The Compound and Friends - Consumer Delinquencies Rise, Alphabet and Spotify Earnings, the Wolf Is at the Door for AUM Fees

Episode Date: July 23, 2024

On this TCAF Tuesday, Josh Brown is joined by Sean Allocca, Senior Editor for The Daily Upside to discuss wealth management, the future of AUM fees, cash sweep, and much more! Then, at 32:00 hear all about Tesla, Google, and Spotify earnings on an all-new episode of What Are Your Thoughts with Josh and Michael Batnick! Thanks to Rocket Money for sponsoring this episode! Visit http://rocketmoney.com/compound and cancel your unwanted subscriptions today!  More from Sean: https://www.thedailyupside.com/author/sean-allocca/ The Compound x Tropical Bros: https://tropicalbros.com/products/super-stretch-the-compound-hawaiian-shirt Sign up for The Compound newsletter and never miss out: https://www.thecompoundnews.com/subscribe Check out the latest in financial blogger fashion at The Compound shop: https://www.idontshop.com Instagram: https://instagram.com/thecompoundnews Twitter: https://twitter.com/thecompoundnews LinkedIn: https://www.linkedin.com/company/the-compound-media/ 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. The Compound Media, Incorporated, 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. Tonight's show is brought to us by Rocket Money. Rocket Money is a personal finance app that finds and cancels unwanted subscriptions, monitors your spending and helps lower your bills. Rocket Money has over 5 million users and has saved a total of $500 million in canceled subscriptions, saving members up to $740 per year when using all of the apps features check it out for yourself Stop wasting money on things you don't use

cancel unwanted subscriptions by going to rocket money calm Compound all right we have a really good one for you tonight Compound. All right, we have a really good one for you tonight. Sean Aloka joins me. Sean writes at The Daily Upside, and he's been doing a lot of wealth management industry stuff that I think is important for all investors to understand. We take a look at some comments that the CEO of Morningstar made, I guess, a couple of weeks ago at their conference in Chicago talking about the wolf being at the door for AUM fees. I beg to differ, but I wanted to hear what Sean had to say on the topic.

We also talked about cash sweep and why cash sweep has become such an important business on Wall Street, one that could be threatened given the upcoming weight cutting cycle. So I think banks and brokers are making a lot of money there, and that might not be the case for much longer. It was a really great conversation. I can't wait for you to hear it. Shout to Sean. Also play in an all new edition of What Are Your Thoughts with Michael Batnick. Michael and I got into, obviously, the big story of the week, CrowdStrike, a company we've talked a lot about on the podcast. We also get into some interesting stuff about the parallels between Chipotle and their scandal years back and how they have recovered from it.

We take a look at Alphabet's earnings, Spotify's earnings. We get into some Netflix stuff. There's just a whole bunch of things on the show that I want you to hear. I won't waste any more time. We'll send you there right away. Duncan, John, Daniel, do your thing. 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 Ritholtz 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. Hey guys, I'm here with Sean Aloka and Sean writes one of the best, I think your daily, it's called the daily upside. It's a newsletter sort of, it's a little bit more in depth than a typical newsletter. Are you doing this five days a week? Yeah, so the daily upside, yeah, they go out every day. Actually, they go out six days a week. On Sundays too.

Six days a week. So we're working hard, Josh. Okay, all right, Sean, how long have you been covering slash writing about finance? Probably a better part of a decade. I think I started out in a lot of the wealth manager publications, so financial planning, what's investment news, so read ETF.com.

So yeah, quarter of a year. Okay, who do you think is the regular reader of the daily upside? I know it's relatively early in the process, but who do you envision is, I know I am, but there aren't a lot of people like me. So, who's the regular reader? Yeah, so the daily upside,

to just a little bit of background, they've been around since 2019. I think they have about a million subscribers total. They're mostly for the newsletters, like an in-read, so you read it right in your email. It's finance markets. They do big tech stuff. So it's up and coming, higher-edited kind of folks that are in the finance and that kind of world.

Okay. Awesome, man. So you having fun? Yeah, I'm loving it. And so we just, as you alluded to, we just launched a wealth management vertical. So that's what we're doing now with the financial advisor upside. So I want to ask you some wealth management-y stuff because you've been riding up a storm and one of your recent pieces talks about the jig is up for cash sweeps.

Not a lot of people are fully aware of the importance of cash sweeps to Wall Street broker dealers and banks, but they are a very big, very systemically important business. When these companies report their earnings, a lot of the earnings are coming from the sweep. Why don't you define what that is and then we'll talk about why you think the jig is up. Yeah, I know I think you're right. It's a little bit under the radar,

but it's a major revenue stream. And it was just, I was so surprised to see it in the earnings call last week. But basically what these brokerages do, especially when they have bank affiliates or bank arm, they'll take some of the uninvested assets from their clients, put them in a cash suite program, just a pool of where they get those assets, that cash, and then they just redeploy it for however much they can, you know, the best for their bottom lines, but essentially, so they'll put, they'll lend it out. They'll put them into

some higher yielding places and basically play the, pay the clients, you know, basis points on those like literally like one to two. Right. So when you say redeploy it, they will redeploy it as an investment for themselves. They will, they will share a few basis points worth of yield and the rest is, you know, they've essentially swept up that potential profit. But they're fully disclosing that they're doing this. And in large part, they're doing this to offset the fact that trading is now commission free. So I think to the active investor, they've probably said to themselves, look, I'm not going to keep a lot of cash anyway, and I prefer this to getting hit for $7.95 per trade.

So to some extent, it hasn't been the worst development that a lot of the brokers have gone to this model. What do you think? Yeah, no, I think you're right. I think in some cases, that's true. I think certainly that that's true. I think certainly that that was true. I mean, it has, I guess, subsidized, you can say some of those free trades and free things you get as well for sure. I think the biggest case and that was

probably the Schwab case with their robo advisor, which was Intelligent Portfolios. They just got hit by the SEC for like, I think it was about 200 million. So for not disclosing these practices, that's where this all kind of started originating this report in a few years ago. But yeah, their RoboVisor was essentially free. So you didn't have to pay any basis points up front. Usually it's like what, 30 basis points or something.

But on the back end, I think to the client's point of view, it's like I'm putting this in this RoboVisor to have it invested, not to have it sit in a cash equivalent essentially on the sidelines. So I think that's where the SEC kind of said, let's put a little investigation there. And they dinged them, like I said, for 200 million. But for sure, it did go to, it wasn't all just basically profits. I do think there was an interesting story from the Wall Street Journal.

I think I mentioned it in the reporting. It was sort of a few years back, but I was GCing this week. And they said that the banks make up to 10x what they pay their customers on that. So I believe it. I believe it when they lend it out and in other circumstances. So I think it's good that clients are becoming more aware of this and starting to make more use of their cash, especially where interest rates were, and especially with what inflation was doing. I mean, that's just killing some of those. Well, so I think there's a couple of things here that are worth mentioning.

The first is if you have a fiduciary financial advisor and they're custodying your assets at any brokerage firm, it doesn't matter if it's Morgan Stanley or Schwab or Wells Fargo. The advisor's job is to inform the client if they have such a large cash balance that they are materially missing out on yield that they would otherwise be able to earn in a high-yielding money market fund. There's probably not that many RIAs or independent advisors who are negligent on that score. I feel like everyone is working their hardest

to maximize the earnings on cash. You see programs like Flourish and MaxMyInterest and all of these startups that have come along to help advisors get better at maximizing client cash, whether it's with the advisor or away. So I think there's some element of like the industry itself is trying to do a good job. One of the problems for the big brokerages, and we saw this in 2023 with Schwab, is that when rates were really low, nobody was paying attention to what they were earning

on cash because they just assumed it was nothing. Once you got to 4%, that's when you started seeing this cash sorting phenomenon where people would literally move money. Like it didn't matter for 10 years and then one day it really mattered a lot. We may be facing the first rate cut. So I wonder if we're going to go back in the other direction now and people will be paying

less attention to the yield that they're getting on cash or at what level do they stop caring as much? What do you think? Yeah, no, I think you're right. I think once it got up to like some of the yields that bonds were paying, I mean, I'm in a high yield savings account and it's like, it's so much easier than having to deal with bonds and terms and how you can take your FDIC insurance. You can take it out whenever you want, move it around.

