The Compound and Friends - “Big Short” Investor Bets on a Crash

Episode Date: August 15, 2023

On this TCAF Tuesday, join Michael Batnick and Downtown Josh Brown for an all-new episode of What Are Your Thoughts and see what they have to say about: retail earnings, stock picking, interest rates, Michael Burry, revenues, the future of Paypal, and much more! Thanks to YCharts for sponsoring this episode! Go to https://go.ycharts.com/animal-spirits-referral to learn more about their scenarios tool. 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

Ladies and gentlemen, welcome to the compound and friends. It is Tuesday. We have an all new edition of what are your thoughts? Michael and I talked about Home Depot retail earnings in general. I just don't like when the media turns his hedge fund trades into personal financial advice for regular retail investors. So we tackled that as well. There's just a lot in the show. I think you guys will really enjoy it. Hope you do. And if you do, make sure to leave us a rating and review. Okay, with no further delay, here is what are your thoughts. 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 Red Holtz Wealth Management.

This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast. Okay, gangsters. Let's see what we got going on in the chat. Sean is here. Jay Luther. Dave Arie. Nicole is out here.

John Carlo. Sean Flynn. Jack Rosenthal, everybody's here. This is a really exciting night. It's a big week. It's Retail Earnings Week. We're going to get into that. We got some interesting stuff to talk about with respect to credit card debt. We're going to get into a whole host of things. But before we get started, Michael, say hello to the folks. Hello, folks.

Would you like to tell us who tonight's sponsor is? Sure. It's our good friends at YCharts. I mean, you already know I use this all day, every day, literally all day, 40 times a day, 100 times a day. There's so much YCharts in the dock tonight. So tonight they want us to cover an enhancement to their scenarios tool, which Ben and I have spoken about. What you can do is you can build hypothetical scenarios that include a future end date.

You could use 10-year total returns or custom returns, DCA, different this, drawdown scenarios. I mean, it's really incredible, the new enhancements to their scenarios tool. Check it out. Link in show notes. You know the deal. Give them a shout. That's right. It's ycharts.com slash what?

Slash link it in show notes. Animal dash. Yeah. That's too many dashes. And enhanced for your pleasure. So, all right. Let's start the show. I wanted to start off with retail and the consumer.

I thought of this week as kind of the week where we just kind of get confirmation of everything CEOs have been saying. So a lot of CEOs touch consumer, you know, Disney and Netflix and everyone else. But retail is like where the rubber hits the road. And if they're singing a different tune, maybe there's some meaning there. But by and large, what we heard from Home Depot this morning

is pretty much what I expected to hear. And I think the market expected to hear. So I just want to go through this really quickly. Before you do, let me just say one thing, just to set the stage. You're right. This is where the rubber not hits the road. It's where it meets the road.

70% of US GDP is consumer spending. So it's the whole enchilada. Back to you. Yeah. Yeah. And it's really what moves the stock market. It's way more important than anything going on the demand, on the supply side. So first things first, actually.

July retail sales came out this morning also. And this is a release that comes out from the Commerce Department every month for the prior months is July retail sales, seasonally adjusted increase of 0.7% for the month. That's way above. Too hot. Too hot.

Way above the 0.4% estimate, according to Dow Jones. If you pulled out autos, sales rose a full 1%. And again, that's also against the 0.4%. What's interesting about that is consumer price rose 0.2%. That's the CPI. So in real terms, consumer spending is actually accelerating. It's not just an absolute, it's hot. July numbers were boosted by a 1.9% jump in spending at online retailers. I think that that's maybe the start of, I don't know, is it Amazon Prime Day in July? Yeah, yeah. I think it sounds right. Try it on real quick, this online stuff. So department stores, I mean, that's obviously in secular decline.

It'll eventually asymptote to zero, right? Does it surprise you? Like if you were to guess what percentage of retail sales are done online, would, I don't know, was it 16%? Would that surprise you? I think I would. Oh, there it is. It's right there, 16.8%.

I would think it's higher. It's complicated because I watch the way Sprinkles does this she's playing no because she's playing both sides against each other she's omni-channel

she's the omni-channel queen of Long Island I have to be honest with you she will buy online multiple sizes and colors of the same thing go to the store look at your

dude it's the playbook I mean I was just talking about some animals with Robin. I said, did you just buy $1,700 worth of clothes from a company called Revolve? Who the hell is Revolve?

It'll net out to $100. She's going to return the other 16. I just saw $1,610 worth of returns. Yes. You're right. It's omnichannel.

Then they go back to the physical store. So I don't know who the hell's paying for this. It's a lot of activity. No, but for real, that chart, I don't know who the hell's paying for this. It's all this activity. It's a lot of activity. No, but for real at that chart, I wonder if you do like non-grocery because people want their produce. I get, I, I like to touch my vegetables. You know what I mean? Uh, someone's asking, do we have a Genesis of the name sprinkles? James Sykes is asking.

That's her stage name. When I took her off the stage, I said she could keep it. Wow. Um, but we had to change everything over the line all right uh it's a cartoon dog is the it's not that it's not that exciting it's a it's a show called blues room which was a blues clues spinoff and one of the talking dogs but look like look like uh look like my wife according to my baby daughter at the time. So she sprinkles ever since. Home Depot reported double beat, reaffirmed guidance. Beat on the top line, although they guided lower for this number a while ago. So they beat a lower hurdle.

