 12-month period. What's going on here? So, look, we could spend weeks talking about this topic.

I am not busy. Companies, like, they want to buy back. Let's go back. Buybacks, wait, wait, can we set the stage? Buybacks were fairly muted last year because of the higher cost of capital. It just wasn't, people were laying off employees. They weren't focused as much on allocation decisions. Or do I have that wrong? You know, net 2% buyback for the OSMP, something like that. I mean, you know, I'll explain the chart quickly. You know, the group on the right is growth stocks,

the middle are a middle zone called neither, and the right are value stocks. We break the market into thirds. And then from left to right, it's your volatility adjusted performance. If you bought back 2.5% or more of your shares, the shares were kind of half to 2.5% lower around neutral and gray, and then you start diluting. So with growth stocks, you want to avoid massive dilution for sure. and then you start diluting. So with growth stocks, you want to avoid massive dilution for sure.

But if you look at like the right where value is, the blue bar, which is buying back 2.5% or more, barely does better than the gray bar, which is keeping your shares unchanged. Not much difference at all. Yeah. And so if you think about that over multiple years, like if you're buying back 2.5% of your shares two, three years in a row

and you're not outperforming someone who's doing anything, like by definition, that capital should be deployed elsewhere. Unless, but what if deploying the capital elsewhere would be even worse? It's funny you say that. I wrote a note on that because the biggest criticism that – one thing you could do elsewhere would be do dumb deals. Exactly.

And so we actually studied that in a note maybe 10 months ago of sort of, long-only PM asked me that. So I'll say that was a smart question. Not that your previous ones weren't smart. That was one of your better moments. I'll take it. And the answer is it helped a little of it versus dumb deals, but not that much. That's surprising. Yeah.

I was going to say, back to Disney, like people were taking issue with Bob Iger paying himself $31 million. I'm like, yeah, but he also could have done it, taken that with Bob Iger paying himself $31 million. I'm like, yeah, but he also could have done it, taken that money and bought back stock at 180. So this is what I want to talk about. So when I, when I covered, no, I, this is important. I, I was a semiconductor analyst, uh, you know, uh, in 2002 to 2006, right. And I covered large cap chip makers. Intel was my most important stock. And those days it's whatever, seventh or eighth biggest now, but it was the biggest then. And they bought back a billion dollars of stock every quarter. So I talked to their CFO at the time.

I was a young analyst. And I said, why do you buy back a billion dollars every quarter? You're cyclical and I think you know stuff about the business. And I would assume you could do better. And he said to me something. I didn't – I was so naive. I didn't understand. He said – this was a quote.

He said, Adam, if I back back $500 million this quarter, you're going to be an asshole to me on the conference call. What did he mean by that? I'm going to say, well, do you think the stock is expensive? Is that why you do it? Why aren't you doing a billion? So I went to my boss and I said, I don't get it. Like I thought they did what actually made sense. Like I don't know.

I was 34 years old. Like who cares what I think? I'm they did what actually made sense. I don't know. I was 34 years old. Who cares what I think? Do what actually makes sense. And I realize it's so much of it is a signal to them. They're selling a story. And it shouldn't be. If you ask Warren Buffett, does he want a signal or does he want to buy it right? He'd say, I want them to buy it right. But some of these management teams,

they're concerned about the two-day market reaction and not deploying the capital correctly. The second thing is when conditions are good and they feel momentum, they feel good, they buy it back. And when it's not, they don't. So they're almost like slightly negative indicators. We then do some work, and a lot of boards and companies are interested now

on accelerated share of purchases where you do big block through a bank. That seems to be more effective. And so we'll see if that's – Hang on. Can you explain? That's a type of a buyback? Yeah, it's ASO. So you do a big chunk at once.

Rather than authorize it in January and then slowly buy opportunistically, you just do it in one shot. Who was doing that? I can't remember. But you're so right. These buybacks are pro-cyclical when in reality it should be the opposite,

but these decisions are made by human beings. There's some more information, and we study this in open market purchases by CEOs or CFOs because then they're doing it in the open market, and that's more of a – And off schedule, right? Well, they're restricted on when they can do it, locked up like crazy.