So yeah, it's going to be interesting to what, where people do with their cash, you know, coming towards the end of the year. I do think it's a fiduciary responsibility, probably. I think most advisors probably do that. I think we've seen in lawsuits from Morgan's, a class action lawsuit against Morgan Stanley for these cash sweeps Wells disclosed one last year I think just as weak LPL disclosed another one. So I think those are civil suits So they're gonna see but they're claiming breach of fiduciary and that's exactly what they're claiming because they I guess they did have those cash

positions it probably shouldn't have perhaps but Yeah, one of the areas of complexity is that we're interchangeably talking about the banking operations and the brokerage operations and the advisory operations of these firms because they're gigantic firms and they have all these different business units and as an advisor you have a fiduciary obligation. As a broker, you're now under what's known as a best interests obligation. And as a banker, it's a whole other thing. But look, these are not immaterial numbers. If the jig truly is up, you noted that Wells Fargo said in its second quarter earnings call,

it would pay customers more in its cash sweep program and that would result in a $350 million hit to interest income on the wealth management side. That's a lot of money. It's significant. And we could see more. Yeah, I think you're right. And it wasn't just Wells, it was Morgan Stanley too, which was what jumped out last week. I thought it was so interesting.

Both of those, I know Morgan Stanley at least, I think they beat expectation. I could be right, I could pull it up. But their wealth was down, I think 10 or 12% in terms of revenue. And a large portion of their CEO mentioned on those earning calls was because of these programs where they had to marginally increase the yields, so brought down a lot of those profits. So I think we're going to

see a continue. I think clients have just had enough. Like you said, if you can get 5% for free, you're going to start doing that. And so these companies are now having to raise those yields and find that revenue elsewhere. I'm sure it's going to come. They're going to probably recoup it somewhere else. I think the, if we're gonna name it, the Morgan Stanley executives said that they might be repricing some of these portfolio models to kind of come to make back some of that

and make up for that lost revenue. But yeah, we'll see what happens. But if you see the writing on the wall, I mean, we never heard of these accounts and these earning calls like this. And that was basically the star of last week. So it'll be fun to watch. Yeah, I think fundamentally, if somebody with just not a lot of knowledge about financial

services were to ask, what's the big difference between being a client of the wealth management operation at a large bank versus being a client of a smaller RIA. This is one of the most illustrative examples I could think of. So it's not that the advisor is a bad guy at the big firm. The business model of his bank would prefer it if he would allow cash to get swept up into their program, whereas the independent advisor has no incentive for that to happen. The advisory firm cannot be paid on something like this, and so you would just never see it. So, I think that's like a really stark difference between wealth management and wealth management.

And most people won't really be aware of that. I want to talk about AUM fees, speaking of wealth management. I'm going to quote you to you and have you react. You very provocatively titled your piece, The Wolf Is Coming for AUM Fees and Nobody Likes Wolves. It's no surprise that wealth managers are some of the better paid financial professionals in the industry with arguably some of the lowest office hours to golf hole ratios in

the country. I resent that remark and it's not true. But market returns are expected to drop over the next decade, putting pressure on the value advisors provide their clients and the fees that they charge them. So you get into this idea that we've seen 12% annualized returns for stocks over the last decade. For how much longer can it really continue at that clip? What happens in a down market? Are there more clients who reevaluate

whether or not it's worth paying advisors on an AUM basis? That's the gist of the piece. Correct. Yeah. And back to the golf operation, that's not a joke. That was a compliment. That's a sincere compliment to everyone in the industry. You should see me play golf and you would take it back. You would take it back. Exactly, me too. I'm what he does. But yeah, just having some fun.

And yeah, it was from the Morningstar conference, actually Kunal, their CEO, had mentioned it. And he said that he thinks, you know, he had been talking about this AUMF coming down and pressure coming on the 1% AUM fee for a while. So he said, you guys think I'm just crying wolf, but the wolf is actually going to come. And actually, their analysts had the past decade, we've had a 12% annualized return in the markets, 12% yearly. They're forecasting the next 10 years to be something around 5% or 6%. And another company he cited to was around 6% or 7% annualized. So his argument really was that this 1% of 5% is

now 20% of the total return. So just like we were talking about when interest rates went up, if the markets go down, what does that do to that 1%? Will clients start thinking a lot, giving a lot more scrutiny about what they're getting in return? I think we've talked about it for a while and you know, I think the markets have gone up and down too with it. 1% has been around for a long, long time, right? I mean, since pre-the Great Recession. It's fairly standard, although most RIAs are not actually charging the majority of the money they have under management 1%. So 1% is sort of a standard for a million dollar client engagement. And if you actually look the average size of a wealth management client being onboarded

at most successful RIAs, the average size of an account is actually going up. A lot of that is market effects. A lot of that is COVID-era stimulus having translated into whatever. And so above a million, very few firms are getting away with 1% or more. The vast majority of RIAs are just not there or if they are, they're moving down. But this is interesting. You quoted Kanal Kapoor, the CEO of Morningstar, whom I think is fantastic, quote, you can be sure it's going to draw a lot more scrutiny.

He said this at the keynote investment conference in Chicago this month. While there are always doomsayers, the day will eventually come when markets begin to sputter. And then Canal says, are we crying wolf again? Let me assure you of this. The wolf shows up eventually. All right. I mean, it's been 30 years. Maybe it'll be right someday. The clock's right once or twice a day. I think that, I mean, I've been saying it for a while too, for the last 10 years almost, I've been wrong, 10 years straight on this.

I don't know how it doesn't come down, but it hasn't. And if clients are happy to pay it, I mean, it's a good value. It's rising. The hottest trend right now in wealth management is raising fees. So let me, so you're in really good company. The two smartest people I know who comment on the investing business, Jason Zweig at

The Wall Street Journal, maybe the greatest of all time, market columnist or investing business columnist, and Morgan Housel, my good friend Morgan Housel, mega bestselling author of The Psychology of Money, they're both on the wrong side of this bet also. And the thing that they don't know, and that I think you don't know or you are aware of because you cover wealth, but maybe you're underestimating its impact, you're not just being paid to manage the money. You're being paid to answer the phone when the market does what it did in 2022.

And if the advisor has nothing at stake, taking those kind of calls where people are down 25% in stocks and 18% in bonds, it's not the thing that they are in a race to do. So one of the main reasons why I think it's stuck around this long is because you do have to compensate people for something for taking risk of putting your money at risk. There is a huge amount of risk that advisors take building portfolios for clients and the more equity heavy those portfolios are, the more potential risk they're taking, that's what the AUM fee is for. Even if you were to make it an hourly fee, it might work out to be the same amount of money. The clients don't like the hourly fee. They don't like feeling like they're on the clock

when they have a question. Actually, wealthy people hate that more than anything else. They are actually wealthy people hate that more than anything else. So the less we look like their lawyers in terms of like the terms of the engagement, the happier they are. So I think that's those are some of the reasons why it's stuck around this long. But I think you make a good point. If we see annualized returns cut in half over the next 10 years, people are going to think longer and harder about am I getting the value that I want to be getting? Right?

I think to your point too, the value prop has kind of changed too, I think, with advisors over the last maybe decade, where it was only about beating the markets and finding alpha and doing that. But I feel like that's now, it's more about, like you said, managing the relationship, getting to retire, answering the right questions at the right time, holding clients hands when they need to be, you know, in some of the tough times. So yeah, I think you're right. We'll see where it goes. I'm still thinking, I guess with the basis, you know, if it comes down from 1%, right, and it's starting to feel some pressure, where does it go to? Like 80 basis points? And

does that really matter? Is that going gonna really change revenue and bottom lines? And myself, or? Right, so I have a public, I have a public form ADV. It exists out there. It's got the entire fee schedule. We've also, in the last couple of years, we've had to send an annual fee schedule, either telling people that something has changed or that it hasn't

changed. It's a new requirement, relatively new requirement. The information is out there. I think $5 million accounts are not being charged 1% anywhere on Wall Street. So there's been an adjustment in pricing. But the other thing that's happened, which is kind of a form of cutting fees, is that services have had to go up. So now it's more common to find RIAs almost carrying out family office-like services. And I think that's helping to hold the line on the quote unquote 1%. They're just doing more for it, which is a form of cutting fees if you think about it. There's a lot more services being offered by your typical wealth management firm and

in some cases kicking and screaming. They don't necessarily want to do tax consulting and trust and estate consulting, but this has now become the industry standard. So that's kind of like another reason why that fee level has stayed in place. But I think it's an interesting question. Like if market returns are lower, will that actually put more? We haven't seen that in 15 years. We've had an incredible run.