Beat on the bottom line, too, and approved a $15 billion additional buyback program. What the CEO said, I feel like is like the perfect encapsulation of the economy circa this summer. Actually, CFO said, quote, continued caution on the part of consumers when it comes to larger ticket, more discretionary spending, because most of them already made those purchases in 2021. Yeah, you already did it. Right. You don't need another dishwasher if you bought one two years ago. But then he said, pandemic dynamics are reversing too. Transportation costs are lower. Vendors aren't coming to Home Depot with requests for price increases. The supply chain disruption is, quote, largely behind us. So that is the perfect

encapsulation, I think, of this earnings season. It's like, yeah, revenue growth is slower. The consumer's calming down, but the costs are falling even faster. Here's your earnings beat. Yeah. One of the things that I've, yes. One thing that I'm noticing a lot of, a lot of retailers saying is resiliency in all areas of the income spectrum, both high and low income earners are resilient. From Visa, MasterCard, down to Chipotle and Starbucks. Yes. So Home Depot's big ticket comparable transactions down 5.5% year over year. All right.

Again, we did those transactions. We lapped a period where people were buying everything. Can I tell you something? Those numbers are super impressive. What was it? Down five compared to the like, I'm sure those are ridiculous comms compared to pre-pandemic. I said this on TV today. The thing that people have gotten wrong about Home Depot, and I only figured this out like

recently. It's not like I knew. It's not a cyclical business. When interest rates are low, the housing market's on fire, people are buying giant houses and they're getting big ticket things done, right? Like, but then when interest rates go higher, you don't get a complete drop-off,

you get a switch in behavior. People are forced to stay in place. You can't sell a house right now. Well, I guess what else, are these purchases being financed? Probably not for the most part. I'm sure some are. Hey, do we have the chart? No, but it's, you can't sell a house right now. Well, I guess these are these purchases. They renovate these purchases being financed. Probably not for the most part. I'm sure some are. Hey, do we have the chart?

You can't. But if you can't sell a house, what's the next best thing? We do your house. Yeah. And in an economic recession, people do what's called nesting. They don't go out and spend money in Las Vegas. They'll spend it within their own four walls. It makes them feel better.

So Home Depot has less cyclicality than a lot of other specialty retailers. John, do we have the chart? Do we have the chart of Home Depot's earnings? I put some big E's on there. So Josh, remember two earnings ago? So two E's, there we go. Two E's ago on the gap down. I think you said you want to buy Home Depot, but you think you'll get it at 270? Yeah, guess who didn't buy it? Well, it never got – it got close. It got as low as 277. It's had a sick rebound.

Last earnings call, I don't quite remember honestly what they said. But given that we've seen this trend play out this earnings quarter – turn it off, please – that we've been speaking about. Companies that are beating are, the stock is not responding well. Companies that are missing are also getting punished. And this company double beat and raise, or $15 billion buyback, and the stock was flat on the day. I'd say that's a win, given where it came from. Yes. Before we move on, can we get a mud room update? I'm being asked in the chat. What do you want to know? How it came out well? Any supplies from Home Depot involved in that project? I feel like I overpaid, if I'm being honest. I think it was...

I haven't seen the room. So the room is 8 by 10, give or take. I don't know, 10 by 10? It's small. Yeah, it's small. And they did a great job. But what they did was they put down – not that I could do this. They put down like wooden planks, put down a floor, put down tiles, and put up some high hats.

And I think I paid like, I don't know, maybe $9,000 or $10,000. But they sheet rocked it. Oh, the sheet rocked it. And they insulated it. All right. So how much did that cost? I feel like I could have got – Hold on.

Is it the same temperature as the house or the rest of the garage? You know, I think they put, well, whatever. I feel like, I feel like I could have, I could have, I could have bargained.

Anyway, the moment was great. Thank you for asking. The funny part of that story is that Sprinkle sent you her general contractor. Oh, that asshole. $40,000.

Dude, I like that guy. I've used him before, but he literally quoted me at like 40. I was like, what are you nuts?,000. Dude, I like that guy. I've used him before, but he literally quoted me at like 40. I was like, what are you nuts? He took your temperature. I'm insulted. They do that to me at Bobby Vans and they bring me the wine list and they let their finger linger over a $400 bottle of wine. He needs a new thermometer because I paid 10. All right. What else do we have? Oh, Home Depot quarterly net sales. This is the thing. And this is, the bears hate this, this phenomenon.

This is two straight quarters of negative year over year sales. And that could very well continue for the balance of the year. I don't think anybody would really fight against that. Margins. And it just doesn't matter. It's still $5 billion in quarterly profit and, I don't know, $50 billion in revenue. And the stock is like stable in the presence of that kind of drop off in revenue. And I know that makes the bears nuts.

But that's just the reality. I mean, it's Home Depot. So $15 billion share buyback. I mean, it's not a huge number, but relative to the market cap, it's pretty big, right? I'm looking now. Their shares outstanding were like 1.15 billion in 2018. Yeah, the shares, they've been aggressively buying back stock. Looks like it was 2.9 billion, 1.5, 1. I mean, they buy back a lot of stock. Okay.

Later this week, we're going to get Walmart and Target. One of them is Wednesday. One of them is Thursday. And I forgot. They'll both be before the open. So this one's interesting to me because there's a huge difference between Walmart and Target since last spring when they both had profit warnings. I wonder, is the ratio chart an autumn high

of Walmart divided by Target? Let me check. Go ahead. I didn't order that. Let's put the one we have up. So you could see in May that both these stocks blew up. I guess they were reporting first quarter earnings and they warned for the rest of the-

Oh, that was the inventory. That was the inventory thing. Yeah, but not May of 23. This is may of 22, but then, but wait, but then Walmart got their shit together and you could see the stock came in during earnings in may, but recovered and made a new 52 week high, not the same story for target. And this is a tremendous gap. Walmart over the last, what is this, three-year chart? Up 10%, Target down 50%. So if you want to be a contrarian, if you want to be a contrarian, not very difficult.

Just say to yourself, I don't think these stores are all that different. One of them is kicking ass and the other one isn't, and they'll figure it out. And that's the one that you buy. I mean, if I had to choose one versus the other for the next 12 months, I'd pick Target or Walmart. Just knowing nothing other than that gigantic gap just seems unreasonable. Next chart. This is from the May 22 sell-offs for both. So they both started at, look, this is even more pronounced. What is Walmart doing 32% off that low?