They can only do it during the appropriate period. Most tech executives, though, are getting too many stock options to be doing an open market purchase. There would be no need to. But that's the signal. I think if you could study the variable compensation, that would tell you a ton. We do a lot of natural language processing where we're ingesting stuff from transcripts systematically. It's very hard to get a variable comp because what I mean by variable comp for everyone listening is not what your salary and bonus is.

But if you hit a 15% revenue growth per year target, you get another 10 million restricted stock. Or I'll get sneaky here for the accounting nerds that are listening. Do you get the dividend on the unvested portion of your deferred? Do you pay capital gains or do you pay income tax? Because remember, if I'm long 10 million bucks of stock with a 4% dividend and I get 400K per year on the unvested stock that's going to vest two, three, four years from now, I'd love myself the dividend, right? I hate options. I don't want it to look that way. So there's a lot of like tie goes to the runner or whatever. Nobody purposely damages their own net worth. So I think the decision-making, especially stocks 300 and below, most of the top 100 have real boards and real finance. But as you get into the squishier 6 billion market cap zone, there's some weird stuff

or like Batnix, your financial guy on your board or whatever. But when you said the opposite is not true, I would assume that companies that are diluting their shareholders, ex-Tesla, is a pretty shitty place to be. Yeah. The growth companies showed that that 2.5% or more dilution is bad. Those were net dilution numbers. So I could see the merits of a company, you know, paying their employees

who are R&D-based 2%, 3% dilution, just buying it back to zero. I could see that. I'm talking the net. But yeah, net. Those are all net that I'm showing. But I don't think like buying back 2.5% versus zero has been very helpful in a lot of cases.

And I think dividend, consistent dividend growth, you know, once companies do it two, three, four years in a row and their payout ratio doesn't get above kind of 0.6, 0.7, meaning like there's no risk they're going to cut it anytime soon. Those companies tend to accrue. You and Ben did this on Animal Spirits, how stocks went from being wealth creation to wealth generation, or what were you trying to say? Just the capital efficiency of these companies

to what we were talking about earlier about earnings in 2020 versus 2025. It's incredible how ruthless and efficient and just amazing these companies are at generating returns for shareholders. Obviously, they can't control the macro, not every year. But if you're talking about generating returns for shareholders as earnings per share,

they've never been better. If you're going to be the CEO of a big company for 10 years, what do you want said about when you're done? Number one, you were a good steward of capital. You avoided stupid deals. Maybe you did one or two good ones. You bought back the stock well. You grew the dividend.

You rewarded your shareholders, right? That's number one. Two, maybe you got a relatively higher multiple on PE, Vita sales or or whatever versus your peers or an absolute. No one's going to remember you for that. But it's correlated to the stock. It matters. You know, you avoided, you know, taking on unnecessary risk. But at the end, it's where you're a conservative capital. So that's why all the advisory stuff is around management decision making. And I just could tell you that generally the system is bad at buybacks relative to the other deployments. You've been doing this a long time. You're a student of market history. Have you ever seen a period of time where companies were so good at generating more and more free

cash flow? I mean, the free cash flow yield is not a good way to look at it because the price might be asymmetrically rewarding that. But I think – Maybe not relative to the market cap, but just earnings per share. Just the way that they create value and turn these battleships around. It's funny. I have some data on the S&P that goes back to 1928. So it's whatever, 95, 96 years of data. And the long-term S&P return is 11.7% per annum.

It's been 13% of change since 2012. It's been 11.8 or 9 since 1972. So like the consistency at which companies can deliver productivity and drive out costs. You're sitting here now, and you're not even in the batter's box yet on AI, right? Like everyone uses it. Yeah, we don't even know the impact of that. I know that the ability to look for low net income or low revenue per employees at huge companies, the ability to – think about it.

the ability to, you know, think about it. If you can take a business that has 50% interaction required down to 10%, you can fire 80% of the people who do human interaction. Like you just start doing the math in your head about, well, why do I ever call an airline? Well, because I want to fly. My wife used miles and I want to pay for my business and I want to sit next to her. Otherwise, I would never call, right?

So if we get to the point in five years from now where I search for London and all of a sudden it says, last time you did this, it goes to seat guru. It knows I don't want to do the men's room. I know. That's where we're headed. It's not happening now, but it's five, six years from now. Separate credit cards. You're flying under business.