I want to ask you about Trump versus FINRA, which is hypothetical, but you were looking at Project 2025. And this is, of course, something that the Heritage Foundation published. It's sort of a manifesto. What would the conservatives do if they managed to gain the White House and maybe Congress? And one of the things that they're calling for is putting an end to the self-regulatory organization or SRO that oversees the brokerage industry. What do you think about the prospects of this? Yeah, I mean, it was an interesting read.

Who knows what happens when if Trump gets back into office, he's for better or worse, been anything but predictable in office. So who really knows? I think there's some real potential to have some of this stuff happening in project 2025. A lot of the authors actually of it were former, you know, uh, they were in the former Trump administration and he said some like glowing things about, about that. And so people really believe this is a framework for what the GOP might

want to try and, you know and put some policies into place. What do you think is their issue with FINRA specifically? They want to see it folded up into the SEC. I know it's expensive. Right. And there's also this idea that they go after people and sue them to fund their own salaries and bonuses. That's been around for 30 years.

People have been saying that. But like what do you think is behind that animus? I think largely it comes on the heels of that Supreme Court decision that we saw that Jharksi versus the SEC where they took some of the powers away from the SEC in terms of having those back office, you know, behind closed doors, tribunals and making these penalties without people allowing, having their Senate amendment right to go to court. So I think it's some kind of like writing on the wall

where we've just seen a shift towards less kind of regulation in terms of the big industries. I think also Wall Street regulating itself was probably, you know, is always going to have come with a lot of conflicts, which some have come to the forefront. In the Project 25, mostly a lot of it was budget reasons. I mean, they don't have to go get really any kind of, they don't need to ask anyone for the budgets that they make.

They just, as you alluded to, they just find people and they fund themselves. They're incentivized to find people and they fund themselves. They're incentivized to find people and penalize people in that way. So I think that they made some good points there. We'll see what happens. So you quoted them as saying, if they can't shut down FINRA, the document suggests improvements to overall transparency and finances. One, any penalties collected from members should go into a newly established investor reimbursement fund or to the Treasury, meaning that should not be FINRA's budget the next year, like how much we were able to find people.

Obviously, it's not a great incentive. You say, two, FINRA must produce meaningful cost benefit analysis with respect to major rules. And then three, proposed rule changes must be made available to the public and undergo a comment period, which there is already. So that's already how it works. FINRA proposes rules, the SEC proposes rules. They do want to hear from the industry before they ram something through.

Some of this may be just a little bit of saber rattling, but I think you have it right. Jarkisi versus SEC or vice versa decision came out the same time as the Chevron defense, a Chevron deference thing, where they're basically like these administrative courts that are an extension of the agency are not quite the same as having a judge and a jury and a trial. And therefore, we should not just rely on these agencies to impose the will of Congress. We should actually have a judicial process. And that's something that would probably stop a lot of actions from being brought because it takes time and it's expensive.

Yeah. And they're going to have to be a lot more selective. You imagine which ones they're going to take. I mean, I talked to a couple of lawyers on it. One of them said it's not really going to matter, honestly, because I thought when we see less actions coming, she said most of them are settled anyway. Like, honestly, they do that. I'm not guilty or I'm not admitting guilt or innocence.

I don't admit guilt or wrongdoing, but here's money. Yeah, right. But here's 200 million. So yeah, so I mean, they settle like, I think probably 90 something percent of these anyway. So that's not going to change. Plus the SEC had already seen this coming for the last five years and has been using the federal courts when they've had to. So I don't see a huge change.

Another lawyer told me it's huge and we're going to see a backlog and some other things, but I don't think so. I saw you talk to Bill Singer, who's an early mentor of mine. One of the first people who started reading my blog in 2008, 2000. The first thing he said was like, who the hell is your compliance officer that's letting you do a blog as a registered representative? Right.

And I said, this is 2008, I said, Bill, I'm pretty sure we're going to go out of business anyway, so I don't think they're worried. Bill has certainly been a longstanding critic of FINRA, outspoken critic of FINRA. Yeah, he was awesome. By far, he gave me the best stuff. So much of it I couldn't use.

But he's a smart guy and I'm happy. I got all of them, honestly. I am absolutely not surprised. I wanted to ask you, I wanted to ask you if you think that maybe nothing would change as a result of this, but just like broadly speaking, the trend, at least on the part of the consumer, is away from brokerage and toward managed money slash investment advisory.

Of course, the Robin Hoods of the world are self-directed But like just this idea of people getting advice, quote unquote advice from a financial salesperson who would be regulated by FINRA, that world is kind of dying anyway. I think about half the firms that existed 20 years ago are now gone. Don't think they're creating a lot of new broker dealers. So it could end up being sucked into the SEC at some point. I don't know that this speeds it up. But what do you think about that idea? No, I think that's spot on. I mean, we've seen it for we've seen that trend for quite some time. And there's consolidation, obviously. So there's a ton less firms. But also, I think the consumer

has come, you know, has learned a lot more about the industry, especially recently, and some of the things that have come come out. And you hear it a lot more about the industry, especially recently, and some of the things that have come out. You hear it a lot more now, Fadusha, you're on the TV, and some of these commercials and marketing, you never used to hear that growing up. Now it just hits my ear. That's a really good point. You see Ken Fisher and all these people, they make it known that, hey, I only make money when you make money.

I think it's become more of a rallying cry for the industry. I think it's ultimately good, probably rallying cry for the insured. I think it's ultimately good probably in the long run for clients. I think there's a place for brokerage accounts and there's a place for that industry. But yeah, I think we'll see it to continue. So really good point like the certified financial planner designation, the organization runs their own commercials, and they are hammering home this fiduciary message. You are hearing it from yeah, you're hearing it more and more. And people, I guess people that care about this sort of thing would take the next step

and Google it. Yeah, yeah. Yeah, go ask somebody. And I think, you know, where it probably started was the fiduciary rule. Remember that Obama's fiduciary rule? Which died. Which they- Yeah, of course.

But I think a lot of that got the name, got the word out that, hey, you know, what's this fiduciary rule, whatever that was. Which died. Which they- Yeah, of course. But I think a lot of that got the name, got the word out that, hey, you know, what's this fiduciary thing? I know they're trying to save you from the brokerages and, you know, I think it's starting to call fire then and we're still seeing it with that momentum. You know, I'm going to tell you that I wrote a book, I wrote a book about the industry right around that time. And I'm going to tell you that it was a Pyrrhic victory for the broker dealers who won that exemption from the fiduciary rule.

They think they won. But when you look at their market share of any business that matters, it's effectively gone to almost zero. And all of the money, all of the talent, all of the attention, all of the clients have moved to advisors operating under either a fiduciary standard or something really close. The gravity is in that direction. They might have won this exemption and they call themselves the best interests rather than a fiduciary, but it did not help them, I don't think.

Not in the long run. No, not, not when the, you know, they made it one the battle, but yeah, when you look at the breakaway movement, like he talks about all the towns moving, all those assets are moving. People want the clients went out, the advisors went out. So yeah, I mean, I don't, it's, it's inevitable at this point. Totally great. Sean, I want to make sure people know where to find your stuff. So you're an author at daily upside and and they can go to dailyupside.com and subscribe and you guys are hitting them with a lot of stuff on a daily basis.

But a lot of investment, hardcore investment related stuff, but very brief takes so that they can get the kernel of truth and then get on with their day. And I really love the way that you're doing it. So is dailyupside.com the best way for people to follow you? Yeah, they get dailyupside.com. If you should reach out to me on LinkedIn, any way you can find me, I'm there. Maybe look out for the financial advisor upside.

That's our wealth management. That'll come to your inbox twice a week too with the same, like you said, Josh, just the bits you need to know and why it matters to you. And so, yeah, we're having a ton of fun doing it. We're happy you're a reader, Josh, just the bits you need to know and why it matters to you. And so, yeah, we're having a ton of fun doing it. We're happy you're a reader, Josh. So it's a- That's awesome, Sean.

That's awesome. Keep it up. I'm reading all summer long and we'll talk soon. Thank you so much for joining us today. All right, all right. It's 5 p.m. in the East, which means it's time for another all-new edition of What Are Your Thoughts? My name is Downtown Josh Brown for those tuning in for the first time. My lovely and adorable co-host, wearing a collared shirt today, Mr. Michael Batnik.