What is Walmart doing that Target isn't? And that's the solution. And they're both doing e-commerce, so don't tell me that. And I'm really surprised. I mean, maybe the guy at Target needs to get fired. I don't know. Can I tell you something? I mean, I do Target pickups twice a week.

So buy the stock. Earnings are, I think earnings are tomorrow. I kind of want to. You kind of should. Be somebody. Do it. Just do it. Let's move on.

Last thing on the consumer. We could shut the fuck up already about credit card debt. It's higher, quote unquote higher, because the economy is bigger. It's a denominator issue as much as it is a credit card debt. Of course, it's higher if the economy is big. I mean, how stupid can you actually be? So this is the chart that you're seeing. Who are you yelling at? I'm shaking my fist at the cloud. This is the chart that you are seeing. Who are you yelling at? I'm shaking my fist at the cloud. This is the chart that you are seeing with no context whatsoever. Thanks to Ryan Dietrich for this. They're just

saying like credit card debt tops 1 trillion for the first time ever. Don't you think it was scary when it topped 1 billion for the first time ever in, I don't know, 1975? Was that a sell signal? first time ever in i don't know 1975 was that a sell signal so uh dietrich does a really nice job uh ryan dietrich of uh carson group and he's got like 20 or 30 charts we're not going to do them all we're going to do the first three and um let's let's pop those bad boys up here so is this the first one you can't even see it no no that throw it back on. No, throw it back on. Yeah. Throw it back on. Yeah.

So total consumer debt, obviously mortgages are, I don't know, what, 60%, whatever it is. Then you've got- Mortgage is yellow. It's almost the entirety. And then you've got home equity right above it. Then you've got cars. Oh, it says right there, mortgages, 70%.

Then you've got cars are 6% and credit cards, 9%.gages, 70%. Then you've got cars, you're 6%. And credit cards, 9%. And it's steady. Just eyeball test. Steady as it goes. Right. That's the point I want to make on this. Eyeball test.

And guess what? I don't know if I have this chart in here for later or what. If you look at the consumer interest expense compared to GDP, household expense, it's down to where it was in 2001. People are not over levered enough. It's the same. Now, let's do this. Let's do this. By the way, that number, this is – wait, go back to the last chart.

This is Dietrich. What stands out, quote, what stands out to me most about the chart above is overall debt was virtually flat the past two quarters from 17.05 to 17.06 trillion tells a much different picture than what the media makes it sound like with all the quote soaring debt end quote yeah all right uh next one also wait a little less thing not to play with the point but also look at trump i got look at look Look at that deal leveraging from the GFC. It took like a decade. Yeah, so calm down. We're below trend. We had a balance sheet recession that lasted 11 years.

We're young past each other. Let's take a break. Okay, this is from the New York Fed's report, zooming in on the relative size of each part of the debt. Again, and if you look at credit card debt specifically, it has, this is Dietrich, consistently stayed in the same range over the long term. So credit card debt might be at a nominal record, but by no means are we seeing consumers go nuts buying everything on credit cards more than they have in history. I call this denominator blindness. All we hear about is the numerator at at a new high a lot of cases

the nominee okay so that's that's the point no yeah you don't call that that's what it's called no that that's what ryan wrote um the last thing on this just to give you just to give everybody a little context in the year 2000 household net worth was 44 trillion dollars michael would you like to take a case of uh take a guess of what it is today? So that was $44 trillion, one? Overall household net worth. One. $44 trillion in the year 2000.

Oh, okay, 70? Okay, $150 trillion. Boom. So why wouldn't credit card debt be $1 trillion? Grow up! There we go. Grow up. Okay, all right, we're moving to,

oh, this is interesting. There we go. Blow up. Okay. All right. We're moving to, oh, this is interesting. I like this. You might have noticed if you buy and sell individual securities that they're kind of not all going up or all going down together, which is actually the way that it should be. The Fed is no longer manipulating the market. Try it on, please. This is from Goldman Sachs. The average sector and average stock correlation is,

I wish that this chart was zoomed out, but oh well, it's all I got. You know, this is good news. This is good news. Remember risk on, risk off? Yeah, that's not this. For like years? Yeah.

That's not this. Right, it's sector by sector. Like you have weight loss drugs versus regional banks right now. Oh, I think Josh Target- And I'm not doing the same thing. Target and Walmart is a perfect example of this dichotomy. Yes. Right? There we go. Like you have weight loss drugs versus regional banks right now. Oh, I think Josh Target. They are not doing the same thing. Target and Walmart is a perfect example of this dichotomy.

Yes. Right? There we go. They are not doing the same thing. And just looking at my own individual stocks in my portfolio, there are huge differences in the direction. I have stocks making multi-year lows and stocks making multi-year highs. And if this is what you were complaining about, that everyone's putting the money into index funds, it's driving everything up, that's no longer a real issue unless you're not looking.

If you're just saying it, you're not looking, OK. You know, a lot of this argument was index funds. Index funds are distorting price discovery. Yeah, not anymore. Not anymore? Winners and losers. I hope you're winning. Hope you're winning.

All right, we've been speaking a lot about valuation. This is an interesting table from Goldman via Faxit and whatever, whatever. Besides tech, and forgive me, I forget who tweeted this. Besides tech, discretionary, and staples, all other sectors are trading at a discount on a forward 12-month PE basis, which is kind of interesting. So you've got the S&P at 19.6 times. And again, what's above that?

Tech is 27. Discretionary, a lot of that's probably Amazon and Tesla is 26. And Staples. The Staples part is head-scratching. Can't figure that out. What, like you're saying? Especially. How expensive they are?