Boom, boom. Last time you said it, the Bonvoy property here. Does that work? It's sooner? Sooner. Sooner than five years. It depends on the business and the application. I think certain

of the big financial industries will take longer because you have to run things in parallel. But the point is, there's a lot of, so the way I try to think about it systematically is like,

where's there a low net income or low revenue per employee and where could that be approved? It might be screwed because it's a call center, it's a dying business, or it might be something that efficiency is.

Where am I paying a high margin? Who's earning a high margin off me? If I'm Jamie Dimon, I'm looking at like which software company and which service company is extracting a lot from me. Can I replace them?

Can I predict my employees, this wall garden of behavior and my clients, can I predict their behavior and just obviate the need to pay all these people? That's going to be a huge productivity boom

for the next decade. So I think we're early days in productivity. I think the real savings is going to be one step beyond the AI autonomy. And just like anything you can think of where a person doesn't need to do that work. And BMW in Spartanburg, South Carolina, they're going to be the first of the automakers

to have humanoid robots in that facility. It's their only facility in the United States. They have a robot that's coming from another company, and it's a lease. It's robots as a service. They're not even buying it. But this is version 01. Is that a REIT?

It could be a REIT. 30 years, it'll be a REIT. But they're going to have a humanoid robot, and they say, well, what is the robot going to do? It's going to work with steel. It's going to pull things out of boxes. It's going to carry heavy objects. We still have human beings doing those jobs

after all this time, and there's no need for it. The semiconductor industry is incredible. When I started doing it years ago, I put a bunny suit on. I went into a huge wafer fabrication facility. There were dudes wearing white suits. You were the white – Yeah, the white bunny suit.

And they're carrying the wafers around. What do people do? They get their hair on it. They drop them. The yield was not great. Now you look at these companies and their efficiency. Like no human being goes in there. It's locked to a thing.

It's a machine. It goes in there. Like there's just massive efficiencies that can happen in every industry all over the place. Obviously, the financial industry is included in that. But I would say healthcare is probably there. Josh, remember in Aliens when Ripley goes into that giant like thing at the end where she kills a queen? I've never seen it. What?

Never seen Aliens. Wait, what? I'm not a science fiction guy. But you know – like that should – I don't know if that's coming. But stuff like that for like factories and warehouses? Yeah. Well, look. Productivity is

betting against that I don't think makes sense. And I think the answer is the companies that have done pretty good underneath, yeah, but they can continue to. And I think that's why you end up with an S&P. From my perspective, Dow 100,000 comes about

because everybody just wants to own the robots and enjoy their lives and not do what, why is there, why is there a human being in a Jersey Mike's making sandwiches? Why isn't that a vending machine? Why, uh, is there a human being who cleans airport bathrooms? Don't tell me, Oh, isn't it great. We're providing employment. Nobody should have that job. Nobody, they should have a different job. No, this is, that's been going on for years and years. I remember Milton Friedman with the whole spoons versus shovels. You know, I didn't realize it was a job program.

You know, what's the spoons? I think that's where we're headed. But I think when you look at it systematically, can the big companies who can afford the upfront spend to benefit predict their customer and employee behavior? Those are the ones that are going to do it first. And I think you're going to unroll it, you know, like you said, now for the next five or 10 years.

So I guess the question is, have these giant companies in particular already gotten the benefit of the doubt? How much of this is priced in or are we just getting started? I think it's closer. I'd say it's the latter. I think it's closer.

We're just getting started or it hasn't even started yet. Me too. Yeah. I mean, obviously there's some people doing, like I bought an NVIDIA GPU out on Prime and AQIX for my business because we're super efficient using it.

I guess every two or three years I have to get a new one, right? I mean like – but like the efficiencies are massive. Like I'll give you a silly example. So let's say 10 years ago, I said, hey, Josh, I want you to look at every consumer and retail company and tell me if there's any stealing, if they're talking about stealing in their transcripts. consumer and retail company and tell me if there's any stealing, if they're talking about stealing in their transcripts. You would go open, control F, type in stealing, shrink, organized retail crime, security. You type in those words. Then you'd go to Excel and you'd say, on this date, I typed it in. So hold that. I can do that on quarter now. Okay. You're on by quarter. Go ahead.