Michael, say hello to the folks. Hello, hello. Sorry, we were one minute late. We are running CrowdStrike in conjunction with Microsoft Windows. Hey, guys, it's so exciting to be here. I want to say hello to some of the faithful. You guys join us for the live all the time and we love you so much for it.

Jeff Asola, John Carlo, Drew is here. I see Magnus in the chat, Georgie D. Who else is up in here? Roger is here. Nicole's in the chat, guys. Say hello to Nicole. Well, listen, everyone's here. Zoe is here. Hello from Greece.

Hi, Zoe. I wish I knew how to say hello in Greece, but I am just not that cultured. All right, guys, we have a big show tonight. Lots of stuff to get to. I want to make sure we give a big shout out to our sponsor, Rocket Money. What's the story with Rocket Money?

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All right. We have to talk about CrowdStrike first. As many of you are aware, I am personally a shareholder in CrowdStrike. I have been for almost five years. And a technical advisor. Well, we've had George Kurtz, the co-founder and CEO on the show, and I think he's incredible and what he's built is amazing. So it really sucked watching what unfolded on Friday.

And of course, my first thought is to anyone affected. I actually knew some people who were dealing with canceled flights and delayed flights. And it's, there's nothing good you could say about it. But effectively CrowdStrike pushed through a software update to Windows users. This affected 8.5 million computers. They did that overnight. And then on Friday, employees at companies and government and airlines and banks went to work, turned on their machine, and they got the blue screen of death because of a

glitch that was part of the software update, something that they do routinely all the time. So George Kurtz did television the entire day. I saw him on the Today Show. So I'm on CNBC. I think he stood and he took it. And he's apologetic and he's professional and he's transparent, but the error is the error and nothing can really change that other than how they react to it.

What were your thoughts when you saw that, Michael? Were you, I'll throw it back to you, were you surprised that the stock was only down 10% or 12% at the open? Well, it fell 15% and then the next day it fell another 15% and today was the quote unquote bounce and it barely went up. And I think that's reflective of reality. There are going to be lawsuits, there are going to be probably refunds. I wouldn't be shocked if Congress calls him to testify because this affected a lot of

shit like all over the world. We couldn't trade? Yeah. a lot of shit like all over the world. We couldn't trade? Yeah, so we're Schwab users and we had connection issues that morning. Fortunately, rectified very quickly, shouts of Schwab, but like there's nobody that wasn't affected, it seems like, among corporations. They did say that this didn't affect every Windows machine and it

did not affect anyone running Apple or other services. One of the interesting things is that because of European Union rules, there's something called the main kernel where your software update is so highly privileged that it literally could alter the main kernel of a computing system. Apple doesn't allow that. Microsoft does, in part because Microsoft was forced to open up in some way because of, I think, antitrust reasons. But that's kind of like a side plot.

That's not really the main thing. The main thing is they have to earn back 10, 12 years worth of trust that was lost in an instant and fortunately it wasn't a hack. Fortunately it wasn't something where, oh, this cybersecurity system doesn't work. It was just company error. And look, I'm sure they're all sick to their stomach about it. And it's going to take time. And I don't know. Let me ask you this.

Let me ask you this. And in the times that we live in, where it's nothing but headlines and not in the next thing, how quickly does this blow over? Or maybe not. Somebody I know said, hey, on the bright side, I don't agree with this by the way, on the bright side, every person on earth now is aware of CrowdStrike as a cybersecurity provider. All press is not good press.

All press is not good press. I want to read some comments from Wall Street. So Joseph Gallo of Jeffreys described this as quote, the most important and will likely significantly constrain potential upside in fiscal second quarter as new customers await assurances that the situation has been handled. Itai Kidron of Oppenheimer agreed this is a major blow to CrowdStrike's reputation and would most likely weigh not only on investor sentiment but on business activity for several

quarters ahead. So this happened right at a period of time where they're trying to close business and maybe business doesn't close and maybe that has an effect on the next quarter they report, like customers holding off. So the sentiment hit has already been taken. We haven't seen the financial fallout yet. So if a company is deciding to use them, there are negotiations, they say, time out, we can't trust you, who do they go to? Who's number two or three? Well, so you saw rallies in shares of Sentinel One, which is a recently public, they have the ticker S. They took it from Sears after

Sears went bankrupt. I thought it was Sprint. Sears? Okay. Maybe it was Sprint. I think you might be right, actually. Sears was SHLD. Sears, that's right. Right. All right. So they, so Sentinel One rally, Palo Alto caught a little bit of a bid late in the day too.

So these are companies that you know will use this to sell against CrowdStrike and they'll say, well, we didn't do that. You know, how can you trust? How can you trust them? So I don't know if that's a one-quarter story or a one-year story I'll take them on that. You know what else I know Josh. I know that gaps get filled and It's pretty monster gap dude. Okay 305 it will it will get filled. I don't know when but it will get filled Here's a here's a couple more analyst comments. Guggenheim downgraded.

Well, great. Thanks. John DeFucci says, the stock was still trading at the highest multiple of recurring revenue across our entire software coverage. We still have the utmost respect for the leadership team at CrowdStrike. Believe the company will eventually become even stronger, which I agree with. If investors have a multi-year horizon, they can ride it out. However, we find it difficult to tell investors they need to buy it now.

Goldman Sachs maintained their buy. They put out a note on Monday morning. Analysts said they expect CrowdStrike's deals to take longer to close. Duh. Our recent conversations re we affirm our view that there will likely be minimal share shifts in endpoint post this event, although we recognize additional details in the post-mortem will further inform this view. So all the shoes haven't dropped yet. I thought this one was funny. Let's put this up.

This is Deutsche Bank and someone sent this to me. I don't know who did the highlighting. But basically, it's a company likely a billion dollar lesson, thoughts on outage. But then they said, our initial reaction on Friday was seeing a 10% pullback in a high quality stock as a buying opportunity. However, we were ironically unable to publish our original research note due to the outage itself. So that's the definition of irony.

What is this chart here? It's just the revenue. And I just wonder, like obviously, we don't know what this is going to do to fundamentals. And to your point, like the bigger known is valuation sentiment. How quickly does the negativity wane and get over it? And I don't know, we'll find out. I think revenue actually will be the least affected part because they sign multi-year deals and they have big enterprise business and I don't think

they get dropped necessarily by a lot. I think what will really be affected is revenue growth. New customers because the switching here is massive. You're not going to do that. Right. And also there's going to be an earnings hit because money is going to have to change hands here. You had like you had a thousand something flights canceled, another 3000 flights delayed, like money will be changing hands here.

And they're also going to have to look at how they're doing these updates and probably make some big investments to make sure that this never happens again. That's the promise that you know they're out there making. One thing that I saw was on TV today and not like defending the company, but just talking about why I didn't sell it. And again, I've written this thing down already. I've seen it get cut in half in 2022. And this is not, I'm not a trader in the stock. If I were, I probably would have sold it. I'm not a trader in the stock. If I were, I probably would have sold it. One thing that's instructive is Chipotle. I think it's a similar situation, but Chipotle might have been worse.

In 2015, the first reports of a norovirus outbreak came as a result of one of the Chipotle stores having inconsistent health oversight. And then all of a sudden, these outbreaks started happening all over the country. Chipotle was in its highest growth phase in the mid-20 teens. And they're trying to do something that no other quick service restaurant is doing. Everywhere else is serving frozen food. Chipotle is handling raw steak and fresh produce. They're growing so fast that they're just not managing the growth and managing the employees.

They have these outbreaks of norovirus all over the country. Of course, there's probably some things being reported that weren't even real, just because it became like an epidemic. So that's 2015. The last reported case was 2018. They paid a $25 million fine in 2021 to put it to bed. But there were criminal charges being considered at one point against Chipotle, believe it or not. Had you sold the stock in 2018, you missed a 10-bagger. It went from a split-adjusted price of $6 back up to $60-something earlier this year. So from 2018 through 2024, over the next six years after they got their shit together, the stock 10xed.