Especially given where interest rates are. Because Ben and I were talking today that dividend stocks, which are not all staples, but certainly most staples pay a dividend, are underperforming big time, as they should. Pepsi was a bond proxy back in the day. I'll clip my 2.6% coupon, whatever it is. And they're having a really rough year relative to the market as they should when it reaches 5%. I think there's two things with staples. There are not a lot of them of size. Really? Yeah, a bunch of small cap staples, but there are not a lot of the really good ones is one. Two, their costs of doing business have been falling. Three, they all put through price increases that they are not taking back. And it's as simple as that, really. They're over-earning.

And that'll correct. And they should not be making as much money as they are. But just understand, their input costs fall. Their end price to the consumer sticks. That gap widens, and they end up beating on earnings for three or four quarters straight. I think it's really just as simple as that. It's not going to go on forever. They're going to start lapping these lower costs next year. And God help them if costs are starting to rise again.

If gasoline, if these things start to get going again, I actually think those earnings are at risk. So I think it's not that complex a story. It's a head scratcher, like how could this be going on? But it probably won't go on for a long time. Can we do some Michael Burry stuff? Let's do it. Okay, let's – they used to call me back in the day the velvet fist.

I heard that. Yeah. The Velvet Fist. I heard that. Yeah. I'm going to say this really nicely because I have nothing but respect for the investor, Michael Burry. I hate the Twitter persona. I really respect the investor. Fully acknowledging, for the record, Michael Burry made one of the hardest to execute, hardest to stick with, greatest trades of all time, documented.

And just to remind people, he was buying credit default swaps from people who were offloading that risk on real estate, mortgages, et cetera. They weren't worried about it. He was. So he was buying credit default swaps, which basically was a situation where he had to pay out income in an illiquid market and wait for the housing crash to happen. And every month that went on was another opportunity to give up on the trade or be driven crazy. And he had all sorts of impediments. He had the people at the investment banks telling him these things are not priced where you think they should be priced. He had investors pulling money. So I have no- Joel Greenblatt?

Yeah. Dude, this was a hard, hard thing to do. There were no instruments other than this really exotic way back in those days. Wait, is that Joel Greenblatt seen in the movie? I can't remember. Joel Greenblatt is a very famous investor that I think seeded Michael Burry. He found him on the message boards. And then he's like, what are you doing? And was in his office like, yeah, trying to get his money.

Yeah. All right. So real quick. Eventually, Burry's analysis proved correct. Like two years later. He made a personal profit of $100 million and a profit for his remaining investors of more than $700 million. This is incredible.

Yeah. Scion Capital ultimately recorded returns of 489% net of fees and expenses between its November 1st, 2000 inception and June 08. The S&P in the same time returned 3%. Okay, great. Nobody would dispute any of that. It's amazing. I couldn't have done it. I don't know anyone else that could have done it.

That was 16 years ago. And my opinion is he's really lucky there was no Twitter back then. Because if there were, I don't think he could have stayed focused on making this trade or executing it for more than a few hours. And I think he would have been way more focused on the attention other people were giving him and how

many people disagreed with him. And that is sadly what he seems to have turned into in recent years. And the January one word tweet sell, I really dislike that because people have so much respect for this guy. They don't understand the context that he's a hedge fund manager and they're not. They think he's like predicting a crash that they are supposed to react to. And that hurts people, honestly. Like if you look at the probability of a crash, we've only had 13 bear markets in this country's history, 13. And crashes are even more rare than bear markets. It's like literally a small handful. So to do stuff like that when you know your audience is a bunch of retail nobodies on Twitter, like relying on you for some reason, you know that they're doing, you know that reason, it, you know, that they're doing, you know,

that they love you. You know, that they're afraid when you say to be afraid. So I don't think somebody in his position should be doing that. Now he stopped tweeting and he's letting his filings talk for him. But again, I know that he knows the impact that his filings have. Um, well, you can't be mad at his filings. I just don't love it. It's the media more than him.

It's the media more than him. You know why it's the media more than him? You can't be mad at how he's trading. Come on. That's not fair. Of course not. No, of course not. You know what the media did not cover?

Whose portfolio is, I don't know, five, 10 times larger? David Tepper, who was super bullish based on his 13F. Did you see any coverage of that? No, because he's not managing money for other people anymore. It doesn't matter. So neither is Bobby, is he? I'm saying, I feel like he doesn't really get that much attention anymore. This is the perfect example of how the media behaves.

Right. David Tepper, who has a much longer, much more successful long-term track record of generating wealth, and it's not just one great trade, was completely not reported. And he loaded up. He like tripled his exposure in all of these tech stocks. So I'm in a big group text with like a lot of guys that are not like not professionals in the market they do other stuff jayru sends a barstool twitter link barstool is covering michael burry yeah yeah the i mean the piece was hard it was like a guy that's like i don't even invest so i don't care about this but blank blank blank blank and it was like they

picked up that two billion dollar figure i don't play i believe but i just relate it you can't blame barstool you blame like people no media media that you know better but the other thing about these 13 f's stop stop what i'm saying is barstool sees an interesting story and the only reason they're writing about it is because of the movie that everyone loved yeah yeah big short yeah and burry was played by christian bale so of course this is going to cross over. I don't blame anybody. I'm just saying I see now how this could spread for people that are unsophisticated or don't know what they're reading. Oh, I blame people who report that Michael Burry

bought $1.6 billion worth of puts. I blame them and they should know better. Can you unpack that for everyone? So we'll go there. But one last thing. If you look at his previous 13F, Michael Burry versus the recent one, there was not a hundred percent turnover, but this guy's not buying and holding. There was a lot of turnover, a ton of turnover. And it's as of June

30th, guess what the market did in July? Pretty damn well, right? Who knows if he even still has these? What if they were one-week options? We don't even know what the expiration is. We don't know the expiration. So, all right, let's get to some of the memes. We don't know the strikes, do we? There's no strikes in the file. No, no, you don't know.