What I do is I come up with, I think of the terms that are relevant. I search every earnings call, every webcast presentation, back to 2011 for 130 retailers. I merge it into my database. I look at forecasted profitability, multiples, returns, estimates. I can create a long-short basket in two hours. That would have taken you like a month to do 10 years ago. So it's nothing I described as AI. It's just extraction and efficiency.

And you're not NASA. Like you're able to do that. I paid 10 grand for the GPU. I paid 450 months in the QI. And I know what to look for. Adam, in three years, it'll take you an hour. It's efficiency. My point is like, I'm a more literate than average person trying to do this. And I think it'll just continue to track down to other businesses over time. So I don't know if it's like eventually like the pizza guy at the corner has got technology that's productive too, but I already see it a little bit. I already see it. Where it really impacts earnings is when people are utilizing AI workflows and don't know it because the skin over that is an app that they use every day. And that's already here. It's already happening. That's already happening. I see it in a lot of my life.

I don't know if you see it, but like I travel once or twice a year to the same cities a lot. And I land and the way says, do you want to go to the place that was the hotel you're at? You know, Marriott, Kansas City. I've been there in a year.

It's just like, it's already, like it's dialing in my life. Don't get directions to Kansas City from him. Why? He doesn't know which state he's in when he's in Kansas City. I thought I was there last week. I thought I was in Kansas. I'm still shook. Kansas City from him. Why? He doesn't know which state he's in when he's in Kansas City. I thought I was there last week. I thought I was in Kansas.

I'm still shook. I've not recovered mentally. Yeah. He's in Missouri. Yeah. I've spent a decent – I've been on – I should estimate the actual number,

but I'll just say I've been on 10,000 airplanes in my life. Not to brag. It's not a good thing. And it's a huge number. And I've been in two tornado warnings at airports in my life, and both were in Kansas City. And it was, I would say, the worst airport

in America. And they really improved it a year or two ago. And so it's gone from a bottom decile to top decile airport. So it's been a share gainer in the airport portfolio. But you don't want to be underneath the tarmac at MCI. I don't want to be underneath the tarmac at MCI. I don't want to be underneath any tarmac.

I want to do one last thing before we go to favorites. I'm short tornado warnings. Totally. You have some stock ideas. Yeah, we try to generate sector industry and stock ideas. So this first one is long slash buy growth stock ideas. And you say the following growth stocks are low growth beta, high quality, low style score, meaning less growth, and have relatively lower revenue growth. Why is that good?

Because, so do you want the 30-second answer or the three-minute one? Your choice. I don't know. I get professorial. I tend to go long. All right. It turns out that when you buy growth stocks, the quartile that works the best, the only one that works over time is the highest quality quartile. You got to buy high quality business. Not fastest growth. What does quality mean? For us, it's a systematic tag.

It's a function of level and stability. Made in Italy. Level and stability of return on equity and net income, turnover of the share base, distance from default, like quality metrics for the business. And so we tag them high, mid, low quality junk every month and we track that as a factor. And so the highest quality one works. Within the highest quality, what works best are the ones that are lower beta, meaning they don't – like ARK is inferior to sort of slower growing but steadier growth businesses. It might not be the best for a two-week trade. If you tell me the financial conditions are going to ease, sure, I'll buy ARK triple long ETF or whatever some of your listeners like to do. But I think if you go and you're investing like for a six- or 12-month turnover or something like that, over time, the highest quality quadrant with lower forecasted growth and lower beta weights.

Why? Because a lot of the fast-growing, fast-expected ones have higher starting valuations, and then they blow up more. They're paying for those. Sorry to cut you off, but what does growth mean to you? Because I'm looking at Walmart,

and I don't think of Walmart as a growth stock. So what makes you classify it as such? Low growth. So we also have a systematic tag for growth. It is in the growth universe, and it's one of the lower-growing ones in the growth universe.

It's a systematic tag. There's four signals that dominate it. Fast, if you have lots of debt, a high dividend, you're cheap on price to book, and you don't grow your value. And if you have sort of faster forecasted five-year growth, don't have a high dividend, don't have debt, and you're expensive on book, you're gross.