I'm not saying that's going to happen here, but I think people should understand that with really high quality companies, what doesn't kill you makes you stronger. Put this drawdown chart up. You could see this was not a fun experience to be down 70% in Chipotle into 2018. But, you know, if you made it through as a shareholder, you survived and I hope for the sake of George and the whole team at CrowdStrike that they can get past this and they can rebuild some of that trust that's been lost. It's not going to be easy. All right. Anything else to say? No. Look, I don't know that I have any real answers about what happened technically. So I

think my perspective is from a shareholder perspective. I know there were cybersecurity experts out there who were doing what's it, like doing, uh, what's, what's it called threads and all that. That's fine. I don't know about that shit. I just know that this is a really high quality company that made a huge mistake. And in my experience, if they really are a high quality company, it'll, it'll, it'll at some point fade away. So I don't know, I don't know when that is. And I And by the way, I didn't buy anymore.

My average cost is in the low 100s. But I do have some buy stop limits, good till canceled. And maybe I'll get hit on one or two of them. We'll see. Okay. Let's talk earnings. We're going to do some Google, some Spotify, some Tesla. Let's start with Spotify.

So, the story with Spotify is that it's been a great product forever. It's been a great product. It keeps getting better. The problem is the business part of it wasn't following through. The podcasting, it just wasn't a great business. And you had to be patient as a shareholder. But it looks like they're on the other side of the mountain. So they made a big bet that people that like to listen to music on the app will also like

to listen to shows. And that was true. The problem was they wanted to build it themselves and they wanted to own the content. So they made deals with the Prince and Princess of England and Michelle Obama, and they bought Bill Simmons for a ton of money, and they bought Joe Rogan, and they were trying to build the HBO of podcasts. But as you and I know, podcasting is not a huge business. Aaron Norris So that part of it didn't work, but they were able to pass along several price increases and the customer didn't blink.

So let's get into it. On that conference call today, Daniel X said, as you will recall, a few quarters ago, I said that while many believe that Spotify is a great product, we needed to prove that we could also be a great business. I think we're really starting to show this now. He said, we also implemented a price increase in self-employed markets, including the US,

which we're rolling out now with great success. In fact, we're seeing less churn in this round of increases than we did in our prior one. Let's go through some charts, please. Wait, are you surprised by that? No, because who's the number two player here, honestly? If you're a Spotify user, but how far behind is Apple? I use both, but I love Spotify.

I'm a little bit surprised that they saw less churn this round because one of the themes that we're hearing from companies everywhere is that their consumer has reached the point where they're like no more price increases. They're making choices. The consumer is making choices. I feel like with Spotify, there's no other choice. I know there is, but you know what I mean? If you're a fan of music and stuff, it's by far the best.

I can't live without it, so I agree with that. Okay. Try it on so I agree with that. Okay. Try it on, please. All right. Total monthly active users, $626 million, up 14% year over year. Premium subscribers, which is where most of their money is made, is up 12%. The ad-supported tier is up 15%. Financials look good.

Margins look great. Look at the gross margins from 24% in the second quarter of last year up to 27% up to 29%. We're going to get into where those are coming from. Next chart please. Multi-active users on the left, pretty incredible growth. The next chart is ad-supported users, which is the majority of it. The majority of people are using the premium version, but the premium users are where their bread is buttered You could see that on the next chart like in terms of the dollars. That's the blue bars. It's all it's all premium next chart Gross margins pretty damn incredible, right? Yeah

Can I say something crazy? Hold on last one and then you could jump in Next chart, please So one of the reasons why they've been able to increase their margins is they're getting their expenses under control big time. So their total operating expenses are down 16% year over year. It peaked, I don't know, seven quarters ago. So huge credit to the management team there. Go ahead, Josh.

All right, put that last slide up. What this, no, no, no, the last one. Yeah. So what this is is no, the last one. Yeah. So what this is is they stop doing stupid deals. Yep. I mean, it's really that simple. I think they've recognized, yes, it's nice to own Joe Rogan and to sell those ads internally rather than split it.

And, you know, that's fine. But there are not like 20 Joe Rogan's. They're just, at a certain point, there aren't enough high quality, big audience shows to buy. And this idea that they're gonna develop them themselves, like we're, I mean, we're gonna get Meghan Markle and she's gonna be a podcast sensation. Like I think that that part they figured out is not really going to happen.

I guess I don't blame them for trying, but that's not going to be a thing. Bill Simmons actually pointed out, first of all, he called them grifters, the Royals when they signed that deal. But Bill Simmons said the problem with having celebrities and giving them a podcast and writing them a $50 million check or whatever is it's like the ninth or tenth thing these people are doing. Like even the Kardashians had a, I think they had a Spotify deal to do a podcast that fizzled because if you're not doing it full time, if it's not the main thing that you're doing,

the odds of you building an amazing show that people keep coming back to week after week are zero. It doesn't matter how famous you are. This is not a thing where it's like, oh, let's get David Beckham and everyone loves him. He'll do a show. Like it doesn't work that way. It's an art and it's a skill and celebrities don't automatically possess that skill.

Any famous person can get somebody to listen to a podcast once. Can you get them to listen seven months later, eight months later, just because you're famous? Not if you're not doing a good show. So that's that expense reduction. Here's a crazy thing I wanted to say. Is it nuts to call this thing Netflix?

No, not at all. Audio Netflix? Not at all. I'm pissed. I bought this stock and I sold it like a year ago. I want shame on me. No, it's not. It's not.

Spotify won. Spotify won the audio. They won audio streaming for sure. So here's another thing similar to Netflix. There's not going to be any new ones. So like five years ago, everyone was launching a streaming service. Nobody's launching a streaming service, maybe ever again. So they're not audio.

No way, dude. What venture capital firm is signing up to start writing checks to someone that's going to compete with Apple and Spotify and audio? They won. It's over. It's over. It's over. It's over, but I love owning a business, like I did this with Uber, right at the moment where it's like, oh, no one's ever gonna try this again,

it's too late. That's where they are. Yeah, so, and similar to Netflix, they went through it. Like the stock got fucking murdered. I think it was down 70%. Let's go to two last charts. So all of this good stuff results in explosive free cash flow generation, by far the highest It went, I think it was down 70%. Let's go to the two last charts.

So all of this good stuff results in explosive free cashflow generation, by far the highest in the company's history. And the last chart just shows they're close to an all-time high after really, really, really going through it over the last couple years. it out. You've been rewarded for the pain, so credit to all involved. All right. Can I tell you an embarrassing story? You know my friend, Brooke? So she talks to Daniel Ek. So I'm like, oh, connect me with Daniel Ek. Because I love it. I'm not an investor in this, but I just love the, I wish I were an investor. I just love it. So I'm like, oh, connect me with Daniel Ek. She's like, yeah, no problem. Josh, meet Daniel on email. I'm like, hey man, we're huge users of Spotify to upload our shows and our podcast.

He writes back, he's like, congratulations on having a podcast. Ooh. Like not in a dickish way, because he's like Swedish, I don't even think they're capable of that but I was like, why did I send that email? I don't remember why I did that. Anyway, go on. What do you got?

Okay, Google. How's Google doing in the after hours? Numbers are good. Oh yeah. Google stock, I forgot that they instituted a dividend last quarter. That's right. Remember quarter. That's right. Remember that? That's right.

The stock is down 2%. I think the neutral correction was higher, but it's now down 2%. Okay. All right, let's go through some shit. This is from App Economy Insights. This show is their income statement. Of course, up top, the main driver of their business is the search advertising, which grew revenue 14% year over year. YouTube

is still chugging along up 13% year over year. Google Ad Mob, Google Ad Manager and AdSense, okay that's up 5% year over year. Google Play, Fitbit, Google Nest, YouTube is up 14% year over year in the cloud, still exploding up 30% year over year in the cloud, still exploding, up 30% year over year. Not bad. Ad sales up 11%. Last quarter it was up 13%. It's still double digits. This is still one of the largest companies in the world finding a way to grow double

digits year over year in its core business, which I think is pretty impressive. I think the cybersecurity startup they wanted to buy, Wiz, we're going to talk about this later actually. I don't think that's impacting the stock really. I don't even know what the reaction would be if they would have been able to buy it. $23 billion would have been Alphabet's largest acquisition of all time. So I don't even know if that would have been met favorably. Did you see anything about YouTube in here?

Yeah. And not only did I see it, we just said it. It was up 13% year over year. know if that would have been met favorably. Did you see anything about YouTube in here? Yeah. And not only did I see it, we just said it. It was up 13% year over year. 13% year over year. Okay. John, let's stop the consensus gurus earning recap. So this company, Consensus Gurus, does great work on all this sort of shit. Look at all these numbers. Year over year revenue, as we just mentioned, like these are, you know, at this number, there's just, there's no slow down. It's wild. It's wild. I mean, it helps that they're number three.