So, okay, so meme on, meme on, please. All right, this is from at Kate, whatever. This person wrote, derivatives on 13Fs are reported as notional values, which means 20,000 one week, 350 SPY puts, so that would be the strike price, 350, costing a penny each worth $20,000.

Okay, so that would be the outlay. Would be reported as 20,000 contracts times 100 times the SPY price is $88,000. Okay. So that would be the outlay would be reported as 20,000 contracts times a hundred times the SPY price is $886 million. This is how it works. This is all leverage. Okay. It's all leverage. He didn't put one. He's not risking 93% of his portfolio. It options that are going to expire most likely worthless. Honestly, a 30 second Google search would tell you he doesn't have that much money, even if he wanted to make that bet, which I don't think he does. So let's just give one more break out of how this works from Spot Gamma. Thank you, Spot Gamma.

The money amount listed on the 13F is not the premium value. The premium is how much it costs. But rather, the value of shares the position represents. Again, it's a part of thisultiplier. That's leverage. So if you back out the S&P 500 value, that's $443 for, I guess this is estimated with the strike price. He owns 20,000 SPY puts, likely worth tens of millions of dollars, which he says, okay. So yeah, listen, if he's right and he still holds these, assuming that the expiration was, I'm assuming he's not buying weeklies, I'm sure he's not, then he's going to make a ton of money. But this idea that he bought $1.6 billion worth of

puts is a scare tactic at best. Right. And you know, there's also a world where the market corrects 15%, he cleans up and everyone having seen that filing would have been better off doing nothing because the market recovers faster than they could sell at the top and buy back at the bottom. And he is not a financial advisor and he doesn't care about you. When he tweets sell, he probably will never do that again. In real life, he cares about himself. He's a professional. This is what he's supposed to be doing. It's not, the implication is not, oh, if he's doing that, I should do that.

You are not, would you watch Evel Knievel jump 16 school buses on a motorcycle and think that's advice for you? I mean, come on. Oh, how about this? Look at LeBron James' diet. You can follow his diet. Are you a professional basketball player?

Right. And again, look at David Tepper, who is equally, if not equally, he's much more successful of an investor with all due respect. And he was super bullish, super bullish. Yeah. So some of this is the media. It's salacious. And look, everybody, we're in a click economy.

It's an attention economy. Fine. I get it. Everyone's got an advertising model. It's an attention economy. Fine. I get it. Everyone's got an advertising model. It's totally fine. But it's on us, normal people, whether we're reading about health breakthroughs, like articles that are advertising a cure for cancer. We just all have to go into this stuff being like, why am I being served this article? In whose interest

is this? It's in no one's interest to inform me. It's in a lot of people's interest to get me to pay attention to something. So if we all wake up and start our day that way, then we're not resharing Michael Burry just shorted $2 billion worth of S&P. That's, I think, the biggest thing. You can't stop people from investing they want to invest. I totally agree with you, Mike. We have to control ourselves, and the media is not going to do it for us. And one last thing, just to put a ball on this. So again, this was as of the end of June. So let's not pretend that he bought them on June 30th, which even after this narrow,

the shallow decline of whatever, 3%, 4% of the S&P. Chart off, please. We don't need this. Thank you. So if he bought this any time in the prior three months, he's well underwater, depending on where the option expiration is, right? These things decay pretty quickly. So he's not making money on this trade yet.

All right, it's enough. I think everyone gets a point. All right, we've been beating this into the ground, but I think it's really important. So this chart from Bank of America is one that I've used, I think, three times now on the show. Why aren't higher interest rates impacting the economy the way that we thought they would? Well, again, more than 75% of US corporate debt is long-term fixed. We're going to run through some charts and then I'll hand it over to you, Josh. Next chart, please.

This is from Sam Rowe. Nearly half of F&P 500 debt is set to mature after 2030. Listen, chart off, please. Remember in 2020 or maybe 21 when Microsoft issued bonds at like 2.5% or something like ludicrous. These companies absolutely gorged on cheap debt as they should. So if rates are higher today, but you locked in low rates yesterday, all else equal and it's not, the higher interest expense is not hitting you. So this is how you could see this textbook breakdown, meaning that this is like the opposite of what textbooks say. This destroyed everything you would see in a textbook. Next chart, please. So corporate interest costs, basically borrowing costs, as a percent of profits, typically track

or lag Fed funds rates or borrowing costs, right? If interest rates go up, so should your expenses. Uh-uh, not this time. So you see the blue line is a Fed funds rate. The black line is the corporate interest cost percent of profits. Yeah, it's not going anywhere. It's the lowest it's been in 60 years because the higher rates aren't impacting them. Now, it doesn't mean that they never will. And if you're not, if you have floating rate, yeah, you're in a world of pain. Matter of fact, the next chart shows exactly what I'm talking about. So this is from, I believe this is from Apollo. The negative effects of higher cost of capital continue. So these are US bankruptcy filings. You see when the Fed started

raising rates. And this likely will continue to rise because companies that don't have the benefit that aren't able to tap public markets that do rely on floating interest rates. They're there. Yeah, they feel it big time. Yeah, I think you'll see this show up in historically. What typically happens is you see this start to show up in the companies that have the most debt and the most economic sensitivity. So that would be small cap industrials, small cap oil and gas companies.

It's companies, it's a double hit. The economy is not great and their costs to borrow and roll debt go up. But you will see that when some of these ETFs tracking corporate debt start to blow out. It's not happening yet. None of that is happening yet. It's not happening yet. Just wait. So Sam also – I. None of that is happening yet. It's not happening yet. Just wait. So Sam also, I don't have this chart in there,

but Sam also, and if you're not subscribed to Sam Rowe at TKER.com, whatever you should be, he has a chart showing the interest coverage ratio. Basically, how much money are they making divided by their interest expense for high yield companies? And guess what? They're super covered.