So like Walmart must be in some cocktail of those four metrics just sneaking into the top there. Are these in any particular order? I think it's just by market cap. So Visa, UnitedHealth, Walmart, Marshall McLennan, which is insurance, Regeneron. So we have a basket of these. What it shows is that if you held this basket

and you recalibrate, I think, quarterly, it will massively outperform. Some of the names will change and some will stay the same. But the important point is it's the basket, not the individual names? Right. So we buy the basket of like 30 names. So why don't you make this an ETF?

We have a lot of baskets that our clients trade. The ETF, my understanding, and you're more an expert on this, is that there's a bit of a hit rate issue. So if you start an ETF that doesn't work, it can be like a net. So it doesn't work. So start 10. Well, if you want to fund all of them, I'll give you some of the upside. Not that much money. We'll talk offline. Let's do this one other one. I'll call it J-O-S-H. These are your value stock ideas. And again, it's a basket.

Below we show long ideas, non-financial mega slash large cap value in the top half of quality with high return on invested capital and declining net debt. That's the secret sauce. Those are attributes that work within value. So what we then offer is like a portfolio of the combination of high quality growth and value

with the appropriate weights. And then we think that over time can beat the S&P. So some guys are growth guys. They just want the growth name. Some are value. They just want the value names. And then can beat the S&P. So it's, you know, some guys are growth guys. They just want the growth name. Some are value. They just want the value names. And then some are core S&Ps. These are your value names.

Exxon, McDonald's, Altria. This is a screen. Colgate. It will outperform value, the value index over time. What's PACAR? PACAR? Did I spell that? What is that?

It's capital goods stock. Trucking. Trucking. Do you have fun on the show today? Yeah, always. I didn't feel like it was a time to buy. Well, this was the warm-up.

This was the warm-up, and now I feel that you're ready. We're going to turn on all the recording equipment. Let's do it. Let's do it. I want to do favorites with you, Adam. Actually, I'm shocked that it's an hour and a half. Time flies when you're

in the very capable hands of the compound. Yeah, I agree. I have a few, so I'm going to go first. Yeah. I really want to just make sure all of our listeners get into this season of Fargo, which just ended. It ended this week. Did you watch the finale yet?

Tonight. Okay. Let me explain what happens in the finale. No? What did you think of the season? Are you in? I watched it. What did you guys think of the season? Are you in? I watched it. What did you guys think of the season?

It was good. I thought it was my second favorite of all the seasons of Fargo. And this is the fifth? Is it the fifth? I think. Okay. This is my second. This is my number two after season two, I would say.

Not giving anything away, but what did you think about the ending? I absolutely loved it. Why? Do you think people didn't like it? I didn't read anything on it on purpose it was very Coen Brothers to me

it was extraordinarily Coen Brothers it feels so Coen-y I love it I love the feel alright if you're not watching Fargo for the love of God

it's 8 episodes would you please just watch it it's 10 True Detective is back we saw the first one on Sunday night what did you think

I have not watched it yet okay anyone else amazing tomorrow True Detective guy I don't really watch any TV okay if you were to watch one show Sunday night. What did you think? I have not watched it yet. Okay. Anyone else? Amazing. Tomorrow. You're a true detective guy? I don't really watch any TV. Okay.

If you were to watch one show. I haven't watched any of the shows you've mentioned. I only mentioned two. But if you were to watch one true detective, I feel like you would appreciate it. I watch less sports. That's about it. Okay. Big year for Michigan.

I'm a Michigan guy. I know. It was a very big stretch. Were you in the blue and maze? I did the correct thing this year. Two years ago, I went to the Georgia game in the Orange Bowl. We got blown out. Last year, I

arrogantly penned an LA trip before the TCU game and then we lost. So I decided not to jinx the team, stay home. That's why they won. Are you a Lions fan too? I'm not. I'm from Boston, but I went to Michigan. So Patriots, Celtics, Red So team, stay home. And that's why they won. Exactly. Are you a Lions fan too? I'm not. I'm from Boston, but I went to Michigan.

Got it. So Patriots, Celtics, Red Sox, Bruins, which has been a nice life. You know, it's nice to see the underdogs from University of Michigan finally get one.