So Microsoft- What, in cloud? In cloud, Microsoft, that's all the growth is going to be cloud. Microsoft Azure is neck and neck with Amazon Web Services. And then Google is a distant three. Think Oracle is a distant four. I think Oracle is a distant four. This to me is similar to the conversation we were just having.

There's not going to be an eighth largest cloud provider that anyone cares about. At a certain point, this is just what the business is. And that's why they just don't find growth. I want to ask you about this. So Alex Morris shows YouTube trailing 12 month ad revenues have doubled over the past four years. Bananas. It's at a $35 billion run rate, give or take.

So Josh, I was listening to Bellany and Lucas Shaw talk about YouTube versus Netflix. They won, right? It's them two and everybody else is in the distant rear view. And Lucas- I think a lot of these other streamers are going to end up as channels that you access through YouTube and Amazon Prime. And there'll be a revenue sharing agreement. And then, you know, like, the question is, can YouTube become the central television

interface for Gen Y and Gen Z? Like can YouTube become synonymous with TV where you turn on your TV and you access everything via YouTube, whether it's regular television channels or movies or whatever? And Amazon and Netflix, Netflix to a lesser extent, Amazon Prime has that same ambition. And I don't know that one has to win, but what the losers are the cable companies who will be reduced to basically providing broadband at some point. I think Prime Video is actually a pretty good service. But the question that Lucas was asking is, is Netflix more likely to maybe not catch up but to really compete on the ad side with YouTube?

Or is YouTube more likely to compete with Netflix on programming? And like, that's the big question. We'll see. I would say that Netflix is further along to being able to do the first thing than YouTube is to being able to do the second thing. YouTube, I mean, effectively YouTube incubates talent and then Amazon comes along and writes Mr. Beast, I don't know, billion dollar check or whatever. Like the idea of YouTube going from user generated to a Netflix esque studio.

It's a whole lot of ball wax. I mean, that is expensive and probably dumb. Netflix is immediately in the game for programmatic advertising. They built the engine a year and a half ago. It's working. It's actually their most profitable segment. They're actually cutting out a middle segment. They're raising the lowest tier of the ad-supported service to a higher price.

I think it's $11 or something or $1,199 or whatever. So I think there's a better chance that Netflix brings the fight to YouTube than YouTube brings the fight to Netflix. S2OB2K0 But interestingly, they say that YouTube, the estimates are if YouTube was a standalone company, it would have like a market cap of 450 billion, give or take. I would not be surprised by that at all. If you value it the way that these other platforms are being valued, it's bigger than all of them.

Netflix's market cap is only 275 billion. One of the things here that's so hard for older people, even on Wall Street, to wrap their heads around is how little the younger generations distinguish between content that, all right, so Apple made the show called Masters of the Air. They spent $300 million on it. At gunpoint, you couldn't get a 16-year-old to watch more than five minutes.

Like at gunpoint, they would tap out. Younger people will endlessly watch things that cost zero dollars. And the algorithm will surface up the best of that stuff and make it even bigger. But the kids don't really distinguish between, oh, Martin Scorsese directed this four hour monstrosity. Josh, people are spending more time on Netflix per day than they spend on Apple for the entire month. Yeah.

Yeah. So Netflix spends on content too. They have gotten religion on that. They're doing less episodes of their series. They're doing them cheaper. They're doing less episodes of their series. They're doing them cheaper. They're doing less prestige stuff. I'm sure Apple has learned their lesson also, but YouTube, it's free content. That's really the conversation is like, dude, this is free content that other people are

creating in the hopes of getting famous or sharing an ad revenue and YouTube does not have to do what HBO has to do, what Paramount has to do, what more, like they don't have to do any of that stuff. And they make even more money. It's incredible. Let's do Tesla real quick. Tesla's down in the after hours. Let's throw some charts on please.

Down 4% in the after hours. All right, so they did well on the top line, in terms of revenue for all their segments, but the margins and the cash flow. Deliveries and margins, right? And guidance. And guidance. And none of it is looking particularly good.

Let's run through some charts. So the market share, I mean, the US, look, it plateaued. They invented the category more or less, but it's just not growing very much. In Europe, it's rolling over. In China, it looks like it's peaked. And if you look at the key metrics on a quarterly basis, vehicle deliveries peaked a couple of quarters ago, operating cash flow, free cash flow, it's probably not terrific. I think the right way to say this is Tesla is still the dominant EV player, but we're in a time where that might not be such a great thing.

There's a political backlash against EVs that I think Elon cozying up to Trump and the right is probably designed to circumvent or turn around. There's just less, and it's not even just political. We already saw most of the people who were dying to get an electric vehicle, and the next class of buyers is not materializing at the same rate. So that's one major issue. The second issue you mentioned, competition. So far, there aren't really a lot of hit EVs coming from anyone else.

Sjoerd McLaughlin Mercedes has a lot of cool ones coming on. Jeff Sjoerd Yeah, the EQS. I was going to test drive that, but then I didn't feel like going to the dealership. My friend has the electric Porsche, which is pretty cool. But it's just, you're not going to outsell Tesla in EVs. I don't think anytime soon. But the question is having the dominant share in a market that's not growing as fast as everyone once hoped it would.

Not great. Not great. All right, let's move on. All right. Where are we going next? The charge-offs? So something to bear, something to keep an eye on, I think. Basically my read of this situation is that affluent consumers continue to spend like

this no tomorrow, no let up in sight. You're hearing that from pretty much everyone, but the lower income and middle income consumers are showing signs of buckling. And part of this is under the weight of the higher prices. And part of this is because they're not getting raises or upgrading their jobs at the rate that they were. Part of this is some of the pandemic era stimulus has run its course. Part of this is fatigue.

The job market is weakening. In the financial company earnings that we got last week, we started to see the first signs of charge-offs noticeably ticking up. Just feel like we should be aware of this. Let me run you through a couple of these numbers. Citigroup said its net credit losses, this means debts that they don't expect to collect, hit $2.28 billion in the second quarter. That is a $780 million increase from what it was in the same quarter in 2023.

Okay. Not catastrophic, but materially higher. Bank of America says net chargeoffs hit $1.5 billion in Q2. That's a 66% rise. It was $900 million in Q2-23. They also said provision for credit losses jumped by $400 million to $1.5 billion. Goldman Sachs said net charge-offsoffs hit 359 million last quarter. Where are their chargeoffs coming from? The credit card business? Is that Marcus stuff?

Honestly, not sure. I thought they were like getting out of the... All right, whatever. JP Morgan said they lost 2.2 billion last quarter due to uncollected debts. Wells Fargo recorded 1.3 billion in net charge off. This is just for Q2 guys So to me, that's what's notable In May the Federal Reserve raised the alarm on rising levels of overall debt It said US household debt reached 17.69 trillion in the first quarter, which was a 640 billion dollar over year surge. So of course, the thing with looking at household debt is you also have to say the economy is

larger too. But I'm just saying, this is like really the first time that we've had some meatiness to these numbers, right? No. We had them. OK, same. We had it last quarter. And I would say, listen, I'm not hand waving this away because we're

going to get into some quotes from these banks. The stock prices all look good. But the stock prices can look good while the lower consumer is perhaps not as good as it was. Both those things can be true. So here's Mark Mason. He's the CFO at Citi. Across our card portfolios, approximately 86% of our card loans are to consumers with

FICO scores of 660 or higher. And while we continue to see an overall resilient US consumer, we also continue to see a divergence in performance and behavior across FICO and income band. When we look at across our consumer clients, only the highest income core tile has more savings than they did at the beginning of 2019. Yeah. Lower FICO bank customers are seeing sharper drops in payments and borrowing more as they are more acutely

impacted by high inflation and interest rates. That said, we're seeing signs of stabilization and delinquency performance across our core portfolios. John, throw this chart on, I'm just going to flex a little bit for quarter. So the highlight, so this is the transcript section of the quarter wrap. Brian Moynihan from Bank of America said, in previous calls, many of you have asked questions or commented upon the question about consumer net charge-offs and when they would stabilize. In the second half of 2024, net expectation remains unchanged. This quarter net charge-offs were 59 basis points. And

for context, this is a stabilization of the rate. I would just remind you to that prior quarter. I have to go all the way back to 2014 to see a charge-off rate that high, and that's near when we were still emerging from the financial crisis. Let's run through some charts. I think this helps paint the story. Credit card update. 30 days past due and 90 days past due. They're down from where they were a quarter ago. How are they down?