Like they are good. Yeah. Doesn't mean that they will be forever, guess what? They're super covered. Like they are good. Yeah. Doesn't mean that they will be forever, but right now they're still good. Another thing that's interesting, that's a different dynamic than the great financial crisis. The last real cyclical downturn is that there is just, there's just oceans of OPM, other people's money sitting in the banks of private equity firms just distressed firms all kinds of funds that are just dying for something to get cheaper in price and they just come in and they snap it up and you could say well that'll and yeah but like in 10 years maybe i saw a headline today i didn't have time to read about funds being raised to buy distressed commercial real estate already yeah they're already starting.

This is Wall Street Journal. This is the headline. Wall Street is ready to scoop up commercial real estate on the cheap. Firms are raising billions of dollars. I'm sorry, there's too much money. There's too much money. I have always said this.

You're exactly right. There's too much money that's too hungry for returns. They're buying things before they even get cheap. And I don't know what changes that, but we did a lot of printing and it's still circulating out there in the economy. So that's the story. Okay, I'm up and I'm doing, what am I doing? This is a great idea.

And I think we should I think the audience Is going to love If they're able to Play along with us We should just I read an article About one of the people

And I just said to myself This has got to be His worst summer ever And then I was thinking Like who's having The best Alright we'll go Name for name

I don't know how many You have Wait wait Lay it out for the audience What are we doing right now? Who's having the best summer We'll start with Who's having the best summer Do you think on Wall who's having the best summer, do you think, on Wall Street?

John, you're going to pop mine up? Wait, hang on. Before we go, this is important. We've never done it before. Josh asked me to come up with two or three names of people on Wall Street that are having the best summer and the worst summer. And I thought that was a great idea. We should do this more often. Did you put me for worst?

I should have. No, no, no. I think we i think we have we have i think we will have at least one of the worst combined we will definitely not have the best you go first all right let's do one of my best are you doing best first might take this might take john a minute yeah best first worst is more fun okay all right, I'm not calling it out. Okay. Here's my two. Jensen Wang and Mark Zuckerberg. Good answers.

So Jensen Wang's net worth, I think, is $36 billion now. Is that notional? Yeah, notional. This is the wealthiest he's ever been. And it started off in May with his tremendous guide up. And they'll report next week. Explain who he is. Jensen Wang is the founder and CEO of NVIDIA.

He's been there since the beginning. He's the innovator. He's the guy that pivoted this from video games to AI. And he saw all of this coming like 10 years in advance. And he's just, this is the summer where everything that he's been building is like now monetized. You know who deserves credit for being bullish on NVIDIA a long, long time ago before you? Marc Andreessen. And me.

You had Andreessen and then got bullish. Andreessen probably made a lot more money than I did. The other guy is Zuckerberg. A year ago at this time, they were basically saying, can he be kicked out of his job? And now he's got a share price heading back toward all-time record highs. He's got Wall Street eating out of his hand once again. Whoa, whoa, whoa, whoa, whoa, whoa, whoa. I don't think it's that close to record highs, is it? Heading back toward was the operative phrase.

Oh, wow. it's that close to recognize, is it? Heading back toward was the operative phrase. And he's got the richest man in the world afraid to fight him. Because not only did he turn his company around, at the same time, he got into Jean-Claude Van Damme 1991 fighting shape. Did you know that Jean-Claude JCVD was supposed to be the predator? I saw that recently on social media somewhere. That blew my face right off. So Facebook- In the suit though, in the suit. In the suit. Yeah, in the suit. Facebook was in a, see, I'm using white charts right now, 77% drawdown. Oh my God. It's now 21% from an all-time high.

That's incredible. Yeah, so those are my best. Who are your best? 87 to 300. John, chart on please. So I took this literally, Josh. I really thought you meant like financiers. Oh, Buffett's having a hot girl summer for sure.

So Warren Buffett.ett yeah look at this right i mean killing it stocking an all-time high and then the other one wow all right say more i mean i love this kid i love it i love this kid is this kid living his best life so jack jack raines is uh an incredibly impressive young man. He's smart. He's wise. He's funny. And he knows how to live life. He's traveling right now around the world. I forget where he is.

But I mean, look at that guy. Look at that smile. Look at that drink. He's doing it right. Yeah. And we had Jack on a recent episode of The Compound and Friends. If you missed it, go back and find it. He is unbridled and hilarious.

All right. I'll start with worst okay uh we definitely share the number one person it's david solomon right yeah i have him on my list this article this article is really bad rough i didn't you know i left a lot out but it's like way too it's like way too personal i think they're just they're just they're cutting his throat it's untenable he's he's, he's gone. He's gone. If the, if we make it to the end of the year,

I don't think so. If the oral sex remark is real, like if he really said that it's bad, I mean, who even knows real or fake, but just the fact that people believe that he said that is bad enough. It's bad. It's a bad situation. And then,

uh, and then I put Schwab. You see this headline yesterday, Charles Schwab, Charlie, Ch put Schwab. Did you see this headline yesterday? Charles Schwab? Charlie – Chucky Schwab. This might be a bit of a stretch, but – Well, so can I say one thing? Yeah, please.

They did say that they expected attrition because they're not going to support all of the smaller firms the way that TD was. smaller firms the way that TD was. So they telegraphed that they don't care as much about the lowest tier of client, whether it's retail or on the institutional side. All right. But the numbers, I think, are maybe larger than the street expected. They said CityWire reported 4% of TD Ameritrade's revenue before the deal. That's what the attrition is. Or about 1% of combined total assets, total assets of both two. That's not nothing. 1% of total assets have left the firm? Yeah, it's not nothing. There's trillions of dollars there. I mean, the firm got so much bigger. Yeah. They took a trillion and added 800 billion to it.

And the stock is about to close the gap, as all gaps do. Honestly, if you do a merger that involves millions of customers and you only lose 1% of assets, I think you're the biggest winner on earth. Yeah. That's a good point. That's a good point. Who do you have for losers? I forgot already. John.