You know what I mean? The leaders in the best. It's nice to see one thing in life go well for those people. It's, it's, it's. My wife went to

University of Michigan. Oh. I can't stand all her friends. They wear the,, it's, it's. My wife went to University of Michigan. Oh. I can't stand all her friends. They wear the, everywhere they go, it's Michigan. It's too much.

It's way too much pride. Take it, relax. You know, I think, I think when you're. College was 40 years ago. I think when you're top,

top 10 in, in, in everything, it's helpful. I, I had a great time there. I mean, I think if you meet someone

who says they went there, didn't like it, you should, it probably says more about them than the university. Oh, no. No question, great school. It's hard to get – as someone who has kids that are college age, it's not as easy to get in as when I applied. I can tell you.

That's for sure. It's an amazing school. We toured it for my daughter. She didn't end up going there. She's not going to end up going there, but it's an incredible school. The problem is what you turn into after, I think, is the main issue. I hear you. I mean, as a Boston guy and as a Michigan guy,

we're in the worst quadrant for, you know, people. Oh, my God. You're at risk. You have two risk factors on you. Yeah, they're the worst. They're the worst. But, you know, I raised my kids in New York City successfully to root for the Boston sports teams.

And so that was huge. In terms of college, it's been a disaster. the worst. But I raised my kids in New York City successfully to root for the Boston sports teams. And so that was huge. In terms of college, it's been a disaster. They go to schools that are opponents of Michigan. So I've had to swallow my pride. The good news is it's fun. It's awesome. It's a fun rivalry. One of my best moments of my life

was my sophomore year in Michigan when we won the national championship in basketball. Did you see they just reunited those guys? I did. I did. That's pretty cool. I did. I saw all five of them together.

I think it's because the team was seven and nine and needed a little bit of a boost. But they won that game. So, you know. Yeah. All right. Well, listen. I know you're not a TV guy. True Detective is back.

Okay. What is that? This is also the fourth season. It's an anthology series, which means that every season has no relation to a prior season it's a new story it's new actors two and three were not good so uh right but this one i think they figured out why those two didn't go well what what happened to me is during covid like everyone i watched a couple series uh heist the one where they were you know stealing some money and and it just they all turned into soap operas.

And then at the end, I thought, I learned nothing. I'm tired. I'm tired. Because you stay up until 2 in the morning watching stuff when you should have shut it off. And I just felt, like, empty inside. I'm looking for that feeling. I want to feel empty. And so I just am like, what am I doing with my life?

And so I've tried to, you know, focus on, you know, learning stuff, you know, podcast reading. And I like live sports, and I like going to live sports with my kids and my wife and that kind of stuff. What do you think for the Super Bowl this year? Do you have a strong take on any of the teams? The Niners look pretty good. I mean, all year they have.

Yeah. I guess, you know, I root against the Ravens just because as a Patriots fan they've been frisking in our face a few times. They're fun to watch though. Yeah. So I guess even though I'm not

from Michigan, Make the call. I would love it if the Lions would win. I think that would be a nice story. I think that would be fun. I want to see Eminem

like going crazy in the stands. Everyone who is not from Tampa or one of the other competing teams is rooting for the Detroit. Everyone who is not from Tampa or one of the other competing teams is rooting for Detroit. How could you not?

Yeah. I mean, it's just this, you know, kind of a team that's had, I liked that guy the other day who was like 89 and he'd been a season ticket

all year for 66 years and he saw his first playoff win. It's unbelievable. I can't be a fan of that. Michael, you got anything for us? Any best of

or what do we got? I loved, I really loved Killers of the Flower Moon. You did? I did. I really did. And I think there's two reasons for that. One, my expectations were thankfully set very low because people did not generally love it. And I watched it in like four sittings.

I think that had I gotten opening weekend to the theater, if opening theater opening weekend to the theater I probably would have been disappointed I'm going to say the worst thing I've said to you so far which is I was encumbered by having read the book first me too and so it made it worse I agree with that take it's just the problem was it wasn't you know I think for all of us

of our year we're like Scorsese, DiCaprio De Niro I'm in like I don't even need any follow up questions and so with that sort of setup, even with, oh yeah, I heard it was long or whatever, it still was disappointing. I thought the best actor in the whole thing was the woman. She was incredible. She was great. Lily Gladstone. Yeah, she was great.