What am I looking? Am I not reading this right? The top two. So 2.3%. They are down. The gray line. The gray line is last quarter and the blue line is now? The gray line is delinquency rate.

What is the blue line? No, the gray line is the blue line is a dollar amount and the gray line is a percent change. Ah, okay. And that's versus 19 though. That's not versus last quarter. No, no, no. Last quarter. No, no, no. Last quarter. So keep going.

This is not the exact same number, but it's seeing like a plateauing. So in Q1, the net charge us was 58 basis points and it's 59 basis points in the second quarter. So not, you know, stabilizing, like you said. Okay. Like you said. Uh, okay. I, again, I think if you were to tease this out amongst various groupings of income, you would see that it's only stabilizing at the 740 FICO score households. And it is definitely not stabilizing at the low end. And then I want to just say something- Well, hold on.

Not definitely. Not definitely. Not definitely. He said that it's good. He does think it's going to be stabilizing in the second half. Stabilizing for the lower income, lower credit score, people? Yes, he did say that. One last chart. So looking at what I highlighted here is consumers that are 90 days past performance, past due.

In the first quarter, it was 1.531 billion. And this quarter, it was down to 1.474 billion. So again, not hand waving it or saying that it's like not something to pay attention to, only that it seems to be potentially stabilizing. If the numbers go up next quarter, they'll stop saying stabilizing. Correct. I'm not saying they will. I'm not saying that will happen, but I'm saying if it does happen you're gonna correct

You're not gonna hear that word anymore Nobody wants that word to be like transitory inflation. You know what I mean? One thing I want to say and I know you know this I'm saying this for the audience My spending is your income and your spending is my income and yes We could have bifurcation, and yes, we can have periods of time where the wealthy run away with the ball and leave everyone else standing around.

But in the end, everybody has to spend for this thing to work, and it breaks. When you've got millions and millions of households that just drop out and they're no longer consuming at the rate that they were a year ago, the comps get worse for everyone. There's no such thing as a standalone luxury goods market or a standalone high-end travel. It just does not exist because the wealthy people are wealthy because they own shares in companies that sell things to the not so wealthy. And when those not so wealthy people stop buying those things, their stock prices fall

and their paper wealth subsides, and then they themselves start spending less. And we just know it's not a sustainable situation if we think these charge-offs are going to continue to rise and the high-end consumer is going to act like it's not happening. I just don't think it's possible, quite frankly. So a lot of stuff is being held up right now by the wealthy consumer and the wealth effect and record high prices for stocks and bonds that are spitting out tons of cash. It's great. I'm not anti.

I love it. But it's not sustainable if these delinquencies start to rise materially. I agree. I agree wholeheartedly. I just want to make sure that we're not painting a picture like the lower income consumers are completely screwed because it's just not seen in the data just yet. But I agree with you. You're right.

But you can't say the same thing about the lower end consumer that you could say a year ago. True. Which is that everyone's humming. Everyone's humming, everyone's going 100 miles an hour. That is just not what's happening today. Correct. Last, last chart that I want to focus on, I think it's from Bank of America. They already had $950 billion of average deposits in the second quarter paying 60 basis points.

Come on people, what are you doing? Get out of there. Get out of there. Get out of there. Okay, let's move on. Urian Timmer tweeted, put this in the quote, I thought I'd seen everything department. The 13 week correlation between the S&P 500 cap weighted index and the equal weighted index is now

36%. That's between two indices that have exactly the same constituents. It's normally 99% as one would expect. This is some hell of a chart. So this is just the extent to which the largest stocks have pulled away from every other stock. And yeah, look at it. Look at this yawning gap between the two. That truly is historic.

Ah, shit, I forgot to put a chart in here. All right, next chart. The chart that I'm missing is the percentage of stocks outperforming the index. It had quite a snap back, sort of similar to this. So what we're looking at here is the rolling eight day difference between the equal weighted sort of similar to this. thrusts where the equal weight destroys the cap weight. And interestingly, that used to happen at or around market bottoms, and that's not happening this time.

Yeah, we talked about this with Todd. It's a breadth thrust, but it's legit, but it's coming at a really strange time. But not such a strange time if you just follow the market via Equalweight or via Russell 3000. It's only strange if you follow the S&P 500 in isolation. Why is there all of a sudden a bread thrust after what the S&P just did? Usually this happens at bottoms, not at all time record highs. So it's a really weird phenomenon. And for me, the takeaway is unprecedented things happen every day. And this is just like yet one more example for our, you know, that we could remember and point out. So I think that's good. The largest IPO of the

year this week. What do you think about that? Do you know what it is? I don't know this company. I'm not familiar with them. Me either. Me either. I learned about it hours ago. Lineage, ticker L-I-N-E. This is a temperature controlled warehouse REIT. So it's a real estate investment trust that owns these refrigerated They've created facilities mostly for the distribution of groceries and medicines. And this thing is, to date, going to be the largest IPO of the year. They're going to raise $3.85 billion, led by Morgan Stanley. There were 28 other investment banks in the syndicate. They're going to be valued at $19.2 billion if they get their pricing.

I thought that was really interesting because one of my big themes for the second half of the year is the return of capital markets. This is a great confirmation bias for me. Companies based in Michigan, it'll be the biggest. The second biggest deal of the year will now become Viking Holdings, which already happened. They raised 1.5 billion. That's the cruise ships. And a $20 billion IPO is not a big deal. It's a big deal, right? Congratulations to NASDAQ. They're listing on NASDAQ. The fact that there are 28 underwriters

is interesting. That's the capital markets theme. Everybody back in the pool. They all wanted a piece of this. And more interesting, the founders were investment bankers working at Morgan Stanley. And in 2008, they looked at this industry. You know, there's one other public company, Cold. C-O-L-D is the ticker. That's Ameri-Cold. It's tiny compared to this. But these Morgan Stanley bankers looked at the industry in 2008 and said, this is a fragmented

business and we could actually make it really efficient and we could build something. And they did. And they were going to, I guess they'll be billionaires now. I don't know how much stock they still own. One other thing about this IPO theme, Wizz, which is a $23 billion, was about to be valued at $23 billion by Alphabet, said, no thanks, we're going to go public instead. I don't know that they would have said that last year. No chance.

No chance. Definitely not the year before. So all of this is kind of confirming what I think we're about to witness in the second half. And I don't know if Wiz is going to go public this year, but just the idea that a company that was raising money at a $12 billion valuation can now say f**k you to $23 billion to me is notable. And this is one of the reasons why I think my position in NASDAQ, NDAQ, is going to work. I want to join you. It looks like it's about to break out.

NASDAQ looks sick right now, right? Yeah, it looks really good. It looks like a breakout. And they're going to get a ton of these listings. And they're in other businesses, but that's a big driver. You have this Renaissance IPO ETF here? Yeah, look, it's behaving a lot better. Pull this up.

I mean, obviously, the thing was at the epicenter of the storm in terms of destruction of shareholder value, but it's been acting much better. OK. This is now at a two-year high, above a two-year high. It is below its 200-day. I don't know if this is a 200-day moving average. No, it's not. No, it's not.

What am I looking at? That's the 200-day moving average, the orange. It says above it. Yeah, you said below. I didn't mean to. What's in this thing is recently public companies. I don't know how long the ETF holds the stock after it goes public. Is it one year?

I thought it was a year. So yeah, signs of life. And I do believe the capital markets theme is going to work out. Okay, you're up. All right. I want to talk about Vanguard's future. So there was a profile of them in the Wall Street Journal a couple of weeks ago. They found the person, as they always do, to give a quote, and this time it was Theodore Wagonar,

a 75 year old retired college professor who has been with Vanguard forever. He said the final straw came after he was locked out of his account for days. It was difficult for me to leave them. My heart is with Vanguard and their mission, who has been a customer for 40 years, but it just continually got worse.

The service is abysmal. Vanguard is ranked last out of eight major brokerages for customer satisfaction. but it just continually got worse. an outsider to write the ship and the ship that needs writing is the technology stinks and the customer service is strained. Can I tell you about my triangle? Do you know about my triangle? Your eyebrows are raised above your forehead. So that's enough. The triangle of sadness?