Okay. So DeSalle. I mean, SPF, they just threw him in jail in brooklyn they put him in jail he's at i think they put him in shkreli jail like real jail yeah and uh yeah i mean uncle uncle carl this this is the i think this is the end tough scene i think i think he's gonna have to unwind this thing and just go private he lost half his money in in from he lost half his money from a tweet storm i mean it's really bad like that's and not just his money his his legacy his reputation i don't know what they do now like his kid takes over and they stop being so vocal and they just go quiet

i really i don't really understand like quite what you do at this point because if you're going to be an activist, you need the threat that I'll buy you just to burn you to the ground. You need to be able to do that shit, and you can't do it now. They don't have the liquidity to use the same tactics that they've been using for 30 years. So I don't really know what you do as a campaign. No, you can't fix that. You can't fix that. You can't fix it. So now you have to convert to family office and get that publicly traded thing off the market.

Just close it somehow. Borrow the money to get rid of it. Get rid of your outside investors and just like – just quietly. And SPF, this idiot, this guy is literally, literally the prime suspect in one of the biggest frauds in history. And he's leaking the diary excerpts of his former girlfriend as if there's any way in hell that's going to help. I don't know what he's thinking. It's going to help the jury pool.

The whole thing is madness to me. The best thing they could do is take away his phone and his computer. He's definitely not doing himself any favors in the eyes of any court by leaking things to New York Times reporters. So I actually think they're helping him out. All right. I mean, it's a fun game to play. Obviously, we don't root for anybody to not have a great summer. But for those who are having a great summer, congratulations. We salute you. All right.

Last week or a couple weeks ago, one of the bear cases that your Denny threw out and that a lot of bears have thrown out is margin deteriorating. Right. Maybe like that would be like the next thing. Well, actually. Symbolist was saying that, too a lot of yeah a lot of people were throwing that out uh s&p x energy profit margins have sequentially improved by quite a bit look at this pretty wild yeah and this is just net profit margin so my favorite is this 11 11 and a half percent profit margin my favorite quote of the year i I think this was from Sevita, but I'm not positive.

I think, well, whatever. It was like, never underestimate the ability of American corporations to retain their margins. Right. So what we're showing here is that margins peaked in the second quarter of 2021 at 12.5%. And for all the talk about pressures, pressures, you would think that they'd be at like 9% or 10% right now. They're at 11.5% in the second quarter of 2023, ex-financials and energy. And that's pretty damn good. So you could see top lines slow down and margins improving and voila, not so bad.

I saw a tweet from Barry Schwartz that I thought was worth mentioning in light of my Apple discussion last week. Another super cycle coming for Apple iPhone is 25% of the installed base is due for an upgrade. So last week, tweet off, last week I was talking about how Apple has now declined, revenue has declined for three consecutive quarters year over year. But in fairness, I did mention that it happened in the past. I think one thing that I underestimated or I probably should have failed to mention was that when the next iPhone drops, so next chart,

please. When the next iPhone drops, so you see these spikes, right? On the top is iPhone revenue. You see those spikes and they're not by accident. They're cyclical. So one is probably coming in the not too distant future. What is it? iPhone 15 or something? Yeah. I have four people in my house with iPhones every year. We're due for an upgrade. Like somebody's phone is due every year. Like just this is how it is now.

Yeah. And it's a replacement business as much as it used to be a growth business. And that's good enough. Still selling phones. Still selling phones. All right. What else do we have on that? That's it. All right. Let's make the case. Two weeks ago, I made the case to avoid Schrodinger, which was a once hot AI play that I think I had kind of like showed most people for the first time in February when I was writing about the five AI publicly traded companies.

And it was like low 20s and it went to over 50. And I traded it for five points. But I wanted to kind of just say like this is the type of stock that's – well, this is the type of stock that's getting killed on earnings. And that call turned out – it didn't have to. That turned out to be a good call. It's now 31% below where they report on earnings in mid-July and probably, my guess, goes lower. And it's not because the company's horrible. The amount of hype in these stocks relative to the amount of actual fundamental change is ridiculous.

Today is something a little bit different. PayPal has already blown up, by my count, five separate times in the last three years. Do we have a chart of PayPal? Can we throw this up? Dude, it's at an 80% drawdown. I can't believe you're saying avoid. Well, this actually, it got worse today. And here's the deal, Mike.

I think this is a $50 or lower stock. And you might say, what's the big deal? Well, 60 to 50 is like another 20%. And a lot of people have the whole way down been saying it's cheap, it's cheap, it's cheap. I think it's the perfect example of a value trap. So that's what I want to spend a minute here on. Okay. It's been a value trap the whole way down. They still have 435 million users. Nobody is denying they have a massive quote unquote user footprint. But I think they've been permanently disrupted by the Apple pay button and the Google pay button on every e-commerce site.

And it just takes PayPal out of the middle and everyone is better off. Everyone has a credit card on their iPhone, everyone. So why would you need another method of payment? You don't. And this is, I think, you're going to see that 435 million user base eventually drop to like 300 million and it's going to take years. So I just think it's pain. You think it'll be all at once?