The book was amazing and different and focused a lot more on the FBI. There was very little FBI in the film. I agree. But I just, again, having low expectations, I thought De Niro was cooking. I agree. But I just, again, having low expectations, I thought De Niro was cooking. Interesting take. I'm surprised, but I really enjoyed it.

The problem is when you get to that level of renown and success as a director in Hollywood, and you have- I'm just happy you picked one thing I've seen. There we go. Listen, it's not Goodfellas. No, no. You have a studio like Apple that's really like unlimited capital and wants prestige. Then you get Marty and it's like, Marty, what's your passion project?

You want to do this? Here's as much money as you need. So I've actually seen two movies. The other one I thought was awful. It was and again, it had me at hello, Paul Giamatti, New England School. That was bad. Sorry, Ben Carlson was into that movie, right? Yeah, that's a film.

No, I'm definitely on your team. It definitely sucked. I mean, I don't mean this to sound arrogant, but my wife and I left the movie and we were like, I think we could have written it better. What are the writers, like, what happened? Like, give me the script, I'll edit it, and I'll make this movie at least somewhat entertaining.

And, like, I like Paul Giamatti. Who doesn't? The guy, I mean, I think the filmmaker is boring. Who doesn't? The guy. I mean, right? I think the filmmaker is boring. Yeah. Alexander Payne. I wish I was flying to Singapore and it just killed three hours flying there and then I wasn't as mad about it.

There are four funny scenes in Sideways and Paul Giamatti is the reason for three of them. No, who's the other dude? I'm drawing a blank on his name. Thomas Hayden Church. It's just not great. It's okay. His knowledge. Elite knowledge. Anyway, who's the other dude? I'm drawing a blank on his name. Thomas Hayden Church. It's just not great. It's okay. He's now an elite. Anyway, Killers is problematic because they make, Leo DiCaprio

plays the dumbest person in the movie. Yes. It's too much time spent with an idiot. The Brendan Fraser character is great. Jesse Plemons character is great. These guys show up in the last 10 minutes of the movie. It's like, wait, this should have been the movie. I love Bobby De Niro and DiCaprio going back and forth.

I just, again, low expectations. So I was blessed with that. Too self-indulgent. All right, we're going to wrap it here. Adam Parker, can we tell people where they can learn more about Trivariate and follow your stuff? So it's Trivariate, not Trivariate.

I should have just called it like T or something. I've had... Yeah, don't start pronouncing things European-like. Michael gets really triggered by that. So it was supposed to mean three variables,

trivariate, which were supposed to be macro, quantum, fundamental, applied to equities. If I did it over, I would have simplified it because... Trace variables.

Yeah, we've gotten, you know, kind of... I was on the air with an unnamed CNBC reporter who I think trevariated me, so it caused me to clench up a little bit. But it's just www.trivariateresearch.com.

Adam Parker Analytics would have been good. You know, I don't think the eponymous thing suits me. I don't like that too much. I think if some people were into it, I don't need that. I like something a. I don't like that too much. I think if some people were into it, I don't need that.

I like something a little bit nerdier. We're getting played off. Yeah, you playing us off? Duncan's pulled the cord. What do you got, a train? It's very subtle. I was just bringing it in. No, you're right.

Bring it up. Nice, good Fargo take. Adam, as you could tell, we love having you here. We could talk to you for hours. We'll do it again. You're one of the brightest, most personable people on Wall Street. We appreciate all of your research, all of your insights.

I hope that our audience will check out your site, your service. And by all means, let's not wait this long again before we have you back. Anytime. What are you doing tomorrow? You said anytime. All right. We'll have you back soon. I mean, I'll come back tomorrow.

You watch what you ask for. All right. Hey hey shout out Duncan welcome back John amazing job as always Rob Nicole Sean Daniel

the whole Compound Media team you guys crushed it it's really elite this is what your improvement is noteworthy thank you wait till you see me

in six months wait till you see me in a year alright hey guys thank you so much for listening leave a rating and review. We'll see you soon. Bye.

Bye. Bye.