What triangle? Yes, the. The triangle of sadness, what triangle? Yes, the Josh Brown triangle of sadness. Picture if you will, a triangle, three sides. I didn't invent this. I'm like half paraphrasing and half stealing it. But you have three points. One of those points is cheap. One of those points is fast.

One of those points is high quality. So as a business, I say to you, my customer, Michael, you can have it fast or you could have it cheap or you could have it high quality. Pick any two. Wasn't this the crypto trilemma that you're describing? I don't know. Is it? I think it is.

Go ahead. I didn't invent this, but this is a truism that I have come to accept. Nobody can do all three. Or you could do all three for a little while, but you'll run out of money or you'll burn your workforce out. You could be the fastest version of something. Here, I'll give this to you tomorrow.

That's H&M, that's Zara, right? Fast fashion. Like this trend is taking off on TikTok on Monday. On Tuesday, we have the clothes in stores. Okay, you could be the cheapest, that's Vanguard. Literally, the lowest cost way to invest, fantastic. People love it, unbelievable. You could be the highest quality.

You could say, hey, we make the best version of this. Nobody can do all three in any industry. Just, it cannot be done profitably. So in Vanguard's case, they're giving you the lowest cost. I would argue they're giving you the highest quality. They can't give it to you the fastest, meaning good customer service. Like, they can't respond to you instantly also.

Because to do that, you gotta pay people. And if you have to pay people, then you can't be the cheapest. So that's the dilemma. Now could they make improvements? Of course they can. And I'm sure they will. But if there's another company charging a little bit more, they could use that excess

income to spend more money on customer service than they can. I think some of the frustration from investors is the index funds obviously run just fine and they're dirt cheap as you mentioned. But what's so funny? Let's hear it. These motherfuckers are laughing at my triangle. It's true though. It's disputed.

It's an isosceles. I dig it. I believe it's an isosceles. But when you are trying to not just be in the index fund business, but the advice business, and you're doing that with human beings and you're charging nothing, yeah, it's hard to do that profitably and well. Do you want to know that Vanguard was once in the advisor custody business? And they got out because this is before you and I were

even in this industry. They got out of it really because it was impossible to service because wealth managers who are working on behalf of clients can't have a problem with customer service. It's like part of what you're selling as an independent advisor is customer service, and you're relying on your back office. And if your back office is a company that is scrimping and saving on customer service, you're going to end up apologizing to your clients all the time. And rather than really try to fix it, they just decided to get out, and they never got

back in. You would think, like of all the incredible initiatives that Vanguard has pursued over the last 10 years, and we've witnessed this company just do amazing things, they never even attempted to do that because of how expensive it is, and it's not the Vanguard way to spend like that. They focus elsewhere. They focus on being low cost and they focus on being easy to use and there's a lot of stuff that they do really well, but it's very expensive to do customer service. I'm sure that's like job number one of the new CEO, but they're going to have to save the money from somewhere else or they're going to have to save the money from somewhere else.

Or they're going to have to charge more or some combination. It's not magic. The forum is going to go nuts. They're not going to be happy. But yeah, some tough choices are going to have to be made. Tough choices. All right, you're up. Okay, I'm going to make the case for a company that I bought a started position in today. Ooh. That's right, Josh. Cut off the presses.

The company is called Sherwin Williams. They're number one and number two. I don't know. I'm sure there's a number two. They do paint. Residential. Ben Kuhn Moore and Sherwin Williams and that's it. Cars.

I won't eat any other kind of paint. Same. All right. They said that we are increasing our full year earnings guidance given our better than expected results in the second quarter. The midpoint of our previous guidance now becomes the low end of our revised guidance. And it's funny, like the numbers weren't that great, but it's guidance, like everything. So the stock was up 7% today.

And this is more technical than anything, but it also falls to my thesis of we're going to see a big bull market in housing and housing activity when rates come down. So chart on please, John. This is the daily. Not afraid to buy a big fat juicy candle. Next chart is the weekly. And I'm not a believer in triple top, so hopefully I didn't buy the top. Maybe I did.

What's that? Pause on this. I love this setup Pause on this. I love this setup, Michael. Thank you. Look at how effortlessly this stock vaulted off that rising 50 day. I'm looking. I'm a liking.

And now, nobody is down in the stock. If you bought the stock in the last three years, you're at worst even, and everyone's up. So now it's mentally, psychologically for people, now it's in their winners camp, which makes them more hesitant to want to sell. Winners win, Josh. I always say that. And lastly, the company is management is very shareholder friendly.

They buy back tons of stock. And so yeah, that's my case. I bought Sherman Williams. I love that. I don't love that the chat is referring to me as Fred Durst because I turned my hat around. I'm going to do a mystery chart for you, and I think you're going to get this one. I think so too. Okay.

So I left the price on, and I'm going to tell you that this company reported earnings today. And I consider this to be the world's most disappointing stock what do you think it is the world's most disappointing stock just a perennial piece of shit you can't make money in this thing no matter what's happening oh man it's a blue chip it's a company's been business for a hundred years It's a blue chip. It's a blue chip. It's a company's been in business for a hundred years. What do they do? They report it today. What are you doing? Podcasts all day? When did they report? This morning? Today. This morning. That's the hint.

Okay. Okay. Pre-open. And so it's not, so it's not tech. No one in the chat has this either. Don't feel bad. What sector? You guys are embarrassing me. Somebody got it. I think it's considered consumer-ish or industrial. It's industrial or... I'm sorry, dude.

CEO is female. Jeopardy music? I don't know, man. What is it? All right. General Motors. Oh, okay. I really thought you had this one.

That was bad. That was bad. I must tell must tell you that's on me If you're a shareholder in this thing Every day is another opportunity you want to fling yourself or off a roof. Wait, don't you own this last year? I Owned it a couple years ago. I'm sure I didn't make money with it. So basically They are they crushed their earnings, Michael, crushed. Like you would think this would be the end, the technical setup looked pretty good going into the number. You would

have thought that this would go up 10% finally, and yet fell 7%. Let me read this to you. They're raising several key financial targets for 2024 after easily beating Wall Street's earnings expectations for the second quarter. Listen to this, earnings before interest in taxes of between $13 and $15 billion or $9.50 and $10.50 per share. Previous guidance was $12.50 to $14.50 billion or $9 to $10 a share. Any other stock on Earth would rally furiously on a guide like that. But they're restructuring their China business. I don't know why they're

in China to begin with. And they are losing tons of money on autonomous vehicles. They have the what's called cruise, GM Cruise. They're trying to do like the autonomous taxis and stuff. So they're losing money there, they're going to pull back. And then there's this feeling that we might have just seen the best result that they'll print all year, which is why Morgan Stanley said impressive results considering large losses in EVs, cruise and China. History suggests the good times won't last. Thanks Adam Jonas.

When were the good times? Stocks been the same price since emerging from bankruptcy 15 years ago. Let me know when the good times are next because I haven't seen them. You know what I hope happens? Just shifting gears off of General Motors and on to Chipotle. Chipotle reports tomorrow. Stock looks really shitty going to earnings. I hope it gaps down 15% to on to Chipotle. Chipotle reports tomorrow, stock looks really shitty going to earnings. I hope it gaps down 15% to come to buy it.

You're going to buy some CMJ? If it bombs, yeah. Well, they're going to need to figure out a way to charge $19 for a burrito because I don't think they could open up that many more stores. All right. Hey everybody, did you know tomorrow is Wednesday, which means an all new edition of my favorite podcast, Animal Spirits with Michael and Ben Carlson. I don't know if you heard the episode from Monday with Matt Middleton from Future Proof. I loved it. And shockingly, my name didn't even come up once, which is great. You guys talked about Future Proof for 40 minutes,

not one Josh Brown. It's not about you. Incredible. Anyway, great episode. I love listening to it. Can't wait for the show tomorrow. On Thursday, Ben is back with an all-new Ask the Compound. We're doing the Compound and Friends Friday with another very special guest and Jill on Monday comes back on Saturday. Thank you guys so much for keeping it locked, watching the show, listening to the show. We appreciate you. Have a great night. Whether you're just getting started as an investor or you're managing a multi-million dollar portfolio, Ridholtz 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 ridholtzwealth.com. Thanks for listening!