No, I think they're going to get bought. That's possible. It's a $60 billion market cap, and there is value here. So how valuable is Venmo? So make your case. Go, go, go. Well, they just put a new CEO in, and he's not there to get bought. He's there to buy. PayPal's strategy on a go-forward basis is M&A. And the way you know that, this kid Alex Chris, who they hired, was the kid who pulled off the MailChimp acquisition for Intuit. He's a buyer. He's not a seller. And I think they want

to go on offense and they want to get into new areas because there's very little money to be made here with Apple basically taking over the shopping carts on all these sites. Now you might say Venmo and I use Venmo and I think it's amazing. I love it. Everyone that uses it loves it. How much do you pay Venmo? The answer is you pay $0. The only way they make money from Venmo is with third party deals with businesses that want to accept Venmo. It's 2.9% PayPal charges them in order to accept Venmo for payment. How badly do people want to pay? Do people want to accept Venmo that they're willing to give 3% of their transaction to PayPal? Is that so much different than the credit cards? Yes. Okay. And keep in mind, the credit cards are on paypal people are using their credit cards on

paypal so it's a charge and a charge it's it's it's tough they were early they innovated they became really widespread during the pandemic and they are now at a six-year low the stock is the same price it was in august of 2017 rough and the worst news, Elliott Associates last night told us this Paul Singer, one of the great activists, threw in the towel. They put a $2 billion investment in this company into their fund a year ago, a lot of fanfare. And they probably looked at this a year later and said, this is not about cutting costs and changing CEOs. This is a seriously technologically challenged business. And they sold, they wiped out the whole position. I don't know what price, because it's as of the end of last quarter, but they were buyers between 90 and 100 reportedly a year ago.

So you got a new CEO. Maybe he'll try to do acquisitions. The activists have thrown in the towel. The stock is breaking six-year lows. Yes, it's 20 times earnings. I understand that. There's no reason why this couldn't be 10 times earnings if earnings are projected to decline. Here's my three charts, and then I'm done.

Price chart. Now let's add P.E. ratio. You understand where this is headed? Now let's add, this is the most important thing, revenue. This is revenue growth quarterly year-over-year revenue growth. It is now 7% at the height of the pandemic. It was plus 30%. That's going to go negative in my opinion. And when it does, people will not be paying 17 times earnings for PayPal. So that is my, my, that is my,

make the case. I'm making the case that it's tempting to buy a stock in a 75% drawdown. It doesn't, 80. It doesn't always work. No, the a hundred percent, a hundred percent PayPal will, will,

I can't imagine what would have to happen for them to make a new all time high. Probably never will happen. Uh, but they don't need an oil. It was a $300 stock. The stock would be happy if it would go up. It's down 80% from an inflated from an inflated value, no doubt.

It's trading at 12 times forward earnings, which could be lower. And everything that you just said is probably right about it being structurally impaired. And I would argue at some point, I don't know if it's today, at some point, all of that news and then some becomes discounted in the stock. Sure. One caveat is a short squeeze could take it a lot higher in the short term. I will buy the stock, I hope, at some point, but not today. Wow. You're going to go against me? Yeah. I think this will outperform. Let's put a timestamp. PayPal will outperform the

S&P over the next 12 months. What if they bought Coinbase? If they did, I would cover my short. If they just took over crypto and then you got ETF approvals, I would cover my short. Just a whiff of anything good in this thing will be up 40% in three weeks. Duncan wants us to put money on this. How much money do you want me to buy? I'll tell you when I buy it. Venmo. We could Venmo each other. If I, if I buy it, I'll let you know when you should buy, you should buy toast instead.

But I will, I will definitely, I will definitely wait for it to stop crashing, which it has not done yet. Uh, you should buy GitHub instead. I got so many, I got so many better, uh, I got so many better software, but all right, let's keep going. Mystery chart, and then we're out. Oh, mystery chart. John, what do we got?

Chart on, please. Okay. This is incredible. All right. So let's just take a minute. Let's just take a minute. So this is 2010. A bar chart.

Up 38, up 24. Sorry, I'm reading numbers. I know you could see it. Up 17. One bad year in 2013. Up 27. Flat, flat. Up 27 see it. Up 17, one bad year in 2013. Up 27, flat, flat. Up 27, flat. Up 58, up 64. Up a little, down a little, up 21. So this chart since 2010 has averaged 17% a year. It's on average, 17% a year.

Pause. Is this a stock or an ETF? It is one stock compared to one index. Oh, this is a stock versus an index? We spoke about the stock today. Apple versus S&P 500? See, I give the best clues, don't I? No, I'm just very smart. That's all it is. How nuts is this?

Apple has, on average, beat the S&P 500. Look at 2020. Look at 2020. Look at 2020. No, I'm just very smart. That's all it is. How nuts is this? Apple has, on average, beat the S&P 500. Look at 2020. Look at 2020. Look at 2020. Did the stock double? I think so. It might have. Yeah.

Because S&P was up 30%. So Apple has beat the S&P on average 17% a year since 2010. That is incredible. So what we just discussed with PayPal, Apple is in the opposite situation. Now, calling the top, I'm not doing it. Calling the top is ludicrously hard. It's impossible. But we just know that for this to continue would be really, really, really miraculous. It will not continue. How about that? It will not do that for the next 13 years. There's no way. Does Apple outperform the S&P if we get a bear market in 2024? Yes.

Yeah. I think so too. So it's – I kind of understand it. I kind of understand it. It's a lot of buyback activity. Oh, I understand it too. It's the best company in the world. It has smashed expectations every single year almost.

It's incredible. It's incredible. Absolutely incredible. All right. We're going to wrap up here. Guys, I wanted to say thank you so much for joining us for the live. For those of you listening to us on the new podcast that we're dropping on the Compound and Friends feed, we really appreciate that as well. If you like what we do, make sure to leave a review and a rating and a positive comment.

And we read them all and we love them. And we really appreciate that. Last things last, brand new episode of my favorite podcast coming tomorrow, Animal Spirits with Michael and Ben, a new Ask the Compound live on YouTube, Thursday afternoon, and then Friday, The Compound and Friends with special guests. And we're going to have a lot of fun on this week's show. Thanks again, guys. Hope everybody has a great night and we'll talk to you soon. Good night. a multimillion dollar portfolio, Ritholtz Wealth Management has the solution for you. It all starts with building the right financial plan. To speak with a certified financial planner today, visit ritholtzwealth.com. Don't forget to check us out at youtube.com slash the compound RWM. Make sure to leave a rating and review on your favorite podcasting app. If you love